November 10, 2022, was the day when the EU Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), the EU Council had until 28 November to adopt it and publish it in the Official Journal. The CSRD would be enforced twenty days later, and EU member states would have 18 months from that date to codify it into their respective national laws.

What’s special about the CSRD is that it will outline new and detailed sustainability reporting requirements for both EU and non-EU companies, subject to this reporting framework. These disclosures extend beyond the typical environmental and climate change reporting that companies are now offering to also cover social and governance matters.

Even though the CSRD will only begin to apply starting in 2024, companies are now on a clock to see whether these standards apply to them and what they should do to prepare for the future.

The Harvard Law School Forum on Corporate Governance article goes into more detail about the obligations and to whom this specific reporting framework applies, but it is still a massive win for ESG in many ways. The biggest of which is that this framework can be a primary example that other countries can use to "persuade” companies to adopt sustainable standards, pay livable wages, or take up ESG initiatives. Here is why:

A Challenging Climate For ESG

At the time of this article's publication, ESG is in a bit of turmoil. 2022 was not very kind to ESG, and there are some clear areas to improve it. One thing that we can easily conclude is that even with businesses scoring high on ESG and investors pouring more money into this cause, it doesn’t always turn out great.

Portfolios can be "greenwashed", obscuring the true pathways of investments, which can be in coal mines or arms manufacturing. And companies getting caught doing those things can shake up ESG's foundation and credibility. Policies play a significant role in preventing these scenarios from occurring in the future. They legitimise large-scale movements like these.

ESG is no longer a set of general guidelines or personal philosophies. It’s been legitimised and standardised by a government body. With the implementation of CSRD, approximately 50,000 organisations will be required to comply. It would be implemented in stages, beginning in 2024 and lasting until 2026.

This thoroughly addresses current issues like “greenwashing” or “greenhush” projects. The latter is critical because, in light of the current political backlash, many companies are undertaking green projects but are not making announcements or displaying results.

It Also Addresses The Lack Of Education

When it comes to ESG, it’s still a relatively new idea to the general population. In business and investing, ESG is even more benign, so being roped into specific standards and threatened with hefty fines can cause a lot of concern and pushback.

The pushback, though, is now in a difficult position since people can’t feign ignorance about these rules and laws. In the case of the EU, these laws are written out and clearly communicated to the public. Companies should know what to do and how to do it.

The EU is still going to face a lot of challenges, but educating people about these changes as they are being made can help people ease into these new changes.

Replication Across Countries

But the biggest reason this has fixed ESG is that other countries can take this example and apply it in their own national or regional contexts. The largest issue right now is the fact that the EU is the only bloc in the world right now that has this kind of policy and is enforcing it.

There is no doubt that it will generally be good, but it is still too early to say whether the changes are effective or necessary. The problem with systems is that sometimes there are faulty gears, redundant steps, or parts that are just frustrating to work with. Large-scale policies like this will fall into the same category.

Nevertheless, this is a step forward, and that’s better than making no step at all. Pointing to a clear example of some standards to generally go by is a start and adds legitimacy to a cause. As above, there is a difference in credibility when a famous person says something versus when the government puts standard processes into law.

We can expect, with some degree of viability, that the EU precedent will be just that, the beginning of regionally relevant rollouts of similar legislation. For a clear overview of the CSRD, take a look at this excellent guide from the Carbon Trust.

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