· 7 min read
As the Corporate Sustainability Reporting Directive (CSRD) deadlines loom, many companies – especially within the tech sector – are scrambling to ensure they meet the new regulatory demands. The directive, which comes from the EU but has a large extra-territorial impact thanks to its applicability to companies with significant revenue or operations within the EU, mandates that businesses report on environmental, social, and governance (ESG) criteria to a higher standard of transparency and accountability in non-financial reporting. Doubtless many will view this as a burdensome compliance task, but forward-thinking companies should see it as a chance to transform their sustainability work into a powerful competitive advantage. Tech companies, in particular, are well positioned to seize this opportunity.
Turning the process of CSRD compliance to your advantage requires understanding the process of CSRD reporting and how each stage can drive value across the business, from supply chain management to customer engagement and product/service innovation. There are three main stages in the CSRD journey that companies should consider - these are double materiality assessment, gap analysis, and annual reporting.
Double materiality
The CSRD's scope is vast, covering a broad range of 10 major ESG topics and issues, from environmental impact to social responsibility within the supply chain. But at the heart of the CSRD is a prioritisation exercise, the concept of double materiality. This assessment requires companies to consider not only how ESG factors impact their business but also how their business impacts the broader environment and society, and identify the material ESG issues.
This two-way lens can provide valuable insight into impacts, risks and opportunities, allowing companies to identify the most critical areas for action. For tech companies in particular, it means gaining a deeper understanding of your business. A comprehensive double materiality assessment enables businesses to pinpoint areas where they may be vulnerable – whether due to reliance on suppliers in risky regions or because of customer expectations for sustainable products and services, for example. Company leaders can become aware of environmental and social impacts they may currently be partially or wholly responsible for, and what exposure they might have because of these impacts.
Gap analysis
Once a company has conducted its double materiality assessment, it normally undertakes a gap analysis. This process highlights areas where the company is underperforming or lacks sufficient reporting mechanisms to monitor and manage the material topics. For many businesses, this can be eye-opening, since it can show gaps in their sustainability or operational strategies that may have gone unnoticed. A tech company might learn that certain suppliers are not meeting the company's sustainability standards, or that while data centre energy usage is well-managed, there is a blind spot in the embodied carbon footprint of data centre equipment such as servers and routers.
Reporting and performance improvement
The final stage of the CSRD process is annual reporting. Here, companies are required to publicly disclose their ESG performance, with an emphasis on transparency and accountability. Unlike past CSR reporting requirements, CSRD leaves little room to hide when it comes to ESG performance. It is fully expected by the policy-makers that the act of reporting drives both external and internal scrutiny and positive change within the organisation itself. Embracing this overriding theme of CSRD is where the real strategic advantage comes into play. With a more complete picture of their organisation, companies are more likely to put in place policies, set targets, and measure against a rigorous and comprehensive set of indicators, making organisations more likely to deliver real-terms improvement in ESG performance. By delivering on ongoing performance improvement in the form of a ratcheting up of action and results in the right areas, companies can evidence that they are “walking the walk” and delivering on commitments in terms of their contributions to real-world sustainability priorities.
Supply chain resilience
So the three steps have the potential to bring awareness, insight and improved performance around sustainability. But what strategic benefits accrue from this forward-thinking approach to sustainability? Broadly speaking, the benefits that tech companies can gain from their CSRD journey fall into four categories: supply chain resilience, customer relationships, innovation, and access to capital.
The global supply chain is fraught with risk, from climate change to geopolitical unrest. Recent events in Israel and Taiwan have highlighted the fragility of international supply chains. For tech companies, many of which rely on complex, global networks of suppliers, this is a real concern. And the CSRD, with its emphasis on transparency and accountability, can help companies become more resilient. By holding suppliers to higher standards of sustainability, companies can reduce the likelihood of disruptions due to environmental or social factors.
Moreover, policies such as a strong supplier code of conduct, developed in line with the CSRD’s requirements, ensure that suppliers are aligned with the company's values and expectations. This not only reduces reputational risk but also helps create a more reliable supply chain. In the long run, adopting CSRD practices can lead to cost savings through better use of resources, reductions in waste, and more efficient processes. A more resilient supply chain is better equipped to weather external shocks, which contributes to the continuity (and profitability) of the business.
Becoming a preferred supplier
Today, companies that can demonstrate strong ESG credentials are more likely to win contracts and secure long-term partnerships. The CSRD offers tech companies an opportunity to position themselves as preferred suppliers by not only showcasing their commitment to sustainability, but by also providing hard quantitative data that evidences their claims. Many procurement decisions now favour low-risk, sustainable supply chains, and tech companies that excel in this area are likely to see increased demand for their products and services. By making CSRD compliance a selling point, companies can strengthen their relationships with customers and gain a competitive edge in the market.
Innovation and customer engagement
The CSRD process is not just about reporting; the process can also be leveraged to foster innovation. By engaging customers and suppliers as key ESG stakeholders, tech companies can develop products and services that better meet the growing demand for sustainable solutions driving revenue growth. For example, by understanding customer requirements around carbon emissions reduction and Scope 3 targets, we have seen companies developing low-carbon services and we’re even seeing the rise of ‘Sustainability as a Service’, where companies offer solutions that help their customers meet their own sustainability goals, such as custom reporting on account-specific sustainability performance.
Access to capital
Finally, CSRD compliance can open doors to green financing opportunities. Investors are increasingly looking to fund companies with strong ESG credentials, and tech companies that excel in sustainability are well-positioned to attract capital. By meeting the CSRD's standards, companies can boost their appeal to investors, securing the cheap funding needed to fuel growth and innovation. Moreover, being a leader in sustainability can lead to cheaper financing options. Many financial institutions now offer favourable terms to companies that demonstrate strong ESG performance, providing an additional incentive for tech companies to embrace the CSRD.
Conclusion
In summary, the CSRD represents much more than just another regulatory hurdle. The EU’s intention with CSRD is to take sustainability and ESG firmly out of the era of “box-ticking”, by bringing the performance management disciplines most commonly found in the realms of the CFO to the desk of the CSO. By bringing transparency and accountability to a structured set of topics, the CSRD is designed to act as a catalyst for rapid, positive change. For tech companies willing to work in the spirit of the directive, it amounts to a fantastic opportunity to improve supply chain resilience, foster innovation, strengthen customer relationships, and unlock new sources of funding. By turning compliance into a strategic advantage, tech companies can position themselves as leaders in sustainability, reduce risk and drive real value for their businesses but also the wider world. The CSRD, seen in this way, can help to reshape the tech industry into something both profitable and sustainable.
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