The Corporate Sustainability Reporting Directive: What Every Board Should Keep in Mind
As the Corporate Sustainability Reporting Directive (CSRD)1 comes into effect, boards of directors and executive committees must brace for a significant shift in how sustainability is reported and governed. Here are some critical points boards should keep in mind as they lead their organizations through the implementation of this transformative regulation.
At the heart of the CSRD is the concept of double materiality, which requires companies to assess not only how sustainability issues impact their financial performance (financial materiality) but also how the company’s activities affect people and the planet (impact materiality). This shift means that boards must oversee comprehensive materiality assessments to ensure that both financial and sustainability factors are identified, measured, and addressed. Directors should push for clear processes to manage these assessments, including setting sustainability goals and integrating these into the overall business strategy.
The CSRD increases the responsibilities of the board in overseeing sustainability matters. Boards must ensure that the company’s governance structures are equipped to handle these new responsibilities. This may involve revising the roles and competencies of board members and ensuring that those tasked with overseeing sustainability have the necessary expertise. Additionally, regular training on sustainability issues seems critical to maintaining high standards of governance.
Supervisory duties will expand to include the evaluation of sustainability risks and opportunities, setting targets, and monitoring the company’s progress in meeting those targets. Boards must also ensure that sustainability is integrated into the company’s risk management processes.
The CSRD introduces reporting standards that go beyond traditional financial metrics. Companies will need to disclose detailed information about their sustainability strategies, policies, targets, and performance. This includes data on climate change, biodiversity, resource use, human rights, and governance practices. Boards must ensure that the company has robust internal controls in place to collect, verify, and report on this information.
Moreover, the CSRD mandates that this information is included in the company’s annual management report filed along with the financial statements. This will require significant coordination between the sustainability and financial reporting teams. Boards must ensure that sustainability data is reliable and consistent with financial information to meet the growing demand for transparency from investors and stakeholders.
One of the most significant challenges posed by the CSRD is the requirement to report on the sustainability impacts across the entire value chain. This means that companies must collect data not only from their own operations but also from suppliers, distributors, and other partners. The board must ensure that the company has a clear plan to engage with its value chain and gather the necessary information. This process will be phased in over several years, giving companies time to build the required infrastructure, but boards should begin preparing now.
Boards must ensure the accuracy and reliability of the company’s sustainability disclosures. Engaging with external auditors or developing internal verification processes will be necessary to meet these requirements. In fact, another key feature of the CSRD is the requirement for limited assurance on sustainability reports. Over time, the assurance level will increase to reasonable assurance, so companies should be prepared for more stringent audits in the future.
The implementation of the CSRD is a critical moment for boards to demonstrate leadership in sustainability. By embedding ESG into the core of their governance and decision-making processes, boards can ensure that their companies not only comply with the new regulations but also thrive in a business environment where sustainability is increasingly linked to long-term success. As the CSRD comes into effect, boards need to make sure that sustainability is well integrated into corporate strategy.
1) Directive 2022/2464. The CSRD reporting requirements will come into effect in several stages, depending on the type of company. The application of these requirements for non-listed small and medium enterprises will be voluntary.
2024 IESE ECGI CORPORATE GOVERNANCE CONFERENCE
The 2024 IESE-ECGI Corporate Governance Conference focused on the theme: “Towards a New Model of Boards of Directors”. The different speakers helped analize and debate how boards of directors can navigate challenges like climate change and sustainability, strategy and digital transformation, and CEO succession planning. Leading scholars from various fields, along with CEOs and chairpersons, offered insights on improving governance in today’s disruptive environment.
A post by Yuki Sakasai, Gaizka Ormazabal and Jordi Canals on the IESE 2024 Survey of Boards of Directors was recently published in the Harvard Law School Forum on Corporate Governance. You can read the post here. The survey provides a unique description of how board directors understand and organize solutions to several critical challenges for their companies: corporate purpose, the board as a team, CEO and leadership development and succession and the role of the board in strategy. You can download the IESE 2024 survey here.
NEWS&TRENDS.
Deloitte has published an interesting article on AI governance at the board level based on a recent survey which found that most boards of directors have limited to no experience or knowledge on this matter. The article proposes some key actions that boards can take to implement effective AI oversight, as well as speed up the process. Read more here.
The link between the application of ESG factors and company profitability or investment returns is highly debated and remains unclear due to the lack of comparable and verifiable ESG data, among other factors. A new UNPRI blog post focuses on some of the latest research on this topic. Read more here.
Two interesting surveys on sustainable investing highlight relevant findings on the investors’ expected impact of the different dimensions that conform ESG on their investment decisions. Read more here and here.
PwC has published its annual corporate directors survey. Topics addressed in the 2024 survey include board assessment and refreshment, board composition and AI implementation. Read more here.
IESE's recent research.
Friedman, H. and Ormazabal, G. (2024). “The role of information in building a more sustainable economy: A supply and demand perspective”. Journal of Accounting Research (forthcoming)
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