Last Friday I had lunch with a friend who is a board director and on the audit committee of a company that must comply with the EU’s “Corporate Sustainability Reporting Directive” (CSRD) which went into force on January 5, 2023. He was complaining about the burden the CSRD was placing on his company, a company which is very sophisticated in sustainability reporting. He stated that being in compliance with the CSRD involved 1,500 underlying data points and would result in another 80-100 pages being added to their annual report. Detailed data he believed no investor would pay any attention to. And while this company has the resources to be in compliance, including the necessary assurance, it was diverting resources from activities that were making both the company more sustainable from a long-term value creation perspective and making the world a more sustainable one as well.

Sustainability reporting and ecological statistics outline hands concept. Corporate ESG analysis with climate impact calculation vector illustration. Nature friendly green practices measurement. | GETTY

This conversation reminded me of one I had during a private session at Climate Week when the CSRD was the basis for some heated discussion. Its advocates, primarily from NGOs, were enthusiastic about the CSRD’s “double materiality” approach, especially the “impact materiality” part of it which is about the positive and negative externalities of a company’s products, services, and operations. People from companies were more dubious about its value. One noted that for many of the 1,000 underlying data points (there appear to be so many it’s hard for people to know the exact number but its around 1,200) there was no underlying standard for the metric. The result would be reported numbers that were ostensibly compare across companies but really wouldn’t be due to different choices in how to measure a specific data item. Everyone in the room agreed that it was an open-ended question whether the CSRD would move capital to more “sustainable activities.” Nearly all of the very large investors I have talked to have expressed little interest in what will come out of the CSRD. That said, there is the possibility that more company-reported data could improve the quality of ESG ratings.

Implementation of the CSRD

The first set of companies, those formerly subject to the Non-financial Reporting Directive (NFRD) will have to publish reports based on the CSRD in 2025 for 2024. The number will increase until 2028 when non-EU companies of a certain size—revenues of >€150 million and either have a branch in the EU of >€ 40 million or have a “large” EU subsidiary, defined as one which meets two of the three criteria: (1) a balance sheet of >€25 million, revenues of >€50 million, and an average number of employees of 250. These are small numbers, and the result is that eventually some 50,000 companies will have to be in compliance with the CSRD.

As the CSRD goes into force it is inevitable that complaints about its cost and complexity will increase. Some people hope that the move to the right in the recent elections for the EU Parliament will lead to some relief. In the U.S, I have had conversations with people who strenuously object to the extraterritoriality requirements of the CSRD. Some have suggested a “tit-for-tat” measure of requiring European companies whose stocks trade on a U.S. exchange be subjected to the Sarbanes-Oxley Act where Section 404 holds the CEO and CFO personally responsible for the quality of the company’s internal control systems.

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