Are companies prepared for CSRD?
Are companies prepared for CSRD?
And what that means for Financial Institutions.
CSRD can be a massive market opportunity or your biggest headache depending on where you’re sitting. In the last few months, we’ve probably seen as many memes from Sustainability managers complaining about CSRD (here’s an example from Briink CEO Tomas van der Heijden, or for french speakers follow “Les Mèmes de l’ISR” on LinkedIn) as we’ve seen new and shiny product launches from data and service providers (including our own) to help corporates take care of that headache.
Starting with a Double Materiality Assessment
The EU Corporate Sustainability Reporting Directive (CSRD) is coming into force in January 2025, and it will truly be a game changer, providing more transparency and consistency to all stakeholders not only on companies’ own activities but also within their supply chain. The first step for companies is to perform a double materiality assessment, or DMA. For Financial Institutions, that means performing a DMA on their entire client list. And the results of this will influence which ESRS and eventually which indicators you will have to report on. So it’s no wonder that people have turned to consultants or data providers to help them out.
Here at impak we’ve been doing double materiality for some time now, so we thought it might be interesting to take a quick look at how companies’ DMA compare to our own. Our DMA is not perfect but we think it’s pretty good, based on standards and aligned with the regulation. And what we found was quite surprising. Of course, this is based on pre-CSRD data, but it highlights the challenges ahead for Corporates and FIs.
68% of companies are missing material negative impacts
68% of all EU companies in our coverage had at least one material negative impact that was not acknowledged. Looking at our global coverage (not only EU) the number increases to 69%, and zooming in on North America, we get to 76% (which can be explained by the prevalent use of single materiality there). Although CSRD was born in Europe, we know that at least 30% of large US-based companies (those having significant operations in Europe) are also in scope.
This begs the question: how bad is it? Looking at our global coverage, on an average of 10.4 material outcomes per company, 49% missed minimum 2 negative impacts, and 24% missed minimum 5, i.e half. And it seems that these numbers have been pretty consistent over the years.
The water example
Let’s deep dive on an example. Our analysis of the Stoxx 600 reveals that few companies adequately address water impact, despite its material significance. This oversight can result in substantial costs. An estimated US$301 billion in business value is at risk unless companies improve and innovate their water usage practices, with the cost of necessary responses estimated at US$55 billion.
6% of our global coverage does not acknowledge their ESG risks related to water. DEME, the Belgian dredging company who otherwise boasts significant positive SDG contributions, fails to recognize both types of water risks: water withdrawal and consumption, and water pollution, which are both extremely relevant to their business.
This gap, if not closed, represents a regulatory risk for FIs as they embark on their CSRD journey, but also a financial risk as they use Corporate materiality data within their risk management processes. We’ve seen larger FI’s develop their own DMA tool to bridge that gap, but for smaller institutions who are looking for an efficient solution, don’t hesitate to contact us.
And to all our sustainability reporting friends we say good luck, and you know where to find us if you need help 🙂