By: Laura Callaghan, Associate Director of ESG Services at Novata
As one of the most far-reaching and in-depth EU regulations, the Corporate Sustainability Reporting Directive (CSRD) has significant implications for investors as well as their portfolio companies. The thresholds by which a company falls within the scope of the CSRD are iterative, with the first group of companies being mandated from 2024 (to report in 2025) and others following every year thereafter. By 2028, the scope is so far-reaching it will even include non-EU companies with a net turnover of over €150 million in the EU and either an EU subsidiary in-scope or an EU branch with €40 million in revenue. Despite the iterative timeline, the CSRD is a tall order for any company falling within scope and requires time, effort, and resources now, not later.
The CSRD is a pivotal effort — alongside the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) — to increase transparency, encourage capital into sustainable investments, and improve the management of risks stemming from environmental, social, and governance (ESG) issues. Under the regulation, more than 50,000 companies globally are estimated to be affected, including public and private companies that must report on the risks and opportunities from social and environmental issues, as well as the impact of their activities on people and the environment.
Given that the regulation is focused heavily on corporations, what impact will it have on investors? Despite the misconception that entities within the scope of SFDR will not be subject to the CSRD, the regulation can apply to investment firms and fund managers [it is worth noting that this does not apply to funds or Alternative Investment Funds (AIFs)]. Like their portfolio companies, investors should be screening for their own applicability to the CSRD. Due to the complexity of the reporting thresholds, even parent entities outside of the EU or entities with revenue or operations in the EU should evaluate their applicability and the impact of the CSRD immediately. However, because the regulation has been written with a corporate focus, it may be difficult for investors (and other sectors) to follow and report on in a meaningful way. Sector-specific guidance, including financial sector standards related to capital markets/investments, insurance, lending, and banking, has yet to be released but is expected to demand further metrics and additional information for reporting. Regardless, investors can begin to prepare resources and capabilities to streamline reporting once further guidance is published.
While the CSRD adds to investors’ sustainability reporting obligations, the data disclosed by their portfolio companies can be leveraged to support investment decisions. The lack of standardization in the current reporting landscape makes it challenging to compare ESG performance across different companies and industries. By providing clear guidance on the information to disclose and the required methodology, the CSRD is helping to improve the consistency and comparability of ESG data. This, in turn, will enable investors to assess a company’s sustainability performance, risks, and opportunities more effectively than before.
Furthermore, for investors in scope with the SFDR, the data collected for CSRD can support the evaluation of investee company performance in line with a fund’s Article classification. Much of the information required in relation to the principal adverse impact (PAI) indicators will be provided by companies through the CSRD. It is important to note that, unlike the SFDR, the information reported under the CRSD is subject to a double materiality assessment, so there may still be some data gaps for investors to fill if a company has not identified a topic (e.g., biodiversity and ecosystems) as material for its business. Nevertheless, the CSRD is still expected to ease the reporting burden of investors in scope of the SFDR.
Overall, the CSRD is a significant step forward for corporate sustainability reporting as it will provide investors with the information to make effective investment decisions, enhance reporting, and support companies making a positive impact on the environment and society. However, there are over 1,200 data collection points to consider and strict guidelines to follow. Due to the robust nature of the regulation, aligning with it will make compliance a resource- and cost-intensive exercise. Establishing processes, capabilities, and data management systems to support reporting in the short term will help companies be ready to collect relevant data and build resilience towards long-term sustainability disclosures. Novata provides an intuitive data management platform and ESG expertise to make collecting, managing, and reporting CSRD data easy. For more on what investors should know about the regulation, read Novata’s eBook, CSRD Simplified: A Guide for Private Market Investors.
Laura Callaghan is a Chartered Environmentalist (via IEMA) and Certified Climate Risk and Sustainability professional (via GARP). She is currently an Associate Director of ESG Services at Novata, a certified B Corp empowering private markets to achieve a more sustainable and inclusive form of capitalism. Starting her career in environmental due diligence for mergers and acquisitions (M&A), Laura now works with investors, asset managers, and their portfolio companies to develop meaningful ESG strategies with a focus on data collection, reporting, and value creation. She also advises clients about regulations such as the CSRD, SFDR, and TCFD, in addition to voluntary frameworks such as the EDCI, ISSB, and more.