CSRD IN, ESG OUT?
Well no. Not really.
Let me explain.
Businesses and corporations are advancing at an increasing pace, and it is getting harder to keep up with all the new standards, regulations and legal requirements. Companies are scrambling to secure various certifications and adapt procedures that would demonstrate their compliance to the larger governing bodies and fulfil their obligation to their customers and stakeholders.
For the past two decades, companies have been largely abiding by the ESG (Environmental, Social and Governance) metrics in order to implement more sustainable and ethical practices. Now this would of course vary according to the business size, type, policies and KPIs. And different industries would mean different metrics. That is fundamentally where the problem with ESG lies.
The idea of a system where factors such as sustainable practices (Environmental), human rights and equity (Social) and stakeholder relationships (Governance); can be rated or given a score, is frankly too utopian and too simplistic. Agencies like Bloomberg, MSCI and Dow Jones all have their own specialized rating systems, which means that there is no standardized system than can be employed for multiple business.
Another point of consequentiality is that while ESG scoring methodologies depicts how companies carry out their internal processes, it fails to account for the real-world impact of their businesses. This makes it harder to compare and track data, and as a result leads to lack of transparency.
But not all hope is lost. With the introduction of CSRD (Corporate Sustainability Reporting Directive), things seem to have taken a turn in this regard — and for the better.
CSRD was introduced by the European Union as an umbrella reporting legislation that came into effect last year in 2023, and is expected to impact around 50,000 companies. This includes mostly European businesses but also non-EU companies which are listed on the EU market. A successor to the previous reporting system NFRD (Non-Financial Reporting Directive), CSRD aims to improve business transparency and have stricter regulations around ESG implementation.
While ESG provides guidelines for sustainability and ethical practices within a company, CSRD makes it a legal requirement and enforces the practices into place. Double materiality is also one of the key elements of CSRD, where companies are expected to identify their impact on the environment and labour practices; as well as report on how sustainability measures impacts their businesses financially.
To ensure complete transparency regarding sustainability and maintaining accountability, companies are now seeking to integrate CSRD-compliant materiality assessments within their operations. This will not only catapult them onto a global scale, but will also improve their relationships with their customers and stakeholders, and benefit them in long-term growth.
All in all, one can say that although ESG is not completely out of the picture just yet; it can be argued that soon it will be entirely integrated within the CSRD framework and become indistinguishable from its original form. Which, I believe is a plus point.
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