EU Scales Back and Delays Corporate Sustainability Reporting Directive
The history of a well-intentioned effort to reduce greenwashing and virtue-signaling turned into a boondoggle resulting in significant waste of time and money for corporations as well as disappointment for advisory and technology firms that based their business on it. Nonetheless, it has created the framework for simple and meaningful transparency for all organizations if the committee focuses only on value creation and risk mitigation. By Bruce Bolger
Omnibus Scales Way Back the Number of US Firms Affected
An Important Contribution to Sustainability Reporting; Double Materiality
What We’ve Learned From the First Reports
Imagine raising money from investors and building an organization, community, and technology for a new government mandate only to have it delayed and scaled back so significantly in scope that the market for it may have shrunk by 80%. That is what has happened to many entrepreneurs, consulting firms, and sustainability executives, not to mention the nearly 200 European Union companies who have either completed or have neared completion of their first Corporate Sustainability Reporting Directive reports so far this year.
If there was ever a textbook case of the high cost and inefficiency of bureaucracy, this is it. An otherwise noble attempt to increase transparency and reduce greenwashing became itself a case study in the risk of over-regulation. The EEA predicted this risk in its earliest posts.
Based on opposition to the scale of regulations generally being imposed in the European Union highlighted in the Draghi Report on EU Competitiveness, which was published after the CSRD law was enacted, the European Union has voted to not only delay reporting until 2028 for fiscal year 2027, it has significantly increased the size of companies subject to the law to start at 1,000 or more employees and $450 million or more in sales.
This could shrink the entire market for CSRD reporting services by 80%. This has caused the many advisory and technology firms sprouted in the EU and even the US to address this need to shift gears to focus on a value creation approach to voluntary sustainability reporting.
Upon examining the chain of affairs, one has to wonder why those committed charged with this task did not start with the proven work of the International Organization for Standardization (ISO), whose work literally facilitated the extraordinary implementation of the Marshall Plan after World War II. It remains as active today as ever in every domain of commerce and has more expertise than any organization in creating standards that align the interests of all stakeholders using transparent, auditable processes, and methods to improve.
Had they applied the ISO approach, it is highly likely the result would have been far more practical, simple, and focused on value creation rather than compliance that would have incorporated all of the good work accomplished by already existing sustainability organizations. Perhaps an organization should examine a process that created such an unnecessarily complicated process that effectively ignored already established process for creating standards and sustainability metrics.
Omnibus Scales Way Back the Number of US Firms Affected
According to Jon McGowan, Attorney at Law, The McGowan Law Firm, Jacksonville, FL, a specialist in ESG reporting, “No US companies are currently in scope. The first round of reporting was limited to large companies traded on EU markets. Any reporting by a US company is voluntary at this point.”
Based on the decision the EU commission, “US companies are off the hook for sustainability reporting until 2028.” With the new company size thresholds envisioned in the revised law, “very few non-EU companies will meet the new requirements.” Some estimate that the number of US companies directly affected could drop by 80% from the original estimate of 3,000 to as little as several hundred, though ESM as of this publication could not confirm a more precise number.
As an organization that sees sustainability reporting as a business opportunity, rather than compliance, the Enterprise Engagement Alliance was among the first in the US to report on the law in late 2022. After publishing one of the first comprehensive reports on the law, we also concluded that the law would create an enormous marketplace for technology and advisory services that could result in inflated costs. We did not anticipate a tsunami of information that made a parady of the entire process and law.
An Important Contribution to Sustainability Reporting; Double Materiality
The EU CSRD brought forth two important innovations in corporate sustainability reporting that are expected to be retained in the final omnibus bill released later this year and which have merit for any type of effort to enhance value through sustainability.
- The value created by addressing the interrelated interests of all stakeholders. The requirements retain the need to report not only on the environment but on how organizations are addressing the interests of customers, employees, distribution and supply chain partners, and communities. These are elements essential in ISO's Annex SL framework applicable to all ISO people process standards.
- The double-materiality framework requires companies to report on both the financial materiality (how sustainability issues affect the company's financial performance) and the environmental and social materiality (how the company's activities impact the environment) as well as on how these factors create risks and opportunities for the company.
What We’ve Learned From the First Reports
The law created bloated, unreadable, and difficult to compare reports that should give the EU committee charged with updating the law plenty of fodder for simplification. It also provides a warning to any organizations dedicated to meaningful sustainability reporting.
Tom Carr, Sustainability Strategy Director at SB+CO, a sustainability strategy advisory firm in the UK, recently posted a useful critique of the first 185 reports demonstrating that the law did anything but streamline and standardize reporting—at least yet.
Carr’s analysis, which mirrors our less-thorough review, indicates that the law became the basis for an explosion of detailed reporting that make the reports almost unreadable, and almost impossible to compare without AI.
“Most CSRD reports are long, and frankly, quite boring. Of the 185 published sustainability statements, the average was 120 pages long (the longest a staggering 413 pages). Investors are often treated as all-knowing, assumed to be able to ingest vast quantities of information, and accurately incorporate this into every decision.”
He continues, “the point of materiality has been lost. It’s unrealistic to expect investors to assign value to everything being found material under CSRD. Company reporting of principle risks and uncertainties (equivalent to material IROs--Impact, Risks, Opportunities) for everything outside of ESG typically take up a small handful of pages of an annual report. Its implausible to assume that 100+ pages of CSRD disclosures are genuinely going to be material. Some smarter companies have included sustainability summaries alongside the lengthy compliance statements.”
His analysis also finds signs of companies “gaming” the system to void uncomfortable disclosures, a practice common in ISO standards as well.
He believes the EU’s omnibus simplification “could be a real benefit if it genuinely helps cut the level of information to something more manageable for users. Currently, CSRD is pushing reporters to flood the market with huge volumes of ESG disclosure whilst at the same time, companies and their investors are needing to become much more focused on the specific sustainability issues that deliver value.”
He notes that AI tools will make the reports more digestible and useful, but that does not negate the failure of the original rules to produce concise, meaningful, and comparable reports.
Enterprise Engagement Alliance Services
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Contact: Bruce Bolger at TheICEE.org; 914-591-7600, ext. 230.
