4 ways the Corporate Sustainability Reporting Directive (CSRD) will change investing

Sustainability no longer concerns with doing the right thing for the planet or people only. It also concerns with long-term value creation.

Sustainability has now become a key material concern for businesses and investors.

Investors are increasingly looking for companies that prioritise sustainability and ESG considerations to identify risks and guide their decision-making.

That's why the Corporate Sustainability Reporting Directive (CSRD) is a game-changer for sustainable investing.

This new set of regulations aims to improve non-financial reporting and increase investors’ understanding of their portfolio companies’ ESG performance, to better integrate these matters into their investment decision-making process.

Let's dive deeper into the 4 ways the CSRD will change investing for the better!

By increasing the scope of non-financial reporting, standardising sustainability reporting, requiring sustainability to be viewed through the prism of double materiality and be part of a business strategy, it will help you make informed investment decisions that prioritise sustainability and long-term sustainable growth.

Integration of Sustainability in business strategy

Sustainability has traditionally been seen as an afterthought for many businesses, something that can be added on if there's time and resources available.

But with the introduction of new regulations, sustainability is becoming a non-negotiable requirement that businesses must meet.

As for the CSRD, companies that meet at least two of the following three criteria will be required to comply with its requirements:

• Net turnover greater than €40 million.
• Balance sheet assets greater than €20 million.
• More than 250 employees.

So, companies, it's time to think more holistically about sustainability and consider the environmental, social, and governance impacts of your activities!

The CSRD requires companies to disclose information on what is their business model, how they consider sustainability risks and dependencies, and how these matters are overseen by the management.

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By aligning sustainability goals with business goals, companies can achieve better long-term outcomes.

Incorporating sustainability into a business strategy can help reduce operational costs, access new markets, and attract customers and investors who prioritise sustainability. And drive businesses, which could be potential investments, to perform better overall!

A good example of a company that has successfully integrated sustainability into its business strategy is the Danish pharmaceutical company Novo Nordisk.

Novo Nordisk, with its access-to-medicine initiatives, has developed a range of initiatives to improve access to diabetes treatment in low-income countries. These initiatives include providing affordable insulin, developing new technologies for insulin delivery, and partnering with local healthcare providers to improve diabetes education and care.

Increased scope of non-financial reporting

Non-financial reporting is increasingly important for making informed investment decisions that prioritise sustainability.

Non-financial reporting refers to the information a company provides on its environmental, social, and governance (ESG) practices. It provides a more complete picture of a company's performance beyond just its financial metrics.

With the CSRD, the scope of non-financial reporting will be expanded to include more detailed information about a company's ESG practices, in three main areas:

STRATEGY

• Business model and strategy
• Primary risks regarding sustainability issues and dependencies
• Management and supervisory bodies' roles in relation to sustainability

IMPLEMENTATION

• Due diligence procedures for operations and the supply chain
• Policies addressing sustainability factors
• Sustainability targets

PERFORMANCE

• Indicators pertinent to measuring all of the above
• Progress toward meeting targets

The CSRD covers all ESG criteria, including environmental, social, and governance issues.

The first set of European Sustainability Reporting Standards (ESRS) addresses 10 ESG topics related to environmental, social, and governance factors. Companies will have to disclose information on these topics based on materiality.

ENVIRONMENT

• Climate change
• Pollution
• Water and marine resources
• Biodiversity and ecosystems
• Circular economy and resource use

SOCIAL

• Own workforce
• Workers in the value chain
• Affected communities
• Consumers and end-users

GOVERNANCE

• Business conduct

By providing more detailed and comparable non-financial information, the CSRD will enable you to make more informed investment decisions based on a company's sustainability performance.

Additionally, mandatory disclosures on sustainability issues will encourage companies to improve their sustainability practices and performance, leading to a more sustainable and resilient economy.

Standardisation of reporting

Currently, the lack of standardisation in sustainability reporting makes it challenging to compare ESG performance across different companies and industries.

How can you assess the risks and opportunities associated with investing in sustainable businesses when the information is not comparable?

That's where the CSRD comes in.

Standardised sustainability reporting will improve transparency and accountability, making it easier for investors to compare ESG performance on a level playing field.

This will be done through three levels of information:

• Industry-agnostic disclosures are mandatory and have been specified by EFRAG in the cross-cutting and topical ESRS mentioned above. For example, climate-related disclosure will be mandatory for all companies.
• Industry-specific disclosures, which are also mandatory and will be defined according to the sector of activity. These will be published as a Delegated Act in June 2024.
• Company-specific information on issues that are important to the company and have not been covered in the rest of the sustainability report.

The standards developed by EFRAG provide clear guidance on what information should be disclosed on a topic, on what scope and following what methodology, thus allowing for comparability (i.e. two companies reporting the same indicator should have the same definition and calculation method, which was not the case with current regulations).

Investors will be able to easily assess the sustainability performance of companies and identify the risks and opportunities associated with investing in them.

Not only that, but standardisation will also enable companies to benchmark their sustainability performance against industry peers and identify areas for improvement.

This will ultimately lead to consistent and improved sustainability practices!

Double materiality and CSRD

Double materiality is an approach that combines financial materiality and impact-based materiality to assess a company's sustainability performance.

Impact-based materiality considers the external impacts of a company's activities on the economy, environment, and people, while financial materiality focuses on the financial impacts that are relevant to investors.

Incorporating financial and impact considerations, double materiality encourages companies to consider both the impact of sustainability issues on their own business and on stakeholders.

For the Corporate Sustainability Reporting Directive (CSRD), double materiality is a key concept.

To comply with the regulation, companies will have to report not only on how sustainability issues might create financial risks for the company (financial materiality), but also on the company’s own impacts on people and the environment (impact materiality).

The reason for this would be the increasing demand for sustainable investment products and the EU's Sustainable Finance Disclosure Regulation, which requires investors to report on the impacts of their investments.

By integrating financial materiality and impact materiality, the CSRD aims to provide you with a more complete and trustworthy understanding of a company's sustainability performance and risk exposure.

And will allow for more informed investment decisions and promote greater sustainability in investing!

In conclusion… Get ready for a significant shift in sustainability reporting and investing with the CSRD!

Overall, the CSRD will increase the scope and standardisation of non-financial reporting, integrate sustainability into business strategy, and improve ESG risk assessment.

This means increased transparency, comparability, and reliability of sustainability reporting, benefiting investors and companies alike.

Investors will now be able to make more informed investment decisions, supporting companies that prioritise sustainability. This is not just about doing the right thing, but also about securing long-term sustainable growth for all.

And companies will be encouraged to improve their sustainability practices and performance, leading to a more sustainable and resilient economy.

The clock is ticking as the deadline for compliance with the CSRD draws near. And it’s crucial for investors and companies alike to be prepared!

And for that, at Apiday, we’ve got you covered!

Our cutting-edge tool is here to guide you on the right compliance track, gathering portfolio data and automating the creation of disclosure reports.

With everything you need to be fully compliant in a single platform, you can save yourself the hassle and stress of trying to figure it all out alone!

No need to spend weeks or hire expensive lawyers for a compliance assessment: our tool provides the precise questions to answer and the best way to answer them.

Our CSRD experts are just a click away to respond and assist you with any concerns, questions and compliance requests!

Make compliance easy and stress-free with our tool. Save your time, money, and effort, and focus on what you do best - investing in a better and more sustainable future.