How CSOs Can Navigate the “Gray” in CSRD Implementation

Double Materiality now rolled out as a new reporting paradigm

CSRD reporting is also unique because it is based on the concept of double materiality: organizations have to disclose information on how their business activities affect the planet and its people, and how their sustainability goals, measures, and risks impact the financial health of their businesses. For example, in addition to requiring an organization to report its energy usage and costs, CSRD requires them to report emissions metrics that detail how that energy use impacts the environment, targets for reducing impact, and information on how achieving those targets will affect the organization’s finances.

Top CSRD implementation challenges include:

• Double Materiality Assessment (DMA) includes a broad variety of non-standardized topics. The diverse range of topics covered in the DMA means there is a high level of subjectivity to the exercise, which is also similar to subjectivity in the assessment of impacts, risks, and opportunities (IROs). Even with reporting standards in place, there will be a need for convergence among similar companies as they gain more experience working with the standards and as best practices continue to emerge.
• Internal data challenges loom large. With such a broad scope of topics, data availability and quality remain the biggest obstacles to the implementation of CSRD. The breadth and depth of CSRD reporting presents a massive challenge as teams work to collect, verify, and consolidate many types of data for the first time. Much of this information does not exist today in companies’ enterprise resource planning (ERP) and other central source systems. It must be tracked down manually from spreadsheets and original documents that are distributed across the enterprise. With so much manual effort, this can lead to inefficient and error-prone processes.
• Defining the value chain for CSRD will be time-consuming. Companies need to assess value chain impacts as well as the inclusion of subsidiaries and joint ventures (JVs). Most standards apply to the entire value chain of the company. For instance, one of the social standards is directly linked to workers in the value chain. This, many environmental data (such as climate-related ones) must include both the company’s operation and upstream/downstream activities.
• Value chain assessments require partner data. The CSRD’s requirement to examine the entire value chain introduces an additional challenge related to data. Companies will have to leverage data from suppliers, customers, third parties, which may be a new muscle for companies to build. Furthermore, not only do they have to collect the data successfully, but they also have to evaluate the reliability of the data.
• Level of data assurance remains uncertain. Companies need to decide the level of assurance for different types of data across the ESRSs. Therefore, assurance providers should be involved from an early stage, even if this can drastically increase costs. Initially, compliance will require the auditor to provide limited assurance, based largely on the organization’s representations, but within the next three years the CSRD will phase in a requirement for reasonable assurance, based on the auditor’s own examination and understanding of the organization’s operations, processes and controls. Companies will have to learn how to navigate and scale up accordingly.
• Limited staff capacity creates challenges to the reporting timeline. Internal Sustainability teams already have been asked to do a lot with a little. CSRD implementation will require additional resourcing for the non-voluntary reporting capability within an organization, which should have direct line of sight by the full management team, board, and Audit Committee.
• Treating the CSRD as a box-checking exercise misses potential for revenue generation. One mistake is considering compliance with the CSRD as a technical endeavor rather than a strategic opportunity for transformation. The CSRD intends to give companies the opportunity to showcase how their global strategy aligns with ESG matters. It is therefore crucial not to treat it as a checkbox exercise.

Actions CSOs, management teams, and the board can take:

• Benchmark peer organizations approach to CSRD implementation and key gray areas: materiality determination, scoping of reporting, data assurance, and integration of reporting frameworks
• Integrate CSRD reporting with other key reporting functions and processes, including the Audit sub-committee and/or ESG sub-committee
• Receive training on CSRD topics and process on a recurring basis
• During and after first reporting cycle, ask Management Team for a summary of growth-related opportunities that have been identified from the reporting exercise

Additional Telesto resources:

Telesto Strategy supports Corporate Directors and management teams to mitigate ESG and climate risks, stay ahead of changing regulatory regimes, and enhance disclosures and reporting in the face of increasingly complex environments. See additional resources to equip Corporate Directors for improved CSRD implementation:

• • Preparing for the SEC Climate Disclosure Ruling: The Board’s Central Role
  • Telesto Maturity Model
  • Atlas Training – Equips your organization’s corporate directors and leaders with the insights and knowledge necessary to stay up to date, mitigate risks, and seize business opportunities associated with sustainability, climate, and ESG
  • Preparing for Climate Litigation: What Board Members Need to Know