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What does the CSRD mean for financial organizations?

Author
Rafaël Reytier Carbon & Sustainable Finance Expert
Category
Climate Essentials
Published
05 February 2024

The European Union's (EU) Corporate Sustainability Reporting Directive (CSRD) represents a pivotal development for all listed companies on the EU regulated market, including financial market participants. With over 1100 indicators to report on, the organizations covered by it face heightened complexity and data requirements. But how does the CSRD apply to the finance sector? Here's what you need to know.

What are the core requirements of the CSRD?

The Corporate Sustainability Reporting Directive (CSRD) builds on the Non Financial Reporting Directive (NFRD). Its more detailed requirements include reporting on all three scopes of emissions to address wider sustainability issues, improving data availability on environmental risks, labor practices, supply chain management, and business conduct. One of the CSRD's major proposals is to "require all companies within the scope to seek limited assurance for reported sustainability information while including an option to move toward a reasonable assurance requirement at a later stage.” 

The European Sustainability Reporting Standards (ESRS) set guidelines for reporting under this framework. Developed by the European Financial Reporting Advisory Group (EFRAG), the ESRS ensures consistency and comparability in sustainability reporting, fostering transparency and informed decision-making among stakeholders. All organizations covered by the CSRD will need to prepare their management report in the electronic reporting format and upload it to the European Single Access Point (ESAP). 

To read more about the requirements of CSRD reporting, see our dedicated resource on the subject

What CSRD compliance challenges and opportunities do financial institutions face?

Financial institutions face a key challenge with CSRD reporting requirements primarily designed for large companies. Although standards specific to financial organizations were initially expected by the end of 2024, EFRAG has made the decision to delay these. While current standards interpretation may remain largely unchanged, it's important to begin preparing as early as possible.

Transitioning targets: Embracing ESG factors

The transition from a predominant focus on climate-related targets to a broader spectrum of Environmental, Social, and Governance (ESG) factors presents a critical challenge. This shift encompasses considerations such as biodiversity, pollution, and social and governance issues, requiring the establishment of new ESG targets aligned with existing initiatives such as carbon accounting.

Adapting to the Climate-Neutral Economy

As the global movement towards a climate-neutral economy gains momentum, financial institutions must grapple with sustainability matters and assess sustainability risks inherent in their business models. This entails not only compliance with regulatory obligations but also proactive measures to fortify the business model against sustainability-related risks.

Establishing governance structures: Ensuring compliance

Establishing robust governance structures is important for institutionalizing ESG reporting across various organizational departments. Such structures ensure compliance with evolving regulations and enable effective management of ESG data. Collaboration between different divisions, investment in operational IT infrastructure, and engagement with internal and external auditors are essential components of this governance framework.

Portfolio perspective: Reporting across the value chain

Adopting a portfolio perspective requires extending reporting obligations beyond climate-related issues to encompass your entire portfolio, as mandated by European Sustainability Reporting Standards (ESRS). This entails comprehensive reporting on activities within the value chain and diligent assessment of sustainability targets such as biodiversity and pollution. Note that during the materiality assessment, financial institutions could include the materiality of each portfolio component, making this a challenging exercise without the right tools. 

What should financial institutions do to comply with the CSRD? 

To prepare for the Corporate Sustainability Reporting Directive, you should begin by conducting a materiality assessment alongside a readinesses evaluation. Then use the findings from both of these to build an effective implementation roadmap.

How to conduct a Materiality Assessment 

Conducting a materiality assessment requires identifying the sustainability matters that can affect your organization's ability to create value, manage risks, and meet the expectations of other stakeholders. These assessments help you to focus your sustainability efforts on areas that matter most in your business operations, enabling you to allocate resources efficiently and drive positive change. 

In recent years, the concept of double materiality has gained prominence in sustainability reporting. Double materiality recognizes the interdependence of financial materiality (the impact of ESG factors on an organization's financial performance) and ESG materiality (the impact of an organization's activities on the environment, society, and governance). 

For more detail on materiality assessments, see our dedicated article here.

How to conduct a readiness evaluation

Assess your CSRD readiness by conducting a thorough readiness assessment of your financial institution's sustainability reporting. Compare your latest sustainability report against upcoming CSRD requirements to pinpoint reporting gaps and assess data availability. Systematically analyse KPIs from an operations perspective and cross-check against published reports for an initial assessment. After identifying gaps, devise internal and external solutions to support ESG reporting. Develop a future governance model aligned with ESG targets and define an implementation roadmap. Consider the comprehensive CSRD approach, including impacts, risks, and opportunities across your entire value chain, for effective planning and data gathering.

How to build an effective implementation roadmap 

You need to establish an ESG committee within your financial institution, led by top executives, to handle projections and updates on projects effectively. With the ever-evolving sustainability reporting standards, rapid decision-making is essential to stay compliant. Anticipate the changing requirements and prepare your bank for the continuous expansion of KPIs, ensuring successful project management.

What are the consequences of non-compliance?

Failure to comply with the Corporate Sustainability Reporting Directive reporting in your company report could lead to potential fines, legal consequences, or damage to reputation and business relationships amongst other stakeholders. 

How can Sweep help?

  • We'll help you to comply with not just the CSRD, but also the Sustainable Finance Disclosure Regulation (SFDR) and other key standards.

  • Our platform can make monitoring your portfolio companies greenhouse gas emissions data simple by offering real time at a glance view of emissions hotspots along company supply chains. 

  • Reducing financed emissions can also lead to long-term cost savings, operational efficiencies and boost of sustainability performance. 

  • By directing investments towards low-carbon and sustainable projects, you can support companies that are well-positioned to thrive in a sustainable economy. 

  • Which in turn will showcase your firm as a responsible player in the financial sector, contributing to a positive image and strengthening stakeholder relationships.

Find out more about how Sweep can support you on your decarbonization journey today. 

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