The Case for Regulation – and Strategic Opportunities
At its core, the CSRD is designed to enhance transparency by requiring large EU companies, listed small and medium enterprises (SMEs), and financial institutions to disclose their ESG impacts and plans. However, this regulation is now facing potential changes to ease companies’ reporting burdens.
Earlier this year, the European Commission proposed and passed the ‘Omnibus’ Simplification Package, which included key changes such as postponing reporting requirements, narrowing the CSRD’s scope to large companies meeting specific thresholds, and offering more flexibility for sustainability reporting. These changes have raised concerns about reaching sustainability targets at the root of regulation. When a government body introduces a regulation as comprehensive as the CSRD, it’s typically driven by a compelling need, with several factors driving its implementation.
The CSRD offers a strategic opportunity for companies to integrate sustainability into their core business strategies. By requiring detailed disclosures, it compels organizations to quantify the negative impacts of climate change and identify opportunities arising from the transition to a green economy. This quantification is crucial for building robust net-zero transition plans and elevating sustainability on the C-level agenda.
Economic research highlights that aligning business practices with sustainability goals can unlock growth opportunities. Europe, which has lagged in digital transformation compared to other regions, can regain momentum by embracing the green economy. The CSRD facilitates this by encouraging companies to align their operations with environmental realities.
Climate change poses another pressing incentive for regulation. Europe is warming two times faster than the global average. This is due partially to its proximity to the Arctic, which is warming at higher-than-average rates, and its landlocked population centers. As the planet gets warmer, we shall continue to align with the Paris Agreement's temperature objectives to keep global warming well below 2°C but strive for 1.5°C.
A Dual Impact on Economic and Environmental Fronts
The CSRD's dual focus on economic and environmental reform can drive positive change. CSRD compels companies to consider how environmental realities impact their financial operations and requires, companies to propose actionable plans and provide updates on these material issues.
For example, a manufacturer consuming large quantities of water could be impacted by local government decisions on water conservation due to increasing risk of droughts in the region. By encouraging companies to anticipate such resource management policies, the CSRD helps ensure long-term business resilience. Through the CSRD lens, businesses must thoughtfully factor in third parties—such as supply chains and municipal governments—and resources into their calculations. This is the real value of the regulation: linking business operations to the renewable energy transition.
Navigating Challenges for Greener Pastures
Despite initial pushback, major companies increasingly view the CSRD as a way to avoid greenwashing and gain a long-term competitive edge. Starting from employees, a company´s stakeholders desire visibility and transparency over their actions is another lever for accountability, as the CSRD also allows by answering these wide variety of stakeholders´ interest in tracking company’s sustainability progress and transition plans.
One challenge is that a significant portion of supply chains—up to 60% in industries such as automotive—are made up of SMEs, which the CSRD may not apply to. If these smaller companies aren't required to report, it creates a blind spot when assessing the full supply chain, leaving a gap in transparency and accountability. One hope is that software will enable SMEs to provide accurate data estimates to larger companies they work with, easing the burden of detailed reporting requirements.
Preparation is crucial when reporting to the granular standards required for CSRD compliance. Establishing unified data architecture across all company functions can make compliance preparation a valuable opportunity to strengthen data governance, improve accuracy, and enhance coordination with the supply chain.
Building the Future Begins Now
Looking ahead, the EU will likely create a future access point for evaluating competing companies’ progress, which will be valuable for investors, sustainability officials, and consumers. While this system is still in its early stages, this amenity serves to raise visibility for role models in nearly every industry.
My fellow panelists and I concluded our discussion with one resounding point: regulations like the CSRD should be seen as tools for creating sustainable standards and leveling the playing field across sectors. Meeting the demands of the CSRD will pose challenges; however, compliance is a necessary step given the broader environmental context. While progress is happening at a slower pace than needed, it’s clear that regulation will play a critical role in driving the transition to net zero.
