To meet the requirements of the EU’s new Corporate Sustainability Reporting Directive (CSRD) both public and private firms across all sectors will have to lean on technology, particularly as the pressure to move away from proxy data grows, Ouida Taaffe reports.
At the start of January 2023, the EU introduced its Corporate Sustainability Reporting Directive (CSRD). The aim of the CSRD is to ensure that investors, and other corporate stakeholders, are provided with the information they need to assess a firm’s sustainability. That information is not part of traditional financial reporting.
What’s more, the CSRD applies to all large firms in the EU – both listed and private – as well as to SMEs, and the reports must be published. The CSRD covers around 50,000 companies in all, and rules start coming into force in 2024 for public reporting in 2025.
Meeting the requirements will not be simple. The CSRD is underpinned by the EU Taxonomy, which defines what economic activities count as sustainable. A sustainable activity is one that contributes to at least one of the six environmental objectives listed in the taxonomy and does ‘no significant harm’ to any of the others. It must also be in line with employment standards and human rights.
Compliance pressure for companies to report on sustainability is growing
All in all, the Taxonomy and the CSRD represent significant compliance pressure.
“For many large companies, this is an additional level of disclosure, but many smaller firms, particularly if they’re private, face much heavier lift in building up a whole reporting structure,” says Christian Spindler, CEO of Sustainaccount, which helps firms to manage climate risks and capture opportunities.
And the reporting structure is not the only challenge. “When it comes to complying with regulation like the EU’s CSRD, the main problem is getting data,” says Alexander Stevens, CEO of Greenomy, which offers firms a sustainable finance reporting solution and is part-owned by Euroclear. “The legislation covers around 2,500 data points.”
What’s the problem with proxy data?
Because regulators are still expanding and bedding-in the requirements for sustainability reporting, firms can use proxy data to try to capture what’s going on. But the window on proxy use is closing.
“Financial institutions won’t be able to use proxy data to report on their sustainability for much longer, so they are expediting the transition to new platforms,” says Stevens at Greenomy.
That transition has a lot of ground to cover. For example, the European Markets and Services Authority recently highlighted the gap between reporting ‘stringency and feasibility’ in a test of whether sustainability-oriented UCITS equity funds would meet Ecolabel requirements. Only 1% hit the proposed 50% mark.
Why the pressure? Spindler says that measuring carbon footprints, for example, can be done by using proxies like spending data. “But this is very coarse,” he says.
That lack of granularity is the problem. “Asset managers and banks rely on corporates to provide the data they use to assess the sustainability of their assets,” says Stevens. “The data has to come from the horse’s mouth.”
Should companies move to new risk software for sustainability reporting?
But though companies are struggling to get to grips with CSRD and the Taxonomy, they’re not necessarily in a hurry to buy yet more software, says Spindler at Sustainaccount. That’s partly because of cost but also because they want to build up knowledge in-house.
Stevens at Greenomy points to the pressure from regulators and the market. “The reason why corporates want to use the platform is that it helps them identify how to improve their taxonomy alignment score and lower their cost of capital,” he says.
There are obvious benefits in a central hub for sustainability data. “The legislation is very lengthy and difficult to categorise and work through,” says Stevens. “Tests have found that using the Greenomy portal to meet the requirements can be seven times faster than doing it manually in-house.”
What are the benefits of central data hubs?
The EU is keen on the benefits that centralised access to sustainability data could bring and is working on a European Single Access Point for sustainability data.
What will happen over time? Spindler argues that there are two ways for firms to become sustainable. The slow way is to change their supply chain. The fast is to buy compensation products like carbon credits. Most firms are not moving quickly.
But it may be that regulation is starting to drive a faster tempo.
“We’re seeing a lot more engagement from finance and risk functions,” says Stevens. “CIOs need to be working closely on this.”
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