A guest article by Dr. Zoe Rost, Teamlead Corporate Sustainability at DEKRA (also available on our Spotify channel).
Dr. Zoe Rost is Teamlead Corporate Sustainability Services at DEKRA Assurances Services and holds a doctorate in corporate sustainability from the University of St. Gallen. For over a decade, she has been helping medium-sized and large companies to improve their sustainability performance, particularly in the areas of strategic sustainability management and sustainability reporting. With her many years of experience in auditing sustainability reports, Zoe Rost provides insights into the requirements and opportunities presented by the CSRD in this blog.
Table of contents
- What is the CSRD anyway?
- Why should small and medium-sized enterprises start looking at CSRD today?
- What are the positive aspects of CSRD?
- What impact does the CSRD have on the economy?
- How do you convince management of the urgency and necessity of sustainability?
- What challenges does the CSRD entail?
- Where should the topic of CSRD be located within the company?
- How do I develop an effective sustainability strategy?
- How can prospective sustainability managers best prepare for the CSRD?
1. what is the CSRD anyway?
CSRD is the abbreviation for Corporate Sustainability Reporting Directive. Basically, it is a revision of an existing law. This obligation mainly applied to capital market-oriented companies, which previously had to publish sustainability reports. However, the legislator has determined that this regulation is not sufficient to encourage enough companies to report on their sustainability measures.
The law has therefore been revised and expanded. This means that significantly more companies are now obliged to report on their sustainability efforts. The directive describes in detail who exactly is affected and what requirements they must meet in order to comply with the CSRD.
In short, the CSRD is a step towards greater transparency and accountability when it comes to sustainability. Companies are encouraged to disclose their efforts in this area and thus make a positive contribution to the environment and society.
2. why should small and medium-sized enterprises start dealing with CSRD today?
The law is being introduced gradually, which is why some companies are not yet affected. This regulation will be implemented gradually over the coming years. Initially, the focus will be on capital market-oriented companies that already have experience in sustainability reporting due to the existing law.
CSRD report as a complex challenge
Medium-sized companies will then be included in the process, followed by the smaller capital market-oriented companies. One mistake that some companies could make, and which we would like to warn everyone about, is to prepare too late for these requirements. After all, preparing a sustainability report is not an easy task that can be done on the spur of the moment. Rather, it is a complex matter that requires a great deal of commitment from companies.
The requirements for the content of the report have been significantly expanded. Companies are expected to provide qualitative and quantitative information on the three pillars of sustainability – environmental, economic and social (ESG). They must not only report on their past and show their development and progress, but also on their future plans, goals and strategies.
Complicated data procurement
Obtaining the required data is a major challenge. Many companies will find that they do not have all the data they need because they have not yet looked at the issue in depth. It is therefore crucial to take action and set targets to close these gaps.
Overall, the preparation of a sustainability report requires an intensive examination of the topic of sustainability and comprehensive data collection. It is a lengthy process that requires thorough preparation and continuous adaptation in order to meet the requirements of the CSRD.
Reading tip: This article describes the five biggest mistakes that companies should avoid on the road to CSRD.
3. what are the positive aspects of CSRD?
It is interesting to observe how corporate social responsibility (CSR) reporting develops in practice. While the textbook suggests that companies should first develop a comprehensive sustainability strategy and work intensively on their topic before producing a report, the reality often shows a different picture, especially with the introduction of CSRD.
Many companies are now putting the cart before the horse by first completing the report before they have already implemented significant measures. Although this is not the traditional approach, I think it is a positive development. By producing the first report, companies get a clear overview of their current status. They can see exactly which ESG initiatives are already being implemented in the company, what is going well and where there is still room for improvement. This enables them to work specifically on their weak points and continuously improve.
Furthermore, CSR reporting not only requires companies to address their challenges, but also the positive aspects. It is no longer just about pointing the finger at the negative points, but also about recognizing opportunities and possibilities. This move towards a positive view of sustainability is extremely encouraging. Companies can recognize that sustainability is not just a risk or a chore, but also offers many positive effects and potentials from which they can benefit.
4 What impact does the CSRD have on the economy?
The introduction of the CSRD has undoubtedly set a great deal of momentum in motion. However, there are also other drivers that are currently causing a lot of movement in this area.
Effects on ratings & rankings
One of these is ratings and rankings. In the business customer sector, companies are increasingly recognizing that a proper sustainability performance is necessary to win business from large customers. These large customers are forced to practice sustainability either due to laws and regulations or due to pressure from their stakeholders. They are therefore passing on the requirements of their ratings to their suppliers.
Effects on creditworthiness
This pressure can also be felt in the financial sector, where banks and investors are paying more attention to sustainability. One example of this is banks that are beginning to link loan conditions to sustainability performance. Companies can receive better conditions if they improve certain sustainability indicators, such as COâ‚‚ emissions or diversity quotas. This trend is crucial to promoting the shift towards greater sustainability in business. In the past, CSR programs were often seen as “soft factors” that were not given much attention. But now the time has come for sustainability to become an economic factor.
As a result of regulation, the issue of sustainability is now being anchored across the entire economy. Even small businesses will have to deal with it. Because if a good sustainability performance means better credit conditions, this can have a decisive impact on companies. On the other hand, a lack of mastery of risk models and ESG data also has disadvantages.
Important contribution to achieving climate targets
Regulation helps to ensure that all players are working towards the same goal. Through different regulations, everyone is brought to the same denominator. This approach is impressive and shows that regulation can make an important contribution to achieving our climate targets. I look forward to seeing the results of this database and the regulations and whether we can achieve our goals as a result.
5 How do you convince the management of the urgency and necessity of sustainability?
The importance of sustainability goes far beyond climate targets. It is a comprehensive transformation in which we must also consider other aspects of our society that are often overshadowed by the dominant climate issue. Biodiversity is a key sustainability challenge that should receive just as much attention as climate protection. Legal requirements and customer expectations are mechanisms that drive companies towards greater sustainability.
I find it particularly positive that this awareness is increasing. In a seminar that I lead, which is aimed at prospective sustainability managers, we discuss precisely this topic. A key question is how to convince managing directors of the importance of sustainability if they are skeptical about the topic.
Sustainability as an economic argument
Three key points emerged from the discussion: Firstly, without sustainability, business operations are not possible in the long term, as legal regulations require this. Secondly, without a sustainable orientation, companies potentially lose orders, as customers increasingly demand sustainable products and services and pay attention to the sustainability performance of their suppliers. And thirdly, without sustainability, financing from banks is at risk or can only be obtained on less favorable terms, as they are increasingly paying attention to the sustainability performance of companies.
These economic arguments should actually convince all managing directors. The economic and legal constraints are clear, and it is becoming increasingly obvious that sustainability is not only an ethical obligation, but also an economic necessity.
6 What challenges does the CSRD entail?
Obtaining data for sustainability reports is a major challenge for companies. Even for companies that do not operate globally distributed production facilities, for example, data collection is often difficult. Many companies completely underestimate this process.
Data procurement as the greatest difficulty
Collecting even supposedly simple data such as electricity consumption or energy consumption from different locations often proves to be time-consuming and complex. What initially appears to be a simple task often drags on for weeks and months, as the required data is not available on time or in the required quality.
The challenge becomes even greater when you consider that social and governance issues as well as data from the supply chain need to be included in reporting alongside traditional environmental indicators. Obtaining reliable data from the entire value chain presents companies with particular difficulties.
In my conversations with customers, it becomes clear that the biggest hurdle is obtaining the required information both within the company and along the entire supply chain.
Proven methods and the right contact person as a solution
If the required data is not available, the question arises as to how to proceed. In such cases, established standards and methods can help. It is important to rely on proven methods in order to achieve reliable results.
When preparing sustainability reports, there are various guidelines and directives that can serve as orientation, depending on the requirements. For example, the Greenhouse Gas Protocol often serves as an ideal guideline for greenhouse gas accounting and provides valuable support for data collection and interpretation.
Another important aspect is identifying the right contacts inside and outside the company who can help with obtaining the data. You should not necessarily proceed according to hierarchical guidelines, but rather select people who show a genuine interest in and commitment to the topic of sustainability. It is often these motivated individuals who are willing to get involved and provide the necessary information.
7. where should the topic of CSRD be located in the company?
In the past, sustainability was often associated with the communications department, which gave the impression that it was purely a communications issue. Fortunately, many companies now realize that sustainability is much more than just a communication issue.
The advantages of a direct connection to the management
As a proponent of sustainability as an independent staff unit directly under the management, I see clear advantages in this organizational structure. Even if sustainability in SMEs is often still anchored in quality or environmental management, I believe that direct integration under the management is the best option. Sustainability is an extremely dynamic topic that requires quick and short decision-making processes. With a direct link to the management, decisions can be made promptly without having to go through long delegation channels. Such a structure enables effective implementation and reaction to current developments in the area of sustainability.
Establishment of the sustainability department as a signal effect
Furthermore, the positioning of the sustainability department at this level is also of great importance for the internal and external impact of the company. If sustainability is positioned several levels below management in the organization chart, there is a risk that the topic will not receive the attention and appreciation it deserves. In addition, a cross-departmental staff unit reflects the relevance of the topic of sustainability for the entire company.
A key success factor for the work of sustainability managers is networking with other departments and business areas within the company. Cooperation with areas such as finance and controlling departments, for example, is of great importance for the implementation of EU taxonomy requirements.
The integration of sustainability into different areas of the company can also be seen in other topics such as diversity, which may fall under sustainability but in practice is often part of HR. Close coordination between HR and the sustainability department is crucial here.
8 How do I develop an effective sustainability strategy?
Once you’ve found your team and started looking at the data, the next steps are to develop a comprehensive sustainability strategy.
First of all, it is important to emphasize that the first sustainability report does not necessarily have to meet the requirements of the CSRD, but can also be based on voluntary reporting standards as long as you are not yet subject to the CSRD reporting obligation. Nevertheless, it provides a good starting point for strategy development. By analysing the status quo and identifying gaps in reporting, you can gain valuable insights into where there is room for improvement and which ESG areas should be prioritized.
Set sustainability targets
An important step is the definition of concrete sustainability goals. This often requires intensive cooperation between sustainability management and the management. It is crucial that the targets are ambitious, but at the same time realistic and measurable. This can be a challenge, as it is often difficult to clearly define and quantify sustainability targets. However, this is where it is important to help companies formulate concrete goals that are in line with their sustainability strategy.
Development and implementation of measures to achieve objectives
Another important step is the development and implementation of measures to achieve these goals. Here, it is crucial to build on a solid database and identify measures that can make a real contribution to the company’s sustainability performance. This often requires a strategic approach and the involvement of different areas of the company and stakeholders.
Monitoring the sustainability strategy
Finally, it is important to continuously monitor and manage the implementation of the strategy. This means regularly checking whether the defined goals are being achieved and whether adjustments need to be made to the selected measures. Only through a structured and strategic approach can the company be successful in the long term and make its contribution to sustainability.
9. how can prospective sustainability managers best prepare for the CSRD?
Personal exchange and networking
I have been working in sustainability consulting for over 10 years, and I draw on this many years of experience in my work. This experience is often not immediately available to new sustainability managers. That’s why I think it’s extremely important to exchange ideas with each other. It is crucial that sustainability managers network and support each other. In our seminars, we therefore always encourage participants to exchange contact details and stay in touch. After all, they often face similar challenges and can benefit from each other, be it by lamenting difficulties together or sharing solutions.
Stay up to date
As already mentioned, the dynamics in the field of sustainability are enormous. It is essential to stay up to date and continuously educate yourself, as regulatory requirements are constantly changing. The EU taxonomy is just one example of a law that is currently being continuously expanded. This requires a considerable amount of time to work through the various regulations and ensure that you are always up to date.
Continuous improvement instead of perfectionism
Very important: you shouldn’t despair and you shouldn’t expect everything to be perfect right from the start. I think it is particularly important to see sustainability and sustainability reporting as a continuous journey, an ongoing process of improvement. It’s perfectly fine if not everything is perfect in the first report and not every gap can be filled. The important thing is to focus on continuously improving and moving forward step by step.
