€4.8 Billion Of ESG Disclosure Spend Anticipated In 2022 And 2023 Due To The EU’s Corporate Sustainability Reporting Directive
In April this year the EU Commission published its proposal for a new corporate sustainability reporting framework which significantly expands on the existing Non-Financial Reporting directive. If the EU Commission’s proposed directive is adopted by the Council and Parliament in 2022 approximately 49,000 undertakings with more than 250 employees and annual revenues of €40 million ($48 million) in the EU will need to make regulated ESG disclosures. By its own calculations, the EU Commission believes this will require upfront spend in 2022/23 of €1.2 billion ($1.4 billion) and will result in annual recurring costs of €3.6 billion ($4.3 billion). This equates to an average spend on internal staff time and external solution providers in the first two years of approximately €100,000 per firm covered by the CSR directive.
To understand what undertakings covered by the directive will need to do, Verdantix conducted a detailed analysis of the EU Commission proposal as well as the technical document on sustainability reporting standards produced by the European Financial Reporting Advisory Group (EFRAG). The Verdantix report, EU Corporate Sustainability Reporting Directive: Time To Gear Up For A Huge Opportunity, finds that the EU’s CSR directive is comprehensive and complex. The fundamental policy goal of the directive is to ensure funds flow into more sustainable business activities by providing investors with the high quality, consistent ESG data they need to make informed decisions about the impact of their investment decisions. This policy objective results in a cascade of requirements: robust quality controls on sustainability information; specific material ESG disclosures across all sectors and within sectors; digital tagging of data to make it machine readable; sustainability data disclosed in the management report alongside financial statements; and mandatory assurance of sustainability disclosures. The CSR directive is applicable to foreign-owned subsidiaries with more than 250 employees in the EU, not just to firms headquartered in the EU.
What should ESG software suppliers do to capture market share? Software vendors need to ensure they have a configurable ESG disclosure mapping engine which enables customers to flow underlying data – such as Scope 1 GHG emissions or diversity metrics for managers – into an out-of-the-box CSR disclosure report. Thousands of medium-sized firms will look for drag and drop data mapping functionality to simplify compliance with the EU CSR directive. As sustainability information will be treated like financial data, ESG software needs to align with financial reporting processes. Firms that already use applications like Wolter Kluwer’s CCH Tagetik or Workiva’s Connected Reporting platform will look for these providers to flow sustainability information into their financial close workflows. Looking beyond the EU directive, ESG disclosure software also needs to produce consistent ESG disclosures using multiple frameworks in parallel. In 2024, a US firm with more than 500 employees in the EU will likely need to comply with SEC regulations on climate and ESG disclosures as well as with the EU CSR directive and in many cases will continue with SASB voluntary reporting. All these frameworks will morph over time. Firms will need a configurable ESG data engine that can evolve with the myriad disclosure frameworks coming down the pipe.