With the reporting season in full swing, now is as good a time as any to analyse the first batch of Corporate Sustainability Reporting Directive (CSRD)-aligned Annual Reports. With more expected in the next few weeks, this will be an initial look at around 60 reports published to date, including some well-known corporates such as Philips, Carlsberg, Airbus and Barclays.
Our analysis focuses not so much on the content of the CSRD-aligned reports but on what communications approach companies are taking: how is the language used in relation to sustainability changing? How is the information presented and what stories are told? How is the emphasis changing year-on-year?
First Things First
CSRD modernised and strengthened the rules concerning the social and environmental information that companies based and active in the European Union have to report (read my colleague Sara Marcus’s review of CSRD here).
As we wrote before, it is an ambitious piece of legislation that requires many disclosures as part of the European Sustainability Reporting Standard (ESRS), including double materiality, impact-risk-opportunity assessments (IROs), positive & negative impacts and a host of sustainability metrics. So far:
- An average 43 out of 83 possible ESRS disclosure requirements are reported.
- An average of 7 out of 10 ESRS topics are addressed with climate change the most and biodiversity & ecosystems the least disclosed.
- The average length comes to around 97 pages, with 70% of businesses increasing their report in length.
The Impact of Impacts
The ESRS requires corporates to identify, measure and manage both their positive and negative impacts. In many cases, negative impacts outnumber positive ones more than 10 to one. This had a significant impact on the content and the language used around sustainability in CSRD-aligned reports. Let’s illustrate the impact of this with an example.
In its latest report, Danish multinational energy company Ørsted recognises “potential work-related injuries and fatalities” and “work-related stress” as potential negative impacts of working at the company. This meant that previously identified positive impacts such as “career progress through training” and “diversity leading to innovation” are now re-framed as actions to mitigate negative impacts.
This is a move away from “corporate good news” reporting to a transparent and honest assessment of what is actually going on—and as a result, a re-definition of “positive impact.” Language used in this context is being toned down to ensure that compliance is not confused with areas where additional investment is yielding actual positive impact.
The Role of Narrative
The ESRS required a significant increase in the amount of disclosures. Corporates faced the challenge to shape their CSRD-aligned disclosures in a way that suits them as well as makes it easy to compare and for readers to find the information they are looking for. To date, the majority opted for a narrative approach, particularly when dealing with new elements such as double materiality and IROs.
As a result, one of the main characteristics of the narrative we are seeing in sustainability sections of CSRD-aligned reports is a focus on risk. It has been challenging for corporates to knit together risks and opportunities with the IROs in their disclosures, leading to increasing lengthy amounts of text that do not really come together in a coherent narrative.
What’s Next for CSRD?
An initial look reveals that the language used around sustainability is changing as a result of the introduction of CSRD. The increased focus on risk, compliance, and impacts is re-shaping the tone and content of Annual Reports—aligning with other disclosure requirements introduced recently such as TCFD and IFRS. A closer link to the language of financial statements could be an outcome of this trend.
As our colleague Hannah Sarfati writes here, there is an ongoing move to “simplify” the Green Deal that will also impact CSRD. It will not go away completely but eligibility may be changed so that fewer companies will be subject to its disclosure requirements. However, the early impact it’s having on the language used by corporates around sustainability is likely to extend much further than the Directive’s formal remit.
