From January 2024 the Corporate Sustainability Reporting Directive (CSRD) comes into force. Initially it will affect 50,000 of the largest companies in the European Union, this number will be increased in 2025, with 2026 being the year in which it will reach SMEs that have to comply with this requirement, i.e. those that must be listed on a regulated market in the EU and meet 2 of the following criteria:
a) Balance sheet total of €4 million.
b) Net turnover of 8 million euros.
c) Average of 50 employees during the financial year.
The objective is to accelerate the transformation to a sustainable economy, reinforcing the implementation of the ambitious European Green Pact strategy.
On paper, it seems that forcing the move to a more sustainable business management and thus economy through the creation of a legal framework that “forces” it is an appropriate step. After all, much of the EU’s regulations (single market, free roaming, mobility or labour regulations to name a few) make it easier to manage. The CSRD has a good basis, prepared by EFRAG’s expert committee, and the latest trends in impact measurement and ESG grouped as the European Sustainability Reporting Standards (ESRS). This directive has been consulted – a standard procedure within the EU – with affected stakeholders and in the summer of 2023 the public consultation phase was closed in order to proceed to its final format.
However, the reaction to the CSRD has not been warm. A directive of such ambition has many challenges to meet, these are some of the main ones in my opinion:
- More bureaucracy than change. Main concern for both legislators and beneficiaries: How will this directive manage to be an element of change when it is merely a reporting and information gathering tool? Bearing in mind that the sustainable, positive impact economy is in its infancy, there are many questions to be answered and approaches to be discovered, with the European market again being the major pilot area for this type of testing.
- Are we ready to demand standardised ESG measurement? I think not, as a global standard is lacking. While it is true that the Sustainable Development Goals have been a step forward in the measurement of the sustainable economy, work is still being done on what and how to measure it. IRS+, GRI or SROI itself promulgate different approaches. I particularly believe that companies should have a simplified format of impact measurement (positive and negative) where we do not take into account cumbersome indicators such as the impact on a supplier that we are contracting their services, for example, how many salaries the office rental contract helps to maintain in the company that manages them. Rather we should focus on key metrics such as how much tax it saves e.g. hiring and reintegrating ex-offenders, or how much CO2 a company helps to reduce e.g. by conducting sustainable green management.
- Adapt legislation to market realities. One of the goals of the renewed European Commission (end of 2024), will be to significantly reduce the bureaucratic burden for SMEs and to streamline the management of European funding by reducing and simplifying the current tools. In other words, the European Commission is aware of the problems, but is still working on how to solve them. In my opinion we can expect a double standard for the application of the CSRD a) one, more demanding for large companies that will have large consultancies as the main beneficiary. b) another much less rigorous for SMEs that is more aimed at raising awareness among these companies than at measuring the sustainability of their management.
We have seen the bureaucracy, now let’s look at the new way of doing business. Starting from the premise that the main objective of the European Union’s strategy is to achieve a sustainable economy (and not to lose competitiveness along the way, something that is not being achieved at the moment), I believe that the sooner we get down to work the better, since the horizon towards which we are heading, sustainability, seems inescapable.
How? Welcome to the world of “Impact Valuation” or how to make better decisions based on the information we will gather through CSRD. It sounds ambitious, very global and reserved for large companies, but make no mistake, properly analysing data to make more favourable decisions for our company is something that concerns everyone, including the self-employed. Let’s adopt sustainability as a business model (customers, suppliers, tax policy…).
We are at the beginning of this science. Until now, and for the last 5 or 6 thousand years, we have measured the effectiveness of a company through its profitability, its balance sheet and other financial documents such as EBITDA. Since the last 20 years we have started to develop a new, more ambitious measurement system that allows us to obtain profitability, increase the positive impact, reduce the negative impact both socially and ecologically, thus changing the essence of a company, instead of just generating profit to focus also on the positive impact.
Why? In the European Union because regulations are forcing us to do so, but also because the consumer is asking for it. In Spain alone, 66% of consumers make purchasing decisions based on companies’ commitment to sustainability.
Large companies are increasingly setting the trend (by measuring the sustainability of their suppliers, among others) and why, at the end of the day and excuse the emotional note, we should leave a better future for our grandchildren.
If we know that we are going to be required to meet the CSRD, I believe that we should use the opportunity to implement sustainability indicators in two formats:
a) The minimum necessary to comply with the law.
b) The maximum necessary to comply with our market.
If, for example, we run a hairdressing salon, we can choose to differentiate ourselves through the use of natural, ecologically certified products that have not been tested on animals in their creation, i.e. comply with what they are going to ask of us from an ESG perspective (impact of the company on ecology, social and management) but applying it directly to the expectations of the company’s environment, or satisfying the needs of a specific market niche.