ESG is broken but the EU may just have fixed it
On 10 November 2022, the European Parliament voted to pass the Corporate Sustainability Reporting Directive (CSRD) – a new ESG (Environmental, Social and Governance) policy framework that combines financial data, ESG information and assurance for the first time. The vote was a landslide, with 525 in favour, 60 against and 28 abstaining.
In summary the directive means:
• ESG will become part of the annual reporting process
• Sustainability will sit alongside finances
• Far more data will need to be collected and analysed
• All of this, including sustainability, will be audited.
Commissioner McGuinness of the European Parliament said in his opening remarks: “For the first time… we are putting sustainability reporting on an equal footing with financial reporting…
We need accurate and reliable information to ensure that investments are being made towards a more sustainable future. Companies need the information to plan their transition paths. And investors need the information to have clarity about what they're investing in and to combat greenwashing.”
This is a global first and one of the biggest shakeups of both corporate auditing and ESG and sustainability. It will have far-reaching impacts for European businesses of a certain size as well as any European branch of an international company. The CSRD aims to expand upon and replace the Non-Financial Reporting Directive (NFRD).
The ‘E’ in Environmental, Social and Governance, despite its momentum and noble aims, is broken. It continues to push a vast amount of money into funds and businesses that show insufficient or non-existent efforts to improve sustainability or tackle the climate crisis.
This weakness is underpinned by a lack of holistic policy. No one knows or defines the true meaning of sustainable, there are no efforts to properly audit or analyse, and no single body to notice or punish misrepresentation of data or a failure to comply with internal or external policy. That is, until now. This is an astonishing piece of legislation, and one that is truly overdue.
Around 50,000 organisations will need to comply with the CSRD in a phased rollout.
• From financial year 2024, all organisations already within the scope of the NFRD (currently around 11,700).
• FY 2025: All "large" organisations with a net turnover of €40 million or more, at least €20 million in assets, and 250+ employees
• Later: All listed companies, including listed small and medium-sized enterprises (SMEs), excluding micro-enterprises
This law’s ambition is only matched by its necessity. Businesses can no longer ‘greenwash’, in which they hide insufficient climate action behind misreporting, or ‘greenhush’, in which they do the same by not reporting action or impact at all. There will no longer be any ambiguity – and this should have an incredible impact on corporate sustainability.
A key issue for companies and boards, and one that I would argue has been a major cause of insufficient corporate sustainability, is a lack of education and engagement at the top. Many board members are not educated on the topics that matter, such as digital transformation, cybersecurity, and the environment, and many are simply not engaged; they are members only because of who they are, and not what they know.
Although the EU is finally taking steps to better enforce climate action, this type of policy is still non-existent throughout most of the world. In its place, educating businesses is a secondbest. This would ensure that company boards and directors understand the impact of the climate crisis and exhibit better governance when confronting it.
David Duffy, pictured below, is CEO and co-founder of Corporate Governance Institute, a global leader in the education and certification of existing and aspiring boardroom directors