Firms must take action over Corporate Sustainability Reporting Directive

There is an urgent need for action in the face of evolving compliance requirements, according to VinciWorks, after a survey revealed that 77% of respondents have yet to commence preparations for Corporate Sustainability Reporting Directive (CSRD) reporting.

The survey of UK, EU and international ESG leaders and compliance managers by compliance and sustainability e-learning specialist VinciWorks shows that 50% of respondents acknowledged their organisations are likely to fall under the purview of CSRD, but only 23% have taken the initiative to commence preparations for CSRD reporting, while less than a third (29%) plan to embark on this journey within the next six months.

The CSRD is new EU legislation requiring all large and listed companies to publish regular reports on the social and environmental risks they face and how their activities impact people and the environment, according to VinciWorks.

Nick Henderson-Mayo, director of learning and content at VinciWorks, points out that the Non-Financial Reporting Directive (NFRD), the predecessor to CSRD, was relatively limited in its scope. Around 10,000 companies had reporting obligations under NFRD, which will see a 400% increase under CSRD.

“But there’s still a sense that it won’t directly apply to many companies,” he says. “This isn’t true under CSRD. Moreover, because CSRD focuses on suppliers, many businesses within a CSRD-related supply chain will have to report upwards of their key ESG metrics, not just Tier 1 suppliers. But the legislation was only passed by the EU in December 2022, and the Member States had 18 months, so under a year remaining, to incorporate this into national legislation, so there’s probably still a wait-and-see approach for some.”

“However, with the first reports due in 2025, next year will be a scramble for those working to prepare this information. Suppliers should beware of the larger companies at the top of their supply chain rushing around to gather data as the deadline draws nearer,” he adds.

The most significant challenge to CSRD compliance, according to the survey, is supply chain information (48%), followed by awareness and understanding (28%), and regulatory adherence (10%).

Henderson-Mayo explains that CSRD aims to establish a baseline for global sustainability standards and audit companies’ sustainability information. “This is a challenging task. Understanding what sustainability means and how to get started is daunting enough without the added regulatory pressures that CSRD brings. However, understanding sustainability and measuring ESG does not always have to be an uphill battle. There are dozens of reporting frameworks out there, such as GRI and TCFD, which can help organisations get a start on their sustainability reporting. There is, however, a bias towards overcomplicating this process,” he says.

“While gathering data on emissions is crucial, it’s not always relevant for many professional services businesses. Your electric bill is your electric bill and, beyond changing suppliers, you can’t do too much about it. But good governance, a strong social impact, supporting human rights in the supply chain and even doing pro bono work can have a much more significant sustainability impact than just turning off the lights at the end of the day. Businesses need to understand their material impact on the world and how they can make things better at an environmental, social and governance level, not just in their business but across their supply chain, too,” says Henderson-Mayo.

He points out that ultimately, ESG is a risk mitigation strategy. “Choosing the cheaper supplier over the one with better labour practices is a risk. Treating lower-paid workers as a disposable commodity is a risk. Ignoring good governance and letting toxic workplace cultures increase is a risk. With an ESG programme, you assess all these risks and determine ways to mitigate them in your business. CSRD also wants you to do the same thing for your supply chain,” he notes.

The key to CSRD, says Henderson-Mayo, is knowing your suppliers – who are they, where are they based, what are their risks, and what’s their own supply chain like? “You can do that by, first of all, having an excellent supplier onboarding process. Do detailed due diligence and have them upload all their policies into a single portal. Include sustainability and ESG clauses inside contracts, and keep those things updated throughout the business relationship,” he says.

“What you need is a way to know your suppliers intimately,” he adds. “Know who they are and build a close working relationship as far down the supply chain as possible. Training can actually help you achieve that. Far more people touch the supply chain in your business than just the accounts department. Get everyone thinking about sustainability in the supply chain so CSRD compliance isn’t just stuck inside an ESG committee but becomes everyone’s responsibility.”

Henderson-Mayo believes the way to get full information from supply chains is to invest in the onboarding process. “Because if you let a supplier pass into your system with significant glaring gaps in the information you need from them, you’re very unlikely to get it afterwards. Make sure the supplier uploads their complete set of policies at the start of your relationship before they can start getting paid. They submit the data you require of them. They sign off on the policies that you expect them to have. If you let things slip at onboarding, it will be much harder to figure out the data later,” he explains.

This is where having an automated system for ongoing monitoring can help, he explains. “So a system that can see the gaps and send out automated reminders, perhaps with increasing frequency or around renewal dates, can help to plug those gaps and also reduce the effort you need to put into keeping things up to date if you can automate those reminder emails to suppliers to say ‘we still need your modern slavery policy’. This is particularly true when you get into hundreds, if not thousands, of supplier relationships. Automating as much as possible, both at onboarding and throughout the business relationship, can help with compliance headaches and prepare you for CSRD,” he says.