While the new Corporate Sustainability Reporting Directive (CSRD) is going to impact thousands of companies, both within the EU and outside, only a few are ready to comply with its requirements. Mandatory reporting requirements on environmental and social impact are accelerating and new approaches must be found to meet the challenge.
- A new report shows that the CSRD mandate is already having a significant impact on reporting.
- Overwhelmed and over-capacity reporting teams underestimate the work that lies ahead.
- Implementing integrated reporting will enable companies to optimise processes and meet new CSRD demands.
These are the key takeaways from the latest survey of over 500 business leaders across Europe by Workiva (NSYE: WK). According to its Annual Reporting Barometer 2023: Facing up to the CSRD, 59% of respondents plan to comply with the CSRD, even when they are not mandated to do so.
That speaks volumes about assumptions on the direction of travel and the expectations of stakeholders. It is important to note that, while officially the CSRD applies to European companies, estimates suggest that up to 4,000 non-EU organisations will be forced to comply due to the size of their European business.
The impact of the CSRD is clearly being felt, with more than three-quarters (77%) of businesses surveyed revealing that ESG now has a moderate or major influence over their annual reporting strategies. What is perhaps most interesting for those following the rows about ESG in the US, is that for 73% of respondents in the DACH region and 67% in the UK and Ireland (UKI) ESG now has a moderate or major influence. This is hugely significant because, as larger companies begin to align their strategies with the management of ESG-related risk, the need for accurate Scope 3 data is going to drive ESG data demands throughout the supply chain.
Companies underestimate the work ahead
One of the biggest challenges is the complexity of the task. Many companies are beginning to recognise that ambitious targets set by chief executives are not always achievable by the ops team. Crocs is a prime example: the footwear maker extended its deadline for net zero from 2030 to 2040, admitting that it had set its target before calculating its baseline, and its absolute emissions have increased through a recent acquisition.
Recent research has highlighted the lack of well-resourced, well-thought-out credible transition plans. CDP estimated that, while more than 4,000 of the 18,600 of its reporting companies claimed to have a transition plan, only 81 (or 0.4%) had demonstrated best practice by disclosing against all 21 key indicators that denote a ‘credible’ strategy. While 2,300 companies had disclosed to many (between 14-20) of the key indicators, that still means that only 13% can be considered to be on the path towards disclosing a credible climate transition plan.
The Workiva report suggests that European organisations are putting in the work, with 43% of respondents planning to spend about the same amount of time as last year on financial transformation over the next 12 months. Finance teams find themselves persistently accepting and absorbing an ever-increasing workload, indicating a frustratingly slow pace of progress.
Over one-third (37%) of respondents admitted to feeling overwhelmed and exceeding their capacity during the previous reporting period. In the UKI, companies felt the most pressure, with 60% being over capacity. It comes as no surprise that 41% asked for more time during next year’s reporting period.
This need for more time is especially interesting given that the International Sustainability Standards Board (ISSB), which was forced to extend its guidelines beyond purely internal financial risk towards external impact due to stakeholder pressure, has already stated that it will not require companies to report on the full suite of metrics in its initial period, due to that complexity.
Overall, what the data suggests is a lack of preparedness for the forthcoming reporting requirement. If companies and their internal teams are struggling this much with carbon footprinting, highly anticipated frameworks about nature and biodiversity reporting are only going to increase pressure on the process.
Automation of internal processes is likely to play a key role, especially considering that many reporting processes remain dependent on the use of Excel. Erik Saito, senior vice president and general manager of EMEA at Workiva, said: “Many reporting teams are at or near capacity and will be challenged by the workload pressure of additional CSRD reporting requirements—including additional disclosure, auditor assurance, and XBRL tagging—which will drive many to leverage new technology solutions.”
Collaboration will be critical to effectiveness
Despite the CSRD mandate requiring companies to integrate both financial and sustainability information into their annual reports, only 10% of those surveyed said that they are currently working to improve collaboration between finance and sustainability. Similarly, only 10% are actively working on improving collaboration between finance and risk, while only 6% are focused on integrating finance, sustainability, and risk. UKI companies were slightly ahead of Europe, at 12% – despite not necessarily needing to comply with the CSRD – while DACH lags further behind, at 8%.
The data suggest that, while there is a great deal of talk about the importance of sharing data and moving beyond silos, the reality lags far behind. While improvements are being made, it is not clear whether existing plans to optimise collaboration between finance, sustainability, and risk to meet CSRD demands are going far enough.
“There is a clear lack of in-depth understanding when it comes to the requirements of integrated reporting—particularly in regard to CSRD compliance and the timelines needed to establish, test and optimise a truly cross-functional reporting structure,” added Saito. “Organisations simply won’t be able to approach CSRD compliance with a ‘trial-and-error’ approach; the demands are far more complex than anything that has come before—and will only continue to increase.”
Technology will play a vital role in improving holistic reporting
With the need to integrate finance and sustainability, organisations need to rethink their existing processes and develop a roadmap for incorporating both their financial and sustainability (non-financial) data with audit and controls into their reporting process. Indeed, finance reporting teams may be accepting of current workloads, but if teams are working with largely manual processes, they will struggle to absorb the shock of the CSRD. Nearly half (46%) of respondents are actively integrating or have already integrated tech into their reporting processes, with the UKI and DACH ahead of Europe in this area, at 52% and 50% respectively.
While European companies may be ahead of the curve in terms of incorporating ESG into annual reporting strategies, this is often because they have to be, rather than because they are genuinely in control. In order to address the coming reporting challenges, businesses must prioritise cost-effective, efficient solutions as they work towards optimising their processes.