More legislation, more requirements, more work: there is a case to be made that the EU Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainable Due Diligence Directive (CSDD) place new and unwanted burdens on the business community. (You can read more about the directives here and take a deep dive into the details of the CSRD here and the CSDD here.)
But is that the full story? Because the flipside is that by requiring small, medium and large enterprises to assess, monitor, measure, record and publish their environmental and social impact, the new laws can actually help companies to capture and realise significant business value.
Risk managers often discuss what we know, what do we suspect, what could we know and what do others know? In these scenarios, any action that increases our business knowledge is a benefit to the organisation. These questions are addressed by the CSRD and the CSDD: they add to the organisation’s body of knowledge about its compliance, supply chain, customers, raw materials, culture, behaviour and much more.
Through seeking to improve corporate sustainability practices and promoting responsible business conduct, the directives can help companies to identify and leverage a range of business opportunities, from enhanced reputation and increased customer loyalty to improved financial performance.
How can the CSRD and CSDD create value for businesses?
Better sustainability practices
The CSRD requires more companies to disclose a wider range of sustainability information than in the past, including environmental, social and governance (ESG) factors. A burden? Yes. But this increase in transparency can help companies to identify where they can improve their business processes, and to work on mitigating and negating any negative impacts they may have on the environment and on society in general.
The positive impact on the environment is self-evident, however from an intrinsically motivated stance, increasing transparency and improving known knowns and known unknowns (and potentially discovering unknown unknowns), companies can improve their efficiency, reduce waste and lower their operating costs. As a result companies are able to make significant financial savings over time, and a reduction in the risk of reputational damage.
Enhanced reputation
We’ve already touched on reputation, but it’s worth underlining: in today's world, customers are increasingly concerned about the social and environmental impact of the companies they engage with. This is true for both private and public companies. Asset managers, private equity firms and other investors are concerned about potentially being tarnished by the companies they invest in. By disclosing their sustainability performance, companies can demonstrate their commitment to responsible business conduct and build trust with their stakeholders.
A strong reputation is generally good for customer loyalty. If we assume that increasing numbers of people are concerned about sustainability and their personal impact on the plant, then we can also assume that those people are increasingly likely to choose companies that share their values and operate in a sustainable manner. A good reputation for sustainability can also help to attract and retain talent, as employees, especially generation Z and millennials, increasingly say they want to work for companies that have a positive impact on society and the environment. Or at least not a negative one.
Improved financial performance
Research has shown that companies that emphasise sustainability and responsible business tend to do better than their competitors over the long term. By adopting sustainable practices and disclosing their sustainability performance, companies demonstrate their commitment to long-term value creation and can attract investors who are looking to invest in doing good.
Sustainable companies are often seen as more resilient and so less of a risk in the face of economic and environmental challenges. This can help to boost their financial performance while also lowering their borrowing costs from lenders who want to focus financing sustainable projects and companies. The new rules also aim to create a level playing field within the EU and hopefully the world.
Mitigation of legal and reputational risks
When it comes into force, possibly in 2025, the CSDD will require companies to conduct due diligence to identify, prevent and mitigate the negative impacts of their operations and supply chains on human rights, the environment and society.
By conducting due diligence and taking action to address any negative impacts, companies can mitigate the risk of expensive legal action and damage to their reputation. This can help to protect their brand and maintain the trust of their stakeholders.
Enhanced stakeholder engagement
The CSRD and CSDDD require companies to engage with their stakeholders, including customers, employees, suppliers and local communities, on sustainability issues. Taking a more proactive approach to stakeholder engagement can help organisations to better understand the needs and concerns of their stakeholders, and work to address them together.
By engaging with their stakeholders on sustainability issues, companies can build stronger relationships with their customers, employees and suppliers. This can increase loyalty and trust from all these groups as stakeholders feel more invested in the success of the company.
Better corporate governance and strategy-setting
The CSDD requires that companies create a governance framework in which directors and officers properly integrate environmental, climate and social risks, opportunities and impacts in their decision-making processes. These issues should form the basis for the organisation’s long-term strategy and business model, including financial and investment planning. Building these into your corporate governance and strategy-setting processes should help to prevent unpleasant or shocks down the line.
Conclusion
The mindset regarding the CSRD and the CSDD will be crucial in determining whether it becomes a benefit or a burden. In our opinion, it offers an opportunity and a reason for organisations to improve their corporate governance workflows and their internal due diligence processes, and that can only be good.
Many years ago, a CFO, when asked why it was so important to him that his company be the first in the Netherlands to report its annual results, said: “because it shows we have our processes in order”. The same will be true of CSRD and CSDD reporting.