Concerns over the credibility of sustainability claims are growing, with a majority of CFOs warning that their industry’s sustainability reporting risks being perceived as greenwashing. This comes at a time that the European Securities and Markets Authority (ESMA) is setting out key priorities for close scrutiny over the next year. Sustainability reporting and more specific Corporate Sustainability Reporting Directive (CSRD) compliance is high on the list. Will CSRD eliminate greenwashing quickly?
CSRD is a major update to the EU’s sustainability reporting framework, significantly expanding the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000. Based on new underlying European Sustainability Reporting Standards (ESRS), the CSRD introduces more detailed reporting requirements on company impacts on the environment, human rights and social standards and sustainability-related risk.
The CSRD took effect from the beginning of 2024 for large public-interest companies with over 500 employees, with the first reports to be issued in 2025, followed by companies with more than 250 employees or €50 million in revenue in the following year, and listed SMEs one year later.
CFO’s have doubts
However, most of the CFO’s have doubts on CSRD readiness of their company. Today, CFOs have to set out how the company will drive sustained performance over the long term while managing near-term volatility. They should confidently allocate capital to long-term growth drivers, from artificial intelligence (AI) to sustainability, while meeting near-term performance expectations. The 2024 EY Global Corporate Reporting Survey examines this imperative. Surveying more than 2,000 finance leaders and 815 institutional investors globally, the research revealed deep concerns about sustainability and transparency:
- Only around half of finance leaders and investors surveyed think it is very likely that corporates will achieve their stated sustainability targets (47% for finance leaders; 53% for investors). This skepticism is reinforced by findings from the 2024 EY Global Climate Action Barometer, indicating that the quality of current disclosures fails to show that companies are undertaking substantial actions to combat climate change.
- More than half of finance leaders surveyed (55%) feel sustainability reporting in their industry faces the risk of being seen as including “greenwashing” elements. The EY Global Climate Action Barometer supports this concern, highlighting the fear of exposure to potential litigation from key stakeholders including investors arising because of incorrect or unsubstantiated claims, and failure to deliver on intended strategy, as well as a reluctance to give away too much information.
- And 96% of CFO’s worry that their organisations’ nonfinancial data is not fit for purpose to support decision-making, citing problems with data formats (39%) and inconsistencies (35%).
While CFO’s have doubts about their readiness, CSRD implementation is imminent. Regulators want to eliminate greenwashing as quick as possible and CSRD is the instrument to achieve this.
ESMA’s tough stance
Among the key requirements introduced by the CSRD is the use of a “double materiality” approach to sustainability reporting. This includes reporting both on the risks and impact of sustainability issues on an enterprise, as well as on the enterprises’ impacts on environment and society.
In its new publication, ESMA makes it clear that the process companies follow behind assessing and reporting on double materiality will be a priority enforcement area for the regulator. ESMA states: “Conducting a thorough materiality assessment covering both impact and financial materiality is the starting point for the determination of the information to be disclosed in the sustainability statement.”
Key areas of focus detailed by ESMA relating to materiality considerations providing detailed disclosures on the assessment process. This includes providing sufficient information on the activities, business relationships, geographies and stakeholders considered. But also provide transparency on how companies identify and prioritize affected stakeholders for engagement under the materiality assessment process.
Under its enforcement priorities regarding the scope and structure of the sustainability statement, ESMA highlights issues underlying the importance of connectivity between the sustainability statement and financial statements. This includes reiterating that each statement is based on the same reporting entity, and that monetary amounts or other quantitative information included in the sustainability statementare also presented in the financial statements. This includes also references to the corresponding financial statement information.
ESMA also noted that the information provided in the sustainability statement must cover impacts, risks and opportunities connected to a company’s value chain. While the ESRS includes transitional reliefs related to value chain information over the first three years of reporting, issuers are still required to describe the efforts made to obtain the value chain information, and their plans to obtain the information in the future.
CSRD will eliminate greenwashing quickly
Following the release of EMSA’s enforcement priorities, sustainability reporting experts noted that the regulator appears to be taking a harder line towards compliance than that suggested by European lawmakers.
This follows a public statement by ESMA in July advising companies to prepare for the CSRD requirements, including calling on issuers to “carefully set up their systems of data collection and analysis, as well as internal controls” in order to meet the ESRS’ detailed reporting requirements and to conduct double materiality assessments.
Following these strict requirements for implementation, there is no doubt: CSRD will eliminate greenwashing quickly.
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This post is based on a publication by EY
