Sustainability regulations

At European level, the Corporate Sustainability Reporting Directive (CSRD) currently provides the central mandatory framework. Large, capital-market-oriented companies will be obliged to comply with the requirements defined therein from the start of fiscal 2024. Large, non-capital-market-oriented companies and capital-market-oriented small and medium-sized enterprises will also be compelled to "get on board" shortly thereafter and start taking the new requirements into account in 2025 and 2026 respectively. In Germany alone, the user base will increase from 500 in the first "run" to around 15,000 companies. However, almost two in five companies have not yet started preparing for this, as shown by the current Horváth study on the status quo of the sustainability transformation. A similar picture can be seen throughout Europe. 

A further, relevant set of mandatory rules is the EU Taxonomy, a classification system for sustainable economic activities that has been in force since 2021 and applies to the same user group as the CSRD. Moving forward, the EU taxonomy requirements contained therein will be transferred to the CSRD. In parallel, additional sustainability standards are being developed at the international level by the independent International Sustainability Standards Board (ISSB), an offshoot of the International Financial Reporting Standards Foundation (IFRS), under the names IFRS S1 and IFRS S2. The focus here is on climate-related disclosures. The extent to which these new international standards can be linked to the existing ones is not yet known. 

While mandatory cross-border standards are gaining in importance (primarily the CSRD in Europe), self-imposed sustainability standards are losing relevance. According to the Green Controlling Study 2022, two-thirds of companies have no plans to apply self-imposed sustainability reporting standards alongside the CSRD. 

European companies should therefore focus on the CSRD – not only by ensuring that it is introduced smoothly as quickly as possible, but above all by linking it in an optimal manner to their own corporate goals in the area of sustainability, future viability and growth. The following four success factors are crucial: 

1. Project preparation and dry runs  
   The time required to introduce new regulatory standards is underestimated in many companies. The first user group will have to implement the requirements of the CSRD as soon as fiscal 2024. To put it bluntly, that's practically the day after tomorrow! A sound approach would be to carry out capacity planning with the teams concerned (in the form of an "impact analysis") at an early stage, and to develop interdisciplinary best-practice solutions. This will reduce both the coordination effort and the degree of uncertainty prior to going live. All requirements must be analyzed in detail ahead of time to ensure that any data gaps can be identified and closed in due course. At least one dry run should be scheduled for the survey, i.e., a "dress rehearsal" that serves to determine the respective reporting capabilities. 
    
2. Ongoing development into holistic sustainability performance management  
   Companies that aim to generate sustainable added value through their organizational development should not stop at simply ensuring their reporting capability. In terms of "sustainability performance management", there is a need to integrate dedicated KPIs on sustainability criteria into the internal management and decision-making processes. This will allow further development potential in the area of sustainability to be exploited throughout the company in an optimal manner. When it comes to a holistic sustainability strategy, however, companies still have a lot of room for improvement. According to the survey carried out for this issue, only 42% have created a comprehensive road map and specific sustainability goals within their organization. 
    
3. Provide training on data (models), systems and processes for complex requirements 
   The requirements for systems and processes are increasing massively for sustainability information. Data gaps, missing evidence and system discontinuities make end-to-end reporting and comprehensive sustainability controlling problematic. The company's legal obligation to undergo external auditing necessitates the introduction of an internal control system and auditable processes. Data models must therefore be defined at an early stage and manual solutions replaced by professional ones. Any manual steps must be automated during the project phase. 
    
4. Set up a new end-to-end (ESG) target operating model 
   The key factor in terms of meeting and implementing the new regulatory framework is to build a comprehensive ESG target operating model. The "ESG TOM" includes new necessary components as well as adjustments to the organizational structure and in the area of workflow management. In order to anchor sustainability in the company in the long term, committees and decision-making structures should be established at an early juncture, i.e., during the project phase. 

While this might sound like a recipe for enormous additional expense, it is actually just "homework" that companies are required to do in any case. An early and targeted approach will pay off in the long run and deliver competitive advantages. When this happens, the regulatory system will have achieved its goal, namely to train companies to be sustainable – in their own interest.