Corporate Sustainability Reporting Directive (CSRD)

Unlocking the true potential of CSRD: Are you merely complying or truly transforming?

The Corporate Sustainability Reporting Directive (CSRD), enacted on 5 January 2023, caused a pivotal shift in corporate reporting standards. This directive extends reporting requirements to a broader spectrum of companies, aiming to enhance data quality to match financial data standards, standardize sustainability disclosures for transparency, and increase the accountability of the board of directors by providing investors and stakeholders with insights into companies' social, environmental and governance impacts.

For companies operating in the Nordic region, renowned for its commitment to sustainability and progressive business practices, CSRD is particularly significant. But beyond its regulatory implications lies a profound revelation: the CSRD presents an opportunity for transformative change. It's not just about meeting disclosure standards; it's about leveraging sustainability as a strategic asset, driving innovation and securing a competitive edge. By embracing this mindset shift, organizations can unlock new avenues for growth and resilience in an increasingly sustainability-focused landscape. Companies that do not embrace this shift in gradually transforming their core activities toward net-zero, nature-positive and respecting human rights are likely to lose their competitive edge. 

The EY approach to CSRD implementation through five transformative workstreams

The EY model for a CSRD-driven transformation provides a detailed framework for businesses to navigate complexities, leveraging it as a catalyst for organizational change and competitive advantage. With a focus on people, competence transformation, and assessment and planning, companies can align efforts with broader sustainability goals, positioning for long-term success. The first step in this journey is to understand the requirements and assess the company’s readiness.

Navigating the CSRD transformation: Challenges and opportunities

Understanding CSRD beyond compliance requires a deep dive into its underlying challenges. The Nordic region presents unique hurdles, shaped by varied regulatory frameworks, business dynamics and consumer behaviors that necessitate targeted strategies. Sustainability is a critical focus, with a significant proportion of investors already committed to net-zero targets and actively divesting from carbon-intensive assets.

Below are six pivotal areas for Nordic businesses to focus on while navigating the CSRD-driven transformation:

1. Shifting the mindset toward CSRD: Many companies face difficulty in transitioning their mindset from traditional compliance-oriented approaches to embracing CSRD and sustainability as strategic imperatives. This shift necessitates recognizing the qualitative dimensions of CSRD, understanding not only climate change impacts but also social disclosures, and adopting long-term perspectives on sustainability. Organizational mindsets and roles must evolve for integrated reporting, fostering transparency and informed decision-making.

2. Aligning strategic priorities with sustainability transformation: The extensive scope of CSRD can be overwhelming. Preparing for CSRD readiness should be a strategic exercise to uncover sustainability themes relevant to your value creation agenda. CSRD requires an integrated approach, combining strategic sustainability initiatives with assurance-ready reporting, all the while using the abundantly available stakeholder insights from strategy and risk management. Start by asking, "How should we integrate sustainability into our strategy to create value?" and "How should we communicate sustainability disclosures and report on our material and financial impacts?" Leverage these insights throughout the journey to ensure a holistic and informed approach to CSRD. 

3. Integrating sustainability into existing management processes: Nordic companies must embed sustainability considerations into core decision-making frameworks, align reporting models with financial standards, enhance data management systems and integrate sustainability into governance structures. Achieving this integration demands substantial organizational change, including a reevaluation of organizational design and operating models, as well as strategic guidance. This shift in approach, from standalone sustainability initiatives to integrated strategic imperatives, requires a transformative mindset and concerted efforts across all levels of the organization. Additionally, a new governance framework is often needed, as CSRD is cross-functional and involves non-traditional players in the reporting process.

4. Ensuring effective change management and upskilling to drive transformation through CSRD: Effective CSRD implementation requires engaging leaders and employees to understand its purpose beyond regulations and aligning actions with sustainability goals. Leadership buy-in, clear communication and targeted initiatives are essential for bridging the gap between intention and action. Change management efforts must focus on breaking down complex sustainability concepts, fostering inclusivity and empowering people with the necessary tools and knowledge to actively contribute to the organization's sustainability agenda.

5. Streamlining reporting processes and ensuring data quality: Companies face challenges in data management and reporting due to the disparity in maturity levels between financial and sustainability reporting systems. Unlike financial reporting, which often relies on robust ERP systems, sustainability reporting often involves manual data entry or disparate data sources, leading to data quality issues. Scope 3 emissions reporting and cross-functional data collection further complicate the process. Finance teams must bridge the gap between financial and sustainability reporting systems, invest in data management tools, and collaborate across functions to ensure accurate and comprehensive reporting.

6. Optimally leveraging technology as a key differentiator: Technology is a key differentiator in sustainability, offering a unique opportunity for organizations to leverage it as a competitive advantage. However, organizations still grapple with data quality and handling issues, hindering this opportunity. To leverage technology effectively, realistic target architectures and roadmaps for technological integration must be established. Continuous automation is necessary, focusing on critical areas for differentiation and effective communication of sustainability efforts. This intersection of technology and sustainability drives operational efficiencies and lays the foundation for a sustainable CSRD-driven transformation journey.

7. Integrating tax considerations into CSRD reporting: CSRD compliance requires collaboration between tax departments and sustainability teams. Tax can be a material sustainability topic, necessitating disclosure of tax information for companies. Required disclosures may include reporting green taxes within specific material topics and detailing tax governance. Tax planning strategies that may imply underpayments of taxes and therefore potentially impact affected communities should also be considered. Whether or not tax is deemed a material topic under CSRD, companies may still report on tax matters to demonstrate responsible tax practices and societal contributions, such as by publishing their global tax footprint or country-by-country reports. Moreover, tax considerations are crucial for alignment with the EU Taxonomy.

How can the board lead your CSRD-driven transformation?

Real change requires depth and speed. It demands leadership capable of guiding companies through tough discussions, setting priorities and integrating sustainability as a core principle while rethinking approaches to profitability. For Nordic companies looking to ride the CSRD transformation wave, boards have a critical role to play in pushing executives to identify the opportunities for growth and value creation — driving a bold program of sustainability transformation.

At the forefront of this journey are pivotal roles, such as the CEO and CFO, whose strategic vision and financial acumen shape the organization's trajectory toward sustainability. Different functions have a stake in this process, no matter how small, mandating a holistic approach to CSRD, helmed by the board. 

The CEO provides visionary leadership to inspire a culture of sustainability from the top down, with collective efforts from executives across various domains — including finance, human resources, technology, strategy, sustainability and tax — ensuring a holistic approach to sustainability integration.

How can EY teams help you in this transformation journey?

Leveraging extensive experience and a multidisciplinary approach, EY teams can offer support across all stages of the CSRD-driven transformation journey. With a deep understanding of regulatory requirements and industry better services, EY professionals across finance, sustainability, supply chain, tax, technology and assurance, collaborate seamlessly to provide detailed services tailored to unique business needs.

From strategic planning and risk assessment to data management and reporting, EY teams offer a full spectrum of services designed to help empower companies to embrace sustainability as a core business strategy. EY teams’ knowledge in change management helps ensure that sustainability initiatives are highly integrated into organizational culture and operations, driving long-term value. Furthermore, using data analytics and automation, we help empower companies to extract actionable insights from sustainability data, driving continuous innovation.

Let us help you navigate the CSRD landscape, with access to the knowledge, resources, insights and end-to-end support needed to help succeed in today's dynamic business environment.