EU CSRD could raise bar on quality of ESG data

U.S. businesses operating in the European Union will face new environmental reporting requirements starting January 2024.

The EU's Corporate Sustainability Reporting Directive (CSRD) will replace its existing reporting framework and apply to a broader scope of companies -- from 11,000 to approximately 50,000 initially. Some of the criteria for businesses falling under the scope of the CSRD include earning 150 million euros ($166 million) annually and having listed securities such as stocks or bonds on a regulated market in the EU.

The EU's advancement of the CSRD reflects a shift in how governments are treating the reporting of environmental, social and governance (ESG) data, such as a company's carbon emissions or diversity and inclusion efforts. In the U.S., the Securities and Exchange Commission is working on its own climate disclosure rule, which would require companies to report climate risk for the first time and is expected to be finalized sometime this fall. ESG reporting aims to help investors and other stakeholders assess risk by understanding a business's impact on people and the environment, as well as how environmental factors such as flooding and fires as a result of climate change can affect a business.

In this Q&A, Nitish Mittal, partner in the technology practice at research firm Everest Group, talks about what businesses can expect from CSRD, which he said is a bold step toward fostering trusted ESG reporting.

Editor's note: Responses have been edited for brevity and clarity.

What's the difference between the EU's existing ESG reporting framework and CSRD?

Nitish Mittal: There are three big differences. In CSRD, you have this concept of double materiality, or how your business impacts people and the planet and also how are these things impacting your business. There's also third-party assurance, where they want you to be able to get an auditor or somebody to assure the outcomes of what you are reporting -- the veracity of the ESG data. The third thing that's different is the nature of how this information is shared. There are specific digital formats in which CSRD mandates that you share it.

Large companies need to start reporting in 2024, followed by small and medium businesses in 2026, and even smaller enterprises by 2028.

What kinds of companies does this apply to?

Mittal: This is going to apply to all industries. There are two ways to qualify: One is whether you're in an EU member state or do business in an EU member state, and the second is by size.

Large companies need to start reporting in 2024, followed by small and medium businesses in 2026, and even smaller enterprises by 2028.

What about CSRD stands out to you?

Mittal: The primary thing that's different and that I have a lot of hope for is the third-party assurance. It speaks to the central aspect of what a lot of companies and the ecosystem are struggling with: allegations of greenwashing. I think this third-party assurance is something that's important to make sure everyone is trusting how brands report.

The second thing that's interesting about CSRD is when we think of sustainability, people have different views when it comes to how they define it. I like to think of it as the triple bottom line -- people, planet and profit. So it's not just about the climate. The climate is important, but what CSRD also does is include things like fair trade practices, diversity and inclusion mandates, and other social factors, so it sets a more holistic way of thinking about this.

How should companies prepare for this?

Mittal: One is having the right data and the right technologies that are scalable to be able to do this. We need bigger systems that can scale, because the scope of what we need to track is much more, and we need to make it real-time. Because this data now needs to be reported in a digital, live format, the need to tag and track digital data is really important.

Nitish Mittal

Since the scope of this is increasing, I think companies will need to evolve a more holistic view of what does sustainability look like for them, which includes people, planet and profit, or environmental, social and governance.

The big thing for enterprises is to not let perfection be the enemy of good. What I mean by that is, a lot of people can get overwhelmed because some of this appears to be a lot, ... but I think the intent is if you can get started with this, it is a journey. There is scope in the regulation to allow you to do this in a stepwise manner versus all together.

Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget Editorial, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.