The extended EU reporting obligations for sustainability in accordance with CSRD/ESRS are coming. Many companies, especially Small and Medium-sized Enterprises (SMEs) are wondering what the obligations mean and how they can master the challenges. We discussed this intensively in a panel at the German Sustainability Day. You can find a summary of the most important content and findings from the panel here.
The panel was moderated by Yvonne Zwick (Chairwoman of B.A.U.M. e.V.). Nicolette Behncke (PwC) represented the perspective of auditing on regulation, Steffen Erath (Head of Sustainability at Hansgrohe) and Philipp Petry (VP Group Sustainability at TAKKT) represented the perspective of SMEs on reporting and transformation as well as innovation and Dr. Matthias Kannegießer (founder of score4more) represented the perspective of using data for transformation via platforms.
In the check-in, Yvonne Zwick asked the audience online and on site via mentimeter: Which word summarizes the extended regulatory and reporting standards? The top word in the results was complexity, as well as many related terms, which expressed the audience's overload.
The next step was to explain key terms in order to create a common understanding in the room. In the form of a quiz by Yvonne Zwick with Nicolette Behncke and Matthias Kannegießer, the most important new EU standards and regulations for companies were briefly presented. Facts were discussed about when and to whom the standards apply, what the EU objectives are and which key requirements need to be met.
The topics discussed included
- EU CSRD (Corporate Sustainability Responsibility Directive) as a regulation for extended non-financial reporting obligations extended to a larger number of companies
- ESRS (European Sustainability Reporting Standards) as a reporting standard developed by the EFRAG (European Financial Reporting Advisory Group) on behalf of the EU Commission, which fulfills the EU CSRD requirements
- EU Taxonomy as a classification standard for the financial market to redirect private capital into sustainable forms of investment
- CSDDD (Corporate Sustainability Due Diligence Directive) as the "European supply chain law", which regulates due diligence obligations and risk management in the value chain, particularly with regard to human rights but also the environmental impact of suppliers
The CSRD and ESRS are the focus for SMEs, as many SMEs will be affected for the first time.
1. How the CSRD/ESRS helps to activate many companies for sustainability
Despite all the overarching discussions on climate change, sustainability and transformation, the situation remains that the majority of companies, particularly in the SME sector, do not yet collect and publish sufficient sustainability data on non-financial topics. This would help the financial market to redirect capital into sustainable forms of investment.
This is changing with the CSRD/ESRS. Many companies that were previously inactive in sustainability reporting are now being activated by the mandatory regulation. According to a PwC study among companies, the CSRD/ESRS is already having a concrete impact on companies and is resulting in corresponding sustainability activities. This means that the regulation is helping to activate a larger number of companies for sustainability.
2. Complexity of the ESRS is the biggest challenge and at the same time relative
The effort and complexity of the ESRS is criticized by companies as the biggest pain point. The ESRS has more than 200 pages and 1,000 data points. Complexity always raises the question of comparison: complex compared to what? The panel drew a comparison with financial reporting, in which companies invest many times more human and financial resources. The IFRS (International Financial Reporting Standards) are also many times more extensive than ESRS. Companies have learned to master this complexity over the years by setting up suitable systems, data and processes. With the CSRD/ESRS, the EU puts financial reporting and sustainability reporting on the same level. As a result, companies will have to balance resources between financial and sustainability reporting.
3. No financing without data: the sustainability report as a catalyst for sustainable financing
Why is the transformation so slow, especially towards climate neutrality? According to the EU Commission, one factor is that private capital is not yet being sufficiently redirected towards sustainable companies and projects due to a lack of data. As complex and extensive as the CSRD/ESRS is, it offers the great opportunity that more transparent sustainability data from companies can also make more sustainable forms of investment and projects visible to the capital market. This will enable sustainable finance and thus the redirection of private capital into sustainable forms of investment on a larger scale and more quickly.
4. Have the bigger "why" clear: Innovation and future viability in SMEs should be the main motivation for sustainability
From a company perspective, the motivation for sustainability should not be compliance with regulation or reporting standards. Rather, it should be driven by self-interest to achieve innovation and business success with sustainable solutions and future viability. It is therefore important to keep an eye on the overarching "why" and the motivation for sustainability within the company and to understand sustainability as an innovation principle and transformation driver for the company's own business model with new market opportunities.
5. The climate crisis leaves no time: reporting data must be linked immediately and used for the transformation
Unlike 15 years ago, there is an increased urgency today: we no longer have time to perfect reporting and audit processes in companies. The 1.5° target with a CO2 budget that will be consumed in just a few years requires reporting and transformation to be dovetailed immediately and implemented in parallel. Instead of being perfect in reporting and auditing, an iterative 80-20 approach is needed in which reporting structures and data are improved quickly and gradually and data generated in parallel is used immediately for transformation, measures and solutions. This is where transformation platforms can help to accelerate decisions directly via data networking and across companies. This means that companies do not remain isolated in the reporting challenges, but transform together through the immediate networking and exchange of data.
In conclusion, the CSRD/ESRS can have various effects in the company despite all its complexity:
- Holistic reflection of the business model and transformation opportunities: CSRD/ESRS structure companies' holistic assessment of their sustainability performance. This goes beyond the mere reporting of numbers - it requires a 360° analysis of the company's own business, including upstream and downstream value creation with risks and opportunities as well as positive and negative impacts. This process helps companies to fundamentally address the opportunities, risks and impacts of their current business model as well as opportunities for transformation.
- Innovation and competitiveness: CSRD/ESRS create incentives for companies to develop innovative solutions to minimize their environmental and social footprint. Companies that proactively respond to these challenges can not only improve their environmental impact, but also increase their competitiveness. Innovation is becoming a central component of the sustainable transformation.
- Stakeholder engagement and trust building: CSRD/ESRS place a strong focus on stakeholder engagement in the reporting process. This promotes open communication and strengthens trust between companies and their stakeholders. Stakeholder feedback can help to gain new perspectives and steer the company agenda towards sustainability.
- Promoting a culture of accountability: the implementation of CSRD/ESRS can help to support a new culture of accountability within the company. Employees are increasingly made aware of how their daily actions contribute to the company's sustainability performance through the data to be reported. This not only promotes awareness, but also strengthens employees' commitment to sustainable practices.
In conclusion, the CSRD/ESRS sets a holistic reporting framework for companies. The data generated can help to accelerate transformations if it is prepared in a meaningful way and networked effectively across companies. This is the focus of score4more as a transformation platform. In addition to reporting solutions that help companies to master data management within the company, transformation platforms network generated reporting data and prepare it in such a way that decisions are directly supported. This enables individual companies and the economy as a whole to pick up speed and create the parallelism of reporting and transformation. You can find out how you can implement this at score4more in another blog article: Four steps to becoming a sustainability pioneer
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