CSRD poses major challenges for financial institutions
The Corporate Sustainable Reporting Directive (CSRD), which will replace the previous Non-Financial Reporting Directive (NFRD), will require financial institutions to provide more detailed sustainability reporting in the future.
But what exactly is changing? What challenges are associated with it?
The CSRD Directive has been in force since January 1, 2023 and will initially be mandatory for large companies for the 2024 financial year. However, this will change by 2026, as smaller companies will also be subject to the disclosure requirement in subsequent years.
Innovations of the CSRD
The content of the new directive has changed considerably; the innovation of the double materiality perspective is particularly relevant. Thus, with the future reporting obligation, all matters of the company that have a social or ecological impact on the environment, as well as all external factors, such as climate change, that influence the company's business success, must be reported.
In addition to the changes in content, companies must have their sustainability reports externally audited in the future. This should lead to more transparency and prevent greenwashing, as sustainability is no longer just a marketing term but is subject to concrete requirements.
The biggest change concerns the group of users: In the course of the CSRD implementation, smaller financial institutions will also be subject to the reporting obligation by 2026 at the latest.
Challenges
The upcoming CSRD obligation will pose a number of challenges for financial institutions. A recent survey by PwC alone shows that a large proportion of the content requirements of the CSRD obligation are not known or only partially known. In particular, financial institutions that have not yet been affected by the NFRD obligation have some catching up to do.
In addition to understanding the new regulations, many companies see a major challenge in collecting the required data and integrating it into existing data management. This is primarily due to the complex requirements of the "double materiality" perspective described above, which requires companies to collect data that was not mandatory under previous reporting requirements.
Another challenge lies in the design of the CSR reporting obligation itself. For example, a look at the requirements of the disclosure obligations shows that the directive was primarily defined for the manufacturing sector. Financial institutions will have difficulty with some requirements that cannot be reflected in their general business activities. An example would be the handling of hazardous chemicals. Here, an interpretation of the key issues for financial institutions is of great importance.
In addition, there is a need for action for financial institutions, particularly in the area of social sustainability, as this has not been an essential part of the reporting requirement to date.
It is also expected that a more comprehensive industry-specific reporting standard will be published in the coming years to adapt the requirements and standards to the financial sector. This may result in further disclosure requirements for which companies will have to prepare accordingly.
In particular, financial institutions not previously covered by the NFRD are recommended to familiarize themselves with the new requirements and to start analysis and implementation at an early stage.
Curious now?
Around the topic of Green Asset Ratio we recommend our free web seminar on October 27, 2023 "Green Asset Ratio - Enhancement of non-financial reporting for credit institutions". You can register for free today via the CURENTIS Web Seminars link.
