Is CSRD a tick-box, arduous exercise?

In the history of corporate sustainability, there has never been such a comprehensive mandatory ESG regulation. The EU’s Corporate Sustainability Reporting Directive (CSRD) is an unprecedented force that penetrates all levels and facets of companies, landing squarely on the desks of CSOs, CFOs, CROs, Legal, EHS, and Procurement. Over the past 18 months, I’ve been part of numerous conversations about CSRD, revealing a spectrum of views. I want to debunk some of the common arguments I hear. When the ‘tick-box’ mindsets permeate through corporate teams, it not only makes it an arduous, painful process to compliance, but crucially it misses the strategic, genuinely impactful potential of the regulation.

1. “Companies can set the threshold wherever they want, it is not a comparative framework.”

The CSRD guidance published by EU standards setter EFRAG prescribes a very clear scoring framework, and although the threshold for materiality can technically be applied ‘anywhere’, this is not the approach that we are seeing companies take. I’ll explain why.

Applying the threshold at the ‘right level’ is crucial for three main-reasons:

a) Risk mitigation: The Double Materiality Assessment (DMA), a cornerstone of CSRD, identifies financial risks and potential negative impacts that often lead to financial repercussions, urging proactive mitigation similar to other principal risks.

b) Internal alignment: Most companies have an enterprise risk management (ERM) process, which entails internal subject-matter experts identifying a universe of risks so the most material ones can be mitigated. Until now, sustainability-related risks were often overlooked but aligning assessment of ESG impacts, risks and opportunities (IRO) with the concepts used in ERM frameworks will ensure seamless integration and embed CSRD efforts into core processes.

c) Audit scrutiny: While CSRD assurance guidelines are pending, aligning thresholds with internal logic prepares companies for potential scrutiny or “stand-back” tests during audits.

So while, yes, a company could in theory set the threshold of materiality anywhere, most will align with internal risk appetite, in order to effectively manage IROs, and anticipate questions during assurance.

2. “It is a tick-box exercise – it’s not going to lead to impact.”

The DMA entails companies identifying and scoring ESG related IROs. Once the DMA is completed, the company is expected to report on these material IROs (in a similar way to how companies report on principle risks). To remain attractive as a long-term investment, companies should develop and resource plans to manage material IROs.

For instance, consider an organisation that previously neglected ESG-related risks in its ERM processes. Through the DMA process mandated by CSRD, the company identifies climate change as a significant financial risk – such as significant financial risk of stranded assets as a result of climate-related adverse weather events. This realisation prompts the company to invest in scenario analysis and adaptation planning, strengthening its resilience and long-term viability.

3. “We’d make more impact if the resource directed into compliance was spent on implementation.”

Yes, CSRD is incredibly resource-intensive, but to achieve meaningful implementation, the preparation needs to be integrated, supported, and comprehensive. The resources spent on compliance are not wasted - they are an investment in building robust ESG related governance, frameworks and processes. Investment in effective reporting systems enable identification of gaps, and accurate target setting which allows companies to monitor progress. Moreover, the data collected through compliance efforts can inform better decision-making and resource allocation. By embedding these practices into operations, there’s a higher level of understanding and, crucially, of accountability when managing ESG related IROs.

The CSRD represents more than a bureaucratic hurdle, it is a strategic imperative for businesses seeking to thrive in a dynamic environment. Compliance with the CSRD isn't just about ticking boxes - it's about laying the groundwork to drive innovation, enhance resilience and secure positions as leaders in a rapidly changing landscape.