According to research the concept that businesses needed to have an ethical and social conscience started around the late 1950’s. The idea grew over the decades and now all businesses should have a considered approach to their long-term viability and how their operations impact upon the wider community (Corporate Social Responsibility).
Environmental change has further enhanced such considerations and ESG reporting (Environmental, Social and Governance) contains a set of standards that measure a business’s impact on these areas. Research by the CBI suggests that two thirds of modern investors take ESG into account when investing. So it isn’t something that can be ignored.
We now come to the reason for this short article, which is the imminent need for EU businesses to comply with their corporate sustainability requirements, or CSRD for short. Reading this in the UK you may be wondering how, since Brexit, an EU directive can affect you. So, let’s look at who needs to comply?
- Companies listed on regulated markets in the EU (apart from listed micro-enterprises), and large companies. The CSRD classifies a large company as one that meets two out of three of the following criteria: more than 250 employees, a turnover of over €40 million and over €20m total assets. These companies will also have to take into account information at subsidiary level.
- Listed SMEs, although there will be a transitional period when SMEs can opt out until 2028. However, there are big benefits for SMEs to comply with the reporting.
- Non-EU companies with a net turnover of €150 million in the EU, and with at least one subsidiary or branch in the union.
The third bullet point is obviously quite key but also as this requirement takes hold and more EU businesses have to comply, they will inevitably start to ask more questions of their supply chain. This means that UK businesses that operate in the EU, will need to have prepared their own ESG statements and be ready to demonstrate their own commitments in this area.
Double Materiality Assessment – risk and opportunity
One very important topic within CSRD is that of double materiality assessment. Put simply, a business needs to identify the relevant issues pertaining to the environment, social contexts, governance as well as broader emerging issues.
Material issues have profound implications for organisational risks and opportunities, making them critical elements for decision-making and strategy setting.
Typically, a topic is considered “material” if:
- It is considered to have a significant impact (positive and/or negative) on activities and/or financial performance.
- It is considered important to key stakeholders, including employees, customers, suppliers, business partners, the planet, and society (e.g., citizens, NGOs, and governments).
If we take an example of a retail business, then a material topic might be to improve societal issues within local communities through various customer touchpoints. If the business does this, it reduces the risk of a decline in sales from a decrease in the infrastructure of daily life, leading to population issues such as an ageing population. The upside of this could be an increase in sales through community revitalisation and through an expanded social role.
CSRD reporting is a complex directive and will require much effort to complete across various teams within an organisation. A small, but important part, is that of the management of risk. Using software such as JCAD CORE, an organisation can not only store their strategic and operational risks, but they can also include topics detailed in CSRD and manage those risks and opportunities in the same tool.
This provides a central place to store, manage and report upon all risks and with the addition of an API to enable dashboards to be developed, all necessary stakeholders can benefit.
Further information regarding the CSRD can be found below but if you would like to talk with us about including such themes, risks and opportunities in your own Enterprise Registers please get in touch by emailing phil@jcad.co.uk.
European Commission – advice on CSRD
