With the race to achieve net zero by 2050, companies are under increased pressure to cut their carbon emissions and improve their sustainability credentials. Against this backdrop, the EU has introduced its Corporate Sustainability Reporting Directive (CSRD), which aims to elevate a company’s sustainability data to the same level of scrutiny as its financial reporting.
The largest companies in Europe – those with more than 500 employees – are due to publish their debut CSRD reports in the first quarter of next year. There will be crucial lessons for the businesses that are next in scope: from January, companies that meet two out of the following three criteria – having more than 250 employees, €50m (£42m) in turnover or €25m in total assets – will need to start collecting their ESG data.
Sustainability experts worry that many of these firms that are next in scope are not ready.
“The majority of companies still seem to be trying to find the right solution to meet the requirements,” says Chris Shaw, director of reporting at Anthesis, a sustainability consultancy.
Mastering the metrics
The first challenge is understanding what metrics they need to report on. This requires a ‘double-materiality’ assessment, identifying not only their operational impact on the environment but also the impact the environment could have on their business. The assessment covers around 1,400 different data points, with companies left to decide how many of those data points are relevant to them. For the companies due to start collecting next year, many are unlikely to be in a position to know exactly the data they need to be collecting, says Shaw.
“Those companies are probably unlikely to have gone through an assurance process before or engaged with an audit firm to scrutinise their data,” he says. “They also typically don’t have very robust or established data-collection processes and are typically still working in Excel – that’s just something that simply won’t work with CSRD.”
Once companies have identified the relevant metrics, accessing the data they need will also be a challenge. Even for those large companies that are due to publish in the new year, they will be collecting data they have not had to collect or disclose previously, such as scope-three carbon emissions – the emissions generated by their entire value chain.
“This is the most problematic area for companies today because this data lives outside of their organisation,” says Levent Ergin, global chief ESG sustainability strategist at Informatica, a cloud data-management business.
It doesn’t matter if you’re not in scope until 2027, the earlier you can start the better
Take a bog-standard T-shirt. To measure its carbon footprint, companies would need to understand the raw materials that have gone into making the T-shirt, such as cotton, elastane and maybe some ink, Ergin explains. This means they need to know the source of origin for those materials, because that will drive different emission factors depending on where the T-shirt was manufactured. For instance, the carbon footprint of a T-shirt manufactured in a factory running on diesel-powered electricity would be significantly more than if the same T-shirt was manufactured in a factory where the electricity is generated by geothermal energy.
Given the complexity of these calculations, companies that are not yet in scope must start preparing as early as possible. This also includes companies based outside of the EU but have operations or subsidiaries in the region who will be coming into scope from 2026.
“It doesn’t matter if you’re not in scope until 2027 or if you are based outside the EU and you’re in scope later, the earlier you can start, the better,” says Sophie Graham, chief sustainability officer at IFS, an enterprise software provider.
Companies must also embed sustainability company-wide so all business functions are engaged in the process and it is not siloed in a single department.
“If you look at the CSRD, the data that it requires is across your business,” Graham says. “ESG sits within your human capital systems; it’s within your procurement systems and it’s within your finance system. This is not about just growing your sustainability team, it’s about getting it entrenched in the business.”
Another key lesson for those next in scope is the importance of ensuring they involve the auditor at every step of the process. This means the auditor can give continuous feedback and help course-correct if needed rather than risk submitting the data at the last minute, when the auditor may be unable to sign it off, says Deborah Fischer, a sustainability partner at RSM Belgium, a consultancy.
Indirect impact
Even for companies that won’t ever be in scope for CSRD, such as small and medium-sized enterprises (SMEs), there will be an indirect impact if their customers have CSRD reporting requirements.
To support Europe’s SME community, the European Financial Reporting Advisory Group (EFRAG) is creating a so-called voluntary reporting standard for SMEs (VSME), which is designed to help smaller companies better manage the growing number of ESG data requests from their customers. This will be critical for SMEs: if they can’t provide this data, there is a risk their customers will switch suppliers.
There may also be pressure on SMEs from customers to cut emissions or engage in other sustainability initiatives if they want to keep their business.
If SMEs can’t show they are taking action on sustainability, “you may be closing some market opportunities for yourself, so being able to use voluntary reporting and making a start on this now, even if you are just starting small, would be a very good move for these companies,” says Fischer.
The effects of CSRD are likely to be far-reaching given the number of companies that will be impacted either directly or indirectly.
“CSRD is a monster piece of regulation – it is a big challenge and is seen by many as a compliance burden, but this is really going to bring sustainability into the mainstream, not just in terms of disclosure, but the management of it, and that’s a positive thing,” says Graham.
Companies that have never focused on ESG will now need to adopt a sustainability mindset. This could prompt organisations to take action faster, helping to create a more sustainable future.
