How CSRD can create value for finance teams?

On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) came into effect. The value that finance teams can derive from the CSRD largely depends on their proactivity.

Finance and sustainability teams within the first wave of companies subject to CSRD are currently very busy. They are diligently deciphering the European Sustainability Reporting Standards (ESRS), establishing reporting systems, procedures, and definitions.  They are paying close attention to the details of the standards and constantly seeking guidance from the European Financial Reporting Advisory Group (EFRAG) and consultants. As a result, significant resources are being dedicated to complying with the regulation.

However, it’s crucial for finance teams not to lose sight of the potential short, medium, and long-term benefits of this effort. This way, it doesn’t merely become a compliance exercise, and they don’t miss out on potential value-creation opportunities.

In my experience proactive finance teams could reap three main benefits from this exercise:

1. In the very short-term: More effective investor engagement.

   Companies across sectors and geographies will have to report more comprehensively and consistently on sustainability topics, providing investors with more information. How investors use and interpret the additional data points is another matter. Finance teams and their investor relations departments have the opportunity to engage with investors through events and communications promptly to provide a fair and accurate interpretation,. Working towards the CSRD reporting enables the creation of a coherent narrative for the organisation given the cooperation required between, among others, the sustainability and finance departments.

2. In the medium term: Funding diversification.

   The collection of data and metrics across an array of material factors should pave the way for the issuance of KPI-linked instruments (bonds and loans) beyond Greenhouse Gas (GHG) reduction. Finance teams will become more comfortable with committing the organisation to a broader array of sustainability targets that align with investor’s agendas. For instance, as institutional investors commit to nature targets, corporate finance teams can respond with KPIs and targets that can be communicated regularly and used as a basis for sustainable finance funding instruments.

   New labels could also become accessible. One example is the Science-Based Targets Network (SBTN). For more about labels, see my previous blog article.

   Another key point is the sensitivity of businesses to physical risks. A deeper understanding of physical risks and how these could be mitigated with dedicated capital expenditures can open new funding opportunities in the labelled bond market.

3. In the medium to long term: Better evaluation of the WACC for a more resilient business model

   From a climate perspective, most companies will need to draft a transition plan.  Writing a transition plan involves an accurate analysis of risks and opportunities and forces finance teams to take a very deep look at the business model and the drivers underpinning it. Proactive finance teams will thoroughly investigate scenario analyses and the options available to the management team and board to steer the company’s strategy towards a more financially resilient business model.

At what point can the finance team say that the CSRD reporting was well worth the effort?
What are the measures of success?

This is very difficult to determine, but I believe finance teams should consider it this way: Setting some KPIs in terms of investor engagement, funding diversification (e.g., percentage of sustainable investors), and strategising for a more financially sustainable business model as part of the CSRD effort should be well worth the time, with pay-offs in the short, medium, and longer term.

So, is CSRD a waste of time for finance teams? What do you think?

I look forward to hearing your feedback,

Fabrizio fabrizio@impactivise.com