What are CSRD's main challenges for business?
The Corporate Sustainability Reporting Directive (CSRD), which expands the European Union's previous Non-Financial Reporting Directive (NFRD), requires businesses to disclose a wide range of sustainability-related information. While it aims to improve transparency and accountability regarding environmental, social, and governance (ESG) matters, there are several challenges for businesses in complying with the CSRD:
1. Data Collection and Quality
Challenge: Companies often face difficulties in collecting consistent, accurate, and reliable ESG data. Many organizations lack established processes for capturing data related to environmental impact, social issues, and governance practices.
Impact: This can lead to challenges in meeting reporting requirements on time and ensuring the data meets the CSRD’s standards of reliability and comparability.
2. Complex Reporting Standards
Challenge: The CSRD introduces detailed reporting requirements, including the use of specific standards like the European Sustainability Reporting Standards (ESRS), which may differ from existing frameworks.
Impact: Businesses will need to align their reporting processes with new or updated frameworks, which may involve significant changes to current reporting systems.
3. Increased Scope of Reporting
Challenge: The CSRD expands the scope of reporting to include not just large public-interest entities but also smaller companies, including subsidiaries of large corporations and private companies meeting certain thresholds.
Impact: Many businesses will now have to comply with these requirements, requiring a shift in how sustainability data is collected and reported.
4. Supply Chain Complexity
Challenge: The directive requires companies to report not only on their direct operations but also on the sustainability practices of their entire supply chain.
Impact: This can be particularly challenging for businesses with complex or global supply chains, as gathering accurate data from suppliers, especially those in regions with less robust sustainability reporting, can be difficult.
5. Resource Intensive
Challenge: The additional reporting requirements will require more resources in terms of time, personnel, and budget. This includes investing in systems to track and analyze sustainability data, as well as potentially hiring or upskilling staff to manage the reporting process.
Impact: Small and medium-sized enterprises (SMEs) may find it harder to comply with these increased resource demands compared to larger corporations.
6. Compliance and Governance Risks
Challenge: Failure to comply with the CSRD can result in penalties or reputational damage. Additionally, companies will need to ensure their governance structures are robust enough to manage and oversee sustainability reporting.
Impact: Boards and management teams will need to dedicate more attention to sustainability matters, requiring proper training, systems, and controls to ensure compliance.
7. Integration with Financial Reporting
Challenge: The CSRD aims to make sustainability reporting as integral to company operations as financial reporting, but businesses often struggle with how to integrate non-financial data into their overall reporting processes.
Impact: Aligning financial and non-financial disclosures may require overhauling existing reporting frameworks and enhancing internal data management systems.
8. Diverse Stakeholder Expectations
Challenge: Companies must address the expectations of various stakeholders, including investors, customers, regulators, and NGOs, who all have different views on what sustainability information is most relevant.
Impact: Balancing these expectations and meeting their reporting demands can be complex, as the CSRD does not always align with other global reporting standards or frameworks.
In summary, while the CSRD aims to drive greater corporate accountability on sustainability issues, businesses face significant challenges in terms of data collection, system integration, resource allocation, and meeting increasingly detailed reporting requirements. These challenges, if not properly addressed, could lead to inefficiencies and compliance risks for businesses.