The EU CSRD from a Governance Perspective

Enacted on January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) extends the reporting requirements to a broader range of companies and aims to enhance the quality of data to match financial data standards. The CSRD represents a multifaceted “shift” in corporate governance, in the context of sustainability reporting. It requires companies to move from a compliance-based approach to one that integrates sustainability into the core of their business strategy and operations. The real “shift” involves a transition from traditional governance models to ones that are proactive, inclusive, and sustainability focused. This entails embedding sustainability into the DNA of corporate governance, ensuring that it is not an afterthought but a driving force in strategic decision-making and risk management. The CSRD is call to action for companies to reassess and realign their governance structures and policies to secure a more sustainable future. Companies cannot navigate the complexities of the new reporting standards and simply integrate them into existing governance frameworks.

This means a fundamental reassessment of how companies operate and govern themselves, with a clear focus on long-term sustainability and accountability. Boards must now ensure that their internal policies reflect this shift and that they are prepared to meet the new standards of governance required by the CSRD. It involves a proactive approach to sustainability, where it is seen not only as a compliance exercise but as a core element of the company’s value proposition to stakeholders.

Following is an analysis of how companies’ governance policies and practices must change to meet the new requirements:

Integration of Double Materiality Assessments (DMAs): Companies are now working on conducting DMAs to prepare their reports in compliance with the CSRD. This involves assessing not only how sustainability issues affect the company but also how the company impacts society and the environment. Governance policies must be revised to include these assessments as a regular part of business reviews and decision-making processes.

*Human Rights and Environmental Due Diligence (HREDD): The CSRD, in tandem with the Corporate Sustainability Due Diligence Directive (CSDDD), mandates companies to conduct HREDD to identify their sustainability impacts. This requires a change in governance practices to ensure that due diligence is conducted not just in-house but throughout the supply chain, and that appropriate measures are taken to prevent, mitigate, and remediate adverse impacts. The CSRD aims to change how companies manage value chain sustainability. Governance must now require input from across the organization, including finance, human resources, and procurement, to manage ESG risks effectively.

Risk-Based Approach to Due Diligence: Both the CSRD and CSDDD reference the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, defining due diligence as encompassing policies and management systems. Governance policies must prioritise impacts based on severity and likelihood, requiring a shift from a blanket approach to a more focused, risk-based approach.

Board Duties and Accountability/CSR Performance: Under the CSRD, the accountability of the board of directors is increased, providing investors and stakeholders with insights into companies’ social, environmental, and governance impacts. This directive requires a more active and informed role from the board, ensuring that sustainability is integrated into the company’s strategy and operations. Research indicates that board characteristics have a significant impact on corporate social responsibility performance (CSRP) and disclosure (CSRD) . Governance practices should evolve to ensure that boards have the necessary expertise and diversity to manage CSRP/CSRD-related issues effectively.

Credibility of CSRD and Reputation of the Company: The credibility of CSRD is paramount. The CSRD aims to standardise sustainability disclosures to improve transparency. This involves creating a set of European Sustainability Reporting Standards (ESRS) that companies must adhere to, ensuring comparability and reliability of the reported information. The CSRD aims to facilitate the digital taxonomy of sustainability information to make it easier for stakeholders to access and analyse data. Academic research also suggests that stakeholders judge the credibility of CSRD based on the assurance provider, the measurement framework, and the alignment between a corporation’s social and environmental conduct. The quality of CSRD can impact corporate reputation and competitive advantage. Governance policies must be adapted to enhance the credibility of disclosures through transparent and reliable reporting practices. Governance practices must be designed to ensure high-quality disclosures that reflect the company’s genuine commitment to sustainability.