New EU rules mean companies must report on the good, the bad and the ugly.

Until now, companies have largely been free to choose what they report on in terms of sustainability. Usually, they have focused on the success stories, glossing over areas where they struggle.

The EU recently launched the Corporate Sustainability Reporting Directive (CSRD). This is a big step towards real sustainability in the daily operations of businesses.

The new EU directive requires that a company reports on all relevant information, regardless of whether it puts the company in a positive or negative light.

This will make it possible for customers, investors and others to use the reports for an objective assessment and comparison of companies.

How to meet the new requirements

The European Financial Reporting Advisory Group recommend companies to report on their impact across three different dimensions: Environment (E), Social (S), and Governance (G) – ESG.

For example, if a firm imports textile from a low-cost country it is important to look at social and environmental conditions at the production facilities.

For governance, it is relevant to report on issues such as board composition (whether both genders are represented, for example), executive pay and transparency.

Many companies begin by collecting what they are already involved in with regards to sustainability, and report on that. A successful sustainability strategy should operate the other way around.

Here are five steps that may be useful in the process of approaching the Corporate Sustainability Reporting Directive (CSRD).:

  1. Map. Form a sustainability group that represents the company. Map the impact the company has on social and environmental factors. The 17 United Nations Development Goals are a good checklist. Based on these findings, develop a sustainability plan with concrete goals and a time frame for reaching these.
  2. Test. Invite key stakeholders, like customers, suppliers, investors etc. to go through the plan. Collect feedback and revise the plan if necessary.
  3. Launch. Announce the plan across the entire organization. Use websites and internal communication platforms. This is a continuous process.
  4. Implement. Track progress on the goals. If the company is not progressing, figure out why and follow up.
  5. Report. What did the company achieve, what did not work and what can the company learn? Transparency is key.

The CSRD is an update to the current Non-Financial Reporting Initiative. The term “non-financial” signals that the directive is not associated with financial performance.

Through the shift to CSRD the EU shows that sustainability is relevant to investors as well. This is something both companies and society will gain from in the long run.

This is an adapted version of a text originally publised in Finansavisen.

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