How sustainability and ensuring long-term profitability go hand in hand in the new EU directive CSRD

In just a few years, sustainability has become a central part of modern corporate governance. Its growing influence at both management and board level led has been accelerated by the fact that it will be reported under the EU’s new Corporate Sustainability Reporting Directive (CSRD).

We discussed this with Åsa Otterlund, Senior Advisor at Signium Sweden in Stockholm. Åsa has extensive experience as boardmember, she also teaches board work at Styrelseakademien (member of ECODA), and recruits members to company boards. Her wise advice and insights can give your organsiation a head start.

A time of change on the EU map

It was anticipated that 2024 was to become the first year when large Swedish companies would have to collect, analyse and report various sustainability metrics under the EU’s CSRD. Then, on 15 February 2024, the government’s proposal on how and when the EU directive will be incorporated into Swedish law was published. In practice this means that the timetable will be postponed until the 2025 financial year. However, this does not mean that companies and their boards should sit back. On the contrary, it is really sensible to use the opportunity to prepare now. The new reporting framework is comprehensive and will cover everything from energy efficiency and carbon emissions to social responsibility and inclusion, depending on the business or organisation. The requirements are part of the EU’s new directive aimed at encouraging businesses to take greater responsibility for achieving global climate goals and other defined important sustainability goals.

What does CSRD mean and how will it affect the business landscape?

The directive in brief, it means that large and listed companies, and also medium-sized and smaller companies, will over time begin to report their environmental and social impact and how they conduct this work (known as governance). This is done with the new reporting standard, ESRS, which has been developed in connection with CSRD. This transparent framework will make it easier to compare companies with each other. Ultimately, the ambition is that companies that are large and have a lot of impact will contribute more and be more transparent – and simply set a good example.

I believe that the reporting requirements will affect the business community in both large and small ways. By including actual data from the companies’ sustainability work, the relationship between sustainability and the companies’ long-term relevance and profitability is made more visible than before.

“In terms of reporting, this directive will eventually tie the somewhat scattered ESG bag together in a much-needed way! It is high time for organisations to become more transparent and sustainable in all aspects of their business. This directive has a higher purpose and this should not be forgotten in complexities of reporting formalities.”

Dare to cross the acronym threshold – How to take the plunge?

CSRD, CSDDD, SFDR, ESRS… Yes, from the 2015 Paris Agreement to today, we have had to learn a lot of different regulatory acronyms and for many, this becomes a threshold in itself that is challenging to overcome. Which regulations are relevant for your company is of course individual, but what unites each acronym is that they all aim to promote sustainability in one way or another. My advice is therefore to invest time in crossing the ’acronyms threshold’ and identify the regulations that affect your particular business.

With a wide range of ambitious sustainability goals, a clear path forward is needed, especially to identify relevant metrics for each company. CSRD is structured in three main areas; Environment, Social and Governance. Today, it contains 16 different sub measurement areas with a large number of KPIs and rules to report on. Some are mandatory, but for most areas it is up to the organisations themselves to assess what is relevant for them. This is why I always recommend that company boards start their work with a materiality analysis.

A materiality analysis helps to determine which KPIs are important to report on. According to CSRD and its reporting standard ESRS, a dual materiality analysis is required, which means that you should analyse both the company’s impact on the outside world and vice versa.

It is the responsibility of the board to carry out this analysis, although of course it is usually done in collaboration with the operational organisation, to identify the sustainability factors that affect the organisation most. The results of the analysis then form the basis for what the company prioritises in its reporting.

What other recommendations do you have for company boards that are about to embark on CSRD reporting?

1. Get in the driver’s seat and get a head start. Invest time so that the whole board learns the directive. Don’t just read about the concrete metric areas. It is just as important from a value creation perspective to relate it to the higher purpose for society and the planet, and not least how it affects your own company’s vision and mission. Even if it initially mainly involves larger companies, it is also highly relevant for smaller companies to familiarise themselves with the directive now. Many organisations will be indirectly affected early on, for example if they are a supplier to a larger company with reporting requirements. It will gradually affect the entire business landscape, and by understanding it early on as a board, you will gain a significant advantage.
2. Engage the whole company – from the operational organisation to the strategic board. The more perspectives and eyes on the reporting requirements, the more likely you are to prioritise correctly and effectively. Give the organisation the right support and conditions to effectively collect the data required for reporting and be present as a board.
3. Carry out a dual materiality analysis at an early stage. Feel free to get outside help, but ensure that your board make the active decisions on which metrics to prioritise based on this. Note that as board you will, according to CSRD, sign the sustainability report as part of your annual report.
4. Use your insights strategically. Make sure that sustainability becomes an integral part of the entire business strategy. In addition to identifying relevant KPIs, use the results to think strategically about how to secure and preferably increase the strategic value of the company. The CSRD framework itself will not automatically make you more sustainable, it is the strategic decisions you make based on the insights from the analysis and reporting that will make the big difference for your company.

The above strategic sustainability board activities will give you a head start in in securing your company´s future relevance and long term profitability.

A recent Signium Interview led by our Irish Partners with Ken Bowles, the CFO of the packaging giant Smurfit Kappa, provides a strong essence of how material well governed sustainability is to corporate success.

A safe partner to have along the way

For companies that are ready to embrace this change, the risk factors decrease while the opportunities increase. For the future of your business, for your customers’ trust and, not least, for our climate. Use CSRD as a catalyst for your important sustainability work, giving you the opportunity to break new ground for a more future-proof and profitable business.

With Signium’s solid experience in board consultancy and expertise in CSRD, we are a stable partner for your company – regardless of size and industry – during this transition period. We offer advice that helps corporate boards navigate the complex requirements for sustainability reporting and, not least, identify the right competences for the board and management.

So, when do we start? Contact Åsa or one of her colleagues today.