Across the EU, these new reporting rules, which are supposed to bridge gaps in the disclosure of non-financial information, should affect about 50,000 companies.
The directive requires all large companies in the EU to report on the non-financial aspects of their sustainability strategies and their implementation. All companies listed on an EU-regulated market have to submit regular reports, if they meet two of the three criteria defined by the proposal--a balance sheet of over €20m, net sales above €40m and more than 250 employees.
The initial impact of the directive will hardly be felt in Luxembourg, says , chair of the Luxembourg Institute of Directors (ILA), but could become a challenge if companies don’t already start setting up sustainability and reporting strategies.
Imprecise information costs time
One of the hurdles companies will come across in their implementation of the directive is that its concepts are not yet clearly defined. “We talk about sustainable investments, but there is still not a clear definition of what that is,” says Feipel. , acting managing director of the institute adds: “First, you have to define what you’re going to report on--that’s not very clear. But to report, you also have to measure. And how do you measure? What are the common measurements?”
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The directive will apply from 1 January 2024 for large public-interest companies, with first reports due in 2025. But, says Wauters, it will take time for companies to define and set up strategies and infrastructures, especially when non-financial information is difficult.
Companies can also not be expected to be perfect in their sustainability from the get-go, and so should be recognised for their efforts and considered within their context, the about the directive.
SMEs should get on board
Companies that do have the time should use it to get ahead, as the CSRD directive is likely to have a downstream effect. The directive will progressively extend its scope, says Feipel. But even if the EU wants to spare SMEs from its directive, “as a small company, you’re going to need to be applying some of those standards to be chosen as part of the supply chain of the larger companies who report on it,” adds Wauters.
As a small company, you’re going to need to be applying some of those standards to be chosen as part of the supply chain of the larger companies who report on it.
As such, the institute says it seems essential that not only SMEs start working on strategies but also that there should be incentives and support for SMEs to be able to start implementing ESG reporting practices. These could come in the shape of tax incentives, or a support centre, Wauters suggests.
Boards need to educate themselves
What should be the first steps for companies as a whole? “It’s the mindset that need to change first,” says Feipel. Boards need to take a step back and assess and understand where they are in terms of their sustainability.
To be able to understand sustainability and all its facets, they also need to expand their knowledge on it. “Directors are not born with that knowledge that they need to have today to redefine the strategy of their company in a sustainable way,” says Feipel. “Training is paramount, and one cannot imagine that this is something someone can just read about and think it’s enough.”
Directors are not born with that knowledge that they need to have today to redefine the strategy of their company in a sustainable way. […] Training is paramount.
Board members should therefore attend workshops and training sessions, so that they can decide on a strategy towards ESG compliance without falling into traps--like greenwashing for instance. It is only thereafter that companies can define what their non-financial KPIs should be.
Regardless of the size of their company, boards “need to realise that this is a topic that is not just a trend that will go away. This will stay with us. This is important and this is relevant. People need to be up to speed and keep up with the development,” concludes Feipel.