What we discussed

The European Union Corporate Sustainability Reporting Directive, or CSRD, has been a hot topic in 2024 and that interest grows even stronger towards the end of the year.

Here at the Urbanista, we discussed CSRD back in episode 25 in February. But since things keep evolving, we want to revisit this topic. We want to see how things have been evolving, if at all, and how companies are doing. For this we called our go-to expert on CSRD, Ella Tanskanen.

Ella, can you tell us who you are and what you do?

Hi. I’m Ella Tanskanen. I'm head of sustainability services at Greenstep. CSRD is of course a big issue for our customers at the moment, and for basically all companies out there. For the smaller clients, CSRD affects them via their bigger customers, and the large corporations already have to start reporting from 2025.

Just to clarify, could you give us a brief overview of what the Corporate Sustainability Reporting Directive is and why companies need to comply with this.

CSRD comes from the words Corporate Sustainability Reporting Directive and basically it means that we are going to have a more comparable, more transparent and more structured way of reporting sustainability. The target is that we have a structured way of reporting so that we can compare companies inside a specific industry.

Before CSRD, we had other frameworks such as the Global Reporting Initiative (GRI), but they were not mandatory for non-listed companies. The CSRD is actually becoming mandatory for many companies out there.

We also have the new European Sustainability Reporting Standard (ESRS). It means that we have specific data points from the environmental side, from a social sustainability side and from governance. It all comes down to preparing a very precise process that also includes this new concept of double materiality assessment.

Can you just remind us which companies fall within the scope of the CSRD regulations?

Basically, it starts from 2024 for large, listed companies and other public interest entities such as banks, insurance companies and so on. But from the year 2025 it will include other large companies. Large is defined by the Accounting Act. It includes companies that meet two of three criteria; if you have over 50 million in revenue, over 25,000,000 in balance sheet total and/or over 250 employees. If you meet two of these three criteria, it means that you should be reporting from the year 2025 onwards.

What is important to understand at this point, is you should conduct the preparation process before you actually know what kind of data you should be collecting. That means a double materiality assessment and gap analysis. You must know what kind of data you already have and if it matches the disclosure requirements or not.

What does the value chain mean, with regard to sustainability?

There is a need for mapping your value chain because now due to CSRD we need to consider not only the company's own operations but instead the whole value chain. We need to map the upstream and downstream of the value chain. The auditors have highlighted the need to identify the value chain with sufficient accuracy from beginning to end. This is part of the starting process and it's crucial to conduct that well before you jump into evaluating impacts, risks and opportunities in the double materiality assessment.

Can you explain more about the Double Materiality Assessment?

Double means that you consider impacts firstly from different perspectives. Firstly, from the inside out, meaning from the company to the outside world. I.e., what kind of impacts do you have on nature, on the climate, on people and so on? Secondly, when it comes to financial materiality, it means that you consider the impacts outside in. What kind of impacts does, for example, climate change have on your business from a financial point of view? This is also very strategic. It is risk management, but it's not just that. We also consider the opportunities.

How is the financial materiality connected to the environmental and social governance aspects?

Once the company has conducted risks assessments of many kinds, they also need to consider how these sustainability matters are impacting the business from a financial point of view. What kind of risks and opportunities do they present for the company and for the whole value chain?

After mapping the value chain, and then looking at the double materiality, what comes next?

You identify the impacts in every step, just like you go through all the standards in the ESRS. We talk about the environmental topics and subtopics, and sub-subtopics from the environmental side. And then we go through the social topics and then the governance side.

We go through all of these and we just consider what kind of impacts they have on us and on the value chain. We also consider the scope and scale. We can then identify how material these impacts actually are.

How long does the CSRD process take?

This is kind of a long process. It takes some time. You can reserve a couple of months to do that and it's very crucial that you form a good project team for this. There needs to be more than just a single person in the company conducting this assessment because you need more perspectives, including from the stakeholder. It is a requirement from the standard to involve stakeholders when identifying those materially sustainability topics. Without this involvement, the double materiality assessment would become overly company centric and might not consider enough the stakeholder expectations.

Is it better to complete this process internally, or hire someone externally to help?

I think it's both at the same time. You definitely need the company’s own resources because this is very much about the business itself, the value chain and the company’s people, the HR people, the IT people, the development people, the CFO's, and so on. They understand the business best. And of course, when we assess the impacts through risks and opportunities, we need their input to so that it is about the company and it's not just creating a document that you will never see again. It's also crucial to schedule it in a way that these people can actually provide their time in the right place of the calendar.

At the same time, the regulation is very new and it's also quite complex. So, I would suggest external help for advice to ask all the questions that that arise during the process, so that you can go forward efficiently and you get help that you need.

What about the Gap Analysis, how do we start with that?

The outcome from the double materiality assessment phase is that you know which standards from the ESRS you should be reporting annually. There can be, for example, three standards. You can have the mandatory ESRS 2 Standard, and then it's very likely that you will have the environmental standard 1E1, which is climate change. You should then describe in more detail why climate change is not material for your company. Then probably the social standard is also one, which is from your own personnel. There can be more of these standards, but that is the kind of outcome from the double materiality assessment.

Then of course, next is to go a bit deeper to these specific material standards, so there are disclosure requirements inside those standards. And inside those disclosure requirements there are multiple data points. We have different kinds of data types. There can be a narrative data where there can be descriptions of material risks and opportunities arising from dependencies on your own workforce, or there can be disclosure of transition plans for climate change mediation. Then there can be tables, monetary percent, mass, area, decimal volume, intensity, etc. So many kinds of data type can be inside those disclosure requirements.

For example, a disclosure requirement from the climate change from E1 standard includes E15, which is energy consumption and mix. In this disclosure requirement there are multiple data points that you need to consider. There can be total energy consumption related to your own operations, there can be fuel consumption from renewable sources as a percentage of renewable sources in total, there is energy consumption, and so on. This kind of very specific data you need to disclose. In the gap analysis you go to this data point level of the standard, and you start to identify if you already have that kind of data somewhere.

In conclusion, you go one step at a time, and you consider where you are at the moment. What kind of data you should be collecting from different systems. You can also name the responsible people inside your organization. Who is responsible for that kind of data? And then the schedule, what kind of schedule do we need to collect or even generate this kind of data if it's not in place already?

This CSRD process can take a long time. What is the schedule for complying?

You should start this process now in order to start that kind of data collection process. However, in some cases you can also have a kind of buffer so that you have more time to be fully prepared. It can be from one year to three years and depends on the size of the organization and the standard that it that we are talking about. Different standards have different provisions for this phasing in.

Additionally, some data points out there in the standard, they can be voluntary, and don’t necessarily have to be fulfilled. Then some of these data points are subject to phasing in provisions that are applicable to undertakings with less than 750 employees. Finally, some data points are subject to facing improvisions that are applicable to all undertakings.

There is a grace period of one to three years that will take us to 2027. Do you anticipate more time extensions beyond that?

Things are changing and evolving and of course we will have also parts of the standards that are still coming, like sector specific standards. So, we will see additions and updates and, of course, we'll learn during this process.  Every company learns, and in the future, when we have actually seen the various reports, we will have benchmarking opportunities. Of course, this year it's very hard because we have few opportunities for benchmarking.

Are there industries that are already more or less set up, with regard to CSRD?

Yes, of course, those industries that have a great number of impacts. For example, environmental impacts, emissions and so on. They have already at least calculated their emissions for a long time because of the stakeholder expectations to produce that kind of information.

But these industries that have the highest impacts, have also the highest expectations on them to make a change. Because if they produce negative impacts, then they also can change that and be the change maker in the industry. What we are looking for from this directive is that these companies are now producing more information, and they want to show the best strength in the industry so that investors come to their side.

Are there other benefits for companies undergoing this process?

This process of CSRD preparation also helps you to structure your sustainability work inside the company in a new way. These new structures also give you more clarity. They give you the specific targets and metrics of how to go forward, and how to see where you're going. For example, from the environmental sustainability side you can see that you're going in the right direction. I would say that this gives you more clarity and more ambition to set those targets and measure them, because you know that these important stakeholders are also evaluating then the results from each year.

And many companies that are smaller in size, they see the value for their employees and actually many companies have said that one reason why these employees are working for us is because we are a sustainable company, and then they see that we are creating value for this for this society, or for the nature and so on. So, this is very much about the employer branding as well.