THIS ARTICLE IS WRITTEN BY DAVID BOEKEL AND LINN LÖFLING. DAVID ([email protected]) AND LINN ARE ([email protected]) SENIOR CONSULTANTS FOCUSSING ON ESG WITHIN RSM NETHERLANDS BUSINESS CONSULTING.

The global economy is undergoing a transformation towards sustainability, prioritizing social inclusion, and achieving climate neutrality. As a result of stricter legislation, disruptive innovations, and growing demands from stakeholders, companies are no longer asking if they should be sustainable, but how.

The Corporate Sustainability Reporting Directive (CSRD) is a European directive that obligates large companies in Europe to report on their Environmental, Social, and Governance (ESG) related impacts. The goal of this directive is to accelerate action by enforcing companies to be transparent on their ESG performance. By 2024, listed companies must share extensive ESG information in their directors’ report, with non-listed large companies to follow in 2025. In addition to this transparency obligation, the information must be digitally tagged, and external assurance must be provided to make it reliable and easy to use for a large group of stakeholders.

Mid-market struggles

Listed European companies have already started with ESG transparency due to the precursor of the CSRD directive, the NFRD. Although the CSRD demands a larger amount of detail, listed companies have already made a start, which makes it easier for them to become compliant. However, mid-market companies face a significant challenge in complying with the CSRD, as ESG transparency is completely new to them, and the amount of detail is very extensive immediately. While mid-market companies have been performing in the field of ESG for many years, they must now proactively disclose their performance to their stakeholders.

Mid-market companies may struggle to take a position in the field of ESG transparency as they do not want to be a frontrunner paving the path for others to follow. However, being a laggard comes with its downsides, such as missing out on potential benefits of being ahead of the curve. Defining the frontrunners and laggards in a different way, intrinsic motivated companies see the benefits of ESG transparency and what it could bring to their company, while compliance-driven companies wait until legal obligations are clear.

Intrinsic motivated companies see benefits in the field of visibility and reputation enhancing brand image, attracting more customers, hiring and retaining employees more efficiently, and becoming more attractive for the capital markets. Additionally, they can reduce operational expenses by acting on ESG indicators, such as reducing energy consumption and optimizing the usage of raw material. Although not all these benefits are immediately visible in terms of cash flows, incentives offered by the government can reduce the burden of necessary investments.

On the other hand, the disadvantages of being an intrinsic motivated company lie in the need to invest in new technology that may not always be customized to the needs of organizations. Furthermore, markets are not yet able to value good ESG performance, which makes investments in improvements not optimal. For example, a lower carbon footprint for a product often increases the cost and therefore the price of the product while consumers are not always willing to pay a higher price.

The compliance-driven approach enables companies to wait until legal obligations become clear, and the market is ready to value ESG performance and best practices on how to act as an entrepreneur are available. When regulation is enforcing them to act, they will act in line with what is obligatory. While the path is paved, the costs are initially low, and the added value in adopting ESG earlier is gained by others. Regardless of their approach, companies must comply with the CSRD. All policies, actions, and ambitions they may have on the ESG level are to be disclosed. Starting early or late, being a frontrunner or a laggard, compliance-driven, or intrinsic motivated, in the end, companies must comply with the CSRD. 

Closing notes

In today's rapidly changing world, the transition towards a more sustainable economy is no longer a question of if, but how. The Corporate Sustainability Reporting Directive (CSRD) is an important step towards greater transparency and accountability for large companies in Europe, but for mid-market companies, it presents a unique set of challenges. However, by embracing ESG transparency and compliance, these companies can differentiate themselves in the market, attract new customers and investors, and ultimately contribute to a more sustainable future. It's important to view ESG transparency not as a burden, but as an opportunity for businesses to demonstrate their commitment to sustainability, build trust with stakeholders, and drive long-term value. As we move towards a more sustainable future, it's crucial that businesses recognize the interdependence between social, environmental, and economic factors and embrace their responsibility to drive positive change on a global scale.