How the CSRD will change corporate narratives

The EU’s Corporate Sustainability Reporting Directive (CSRD) requires companies with interests in Europe to make extensive, detailed disclosures about sustainability performance and related strategic implications. Whereas the letter of the directive necessitates extensive box-ticking, the spirit supports change in business conduct.

Under the CSRD, company directors must investigate sustainability issues such as climate change, biodiversity loss, and human rights. They must also link these issues to financial opportunities and risks and explain how they coordinate sustainability and financial performance. This will have a significant impact on narrative reporting whether or not you have a EU footprint.

Value creation

After the first wave of CSRD reporting, capital markets will pay more attention to responsible risks and opportunities. By providing more consistent and comparable data, the directive enables companies to be evaluated more easily and better.

Those capable of presenting a compelling narrative on how they compete amidst sustainability-driven market forces will be rewarded. The sustainability reporting paradigm will shift from risk resilience to value creation.

The executives who view CSRD reporting as a mere box-ticking exercise will fail to consider the connections between sustainability and value creation; they are likely to see fewer benefits, or worse, that their company’s value decreases as investors realise that the business is blind to opportunities. Conversely, directors who correctly apply the CSRD spirit can better understand how sustainability factors influence value creation, leading to more robust financial outcomes. The annual report will reveal in what camp the company sits.

“ Those capable of presenting a compelling narrative on how they compete amidst sustainability-driven market forces will be rewarded.”

Business strategy

The CSRD will change how directors relate their business strategy to the sustainability agenda. We can observe from annual reports that although some companies link some sustainability topics to business strategy, the practice isn’t mainstream. However, reporting how the business strategy addresses sustainability factors and their financial implications will become standard under the directive.

The CSRD bares how directors assess business opportunities and risks related to sustainability matters. These must include environmental and societal impacts, financial outcomes, and improvement plans. The CSRD requires management to go into the weeds of the matter. For instance, if water use is material to a paper mill, its directors need to connect their strategy to impact, opportunity, and risk pertinent to water use. They must also disclose performance indicators across the value chain, such as water use from tree growth to cellulose processing. This level of transparency will encourage directors to align business strategies and operations with sustainability considerations. Reporting narratives will reflect this.

Stakeholder engagement

The new directive specifies an essential action for directors: to understand and manage the impacts of their business on the environment and society. Previously, leaders were only required to report on how the environment and society might affect the company’s finances. However, the CSRD now requires them to take an additional “inside-out” perspective and manage outward impacts. This two-way approach is referred to as “double materiality”. Getting a handle on what is material from the inside out is a new practice. It usually boils down to asking stakeholders for feedback.

Good engagement leads to mapping the nature, timing, and remediation of actual and potential consequences on society and the environment. It also sits at the core of broader strategic insight, risk management, and value creation processes. These aspects will be discussed more in annual reports. The CSRD will help elevate and integrate a typically underplayed disclosure.

“ Getting a handle on what is material from the inside out is a new practice. It usually boils down to asking stakeholders for feedback.”

Operational performance

Because the CSRD guides the development of strategic narratives that integrate material sustainability factors, both inwards and outwards, annual report readers will want to understand the governance of the decision-making process and its impact.

The directive mandates company directors to explain whether and how they manage sustainability performance. For instance, the executive may need to decide between investing in a project with strong financial returns and social benefits but poor environmental outcomes and a project with modest financial returns but exceptional social benefits and superior environmental performance. How will the management balance short-term results and long-term goals? How will it calibrate financial and non-financial outcomes? The annual report will reveal. The CSRD encourages company executives to develop business strategies that maximise the value they create by managing sustainability factors. As with any other strategic task, the C-suite must fulfil its part. The directive might not apply to you, but we may be on the cusp of a golden era of integrated reporting; will you be part of it?

“ Some companies link sustainability topics to business strategy, but the practice isn’t mainstream.”

If you’d like to discuss this, or any other subject, please get in touch with Richard Costa, Senior Corporate Communications and Reporting Consultant at richardc@gather.london

We’d love to know what you think.