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Sustainability
CFOs and the CSRD: A strategic opportunity for resilient growth
More than simply a compliance exercise, sustainability reporting regulations offer a chance to develop and strengthen your business, says IMD’s Salvatore Cantale.
CFOs are feeling the regulatory pressure. From the 2023/24 fiscal year, large and listed EU companies must comply with the Corporate Sustainability Reporting Directive (CSRD), which mandates disclosure of the carbon footprint of direct operations, energy use, and emissions along the supply chain.
Although the CSRD applies primarily to large entities listed in the EU, it extends to EU subsidiaries of foreign firms, potentially affecting up to 10,300 companies outside Europe, including over 3,000 in the US. California’s new climate bills further complicate the US regulatory landscape, compelling businesses to disclose both emissions levels and climate-related financial risks.
While these mandates bring additional challenges for CFOs, they also present them with an opportunity to secure a strategic advantage for their companies. To seize this opportunity, finance leaders must ensure their sustainability reporting is effective by addressing any issues with skills gaps, data quality, interoperability, and technology readiness.
Skills gaps. Finance teams, experts in regulated financial reporting, must now also navigate the less familiar territory of nonfinancial disclosures. CFOs will need to reinforce capabilities within their teams, particularly in emerging areas such as carbon accounting and sustainability reporting regulations. Financial controllers and other finance professionals must gain a solid understanding of environmental metrics and their implications for corporate strategy.
Data challenges. Unlike financial data, which has long been subject to stringent internal controls, nonfinancial data comes from a variety of sources across the business, including HR, operations, and supply chain, which may have a less rigorous approach to data collection and reporting than the finance function. This inconsistency can prompt questions around data quality, leading the CSRD to require independent third-party assurance. Consequently, it is crucial the CFO ensures that the company’s nonfinancial data is sufficiently robust to withstand external scrutiny.
Complexity and interoperability. The CSRD requires companies to align themselves with European Sustainability Reporting Standards (ESRS), but this is only one aspect of evolving global standards. CFOs may need to navigate other frameworks, such as those of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), each with distinct metrics and requirements. Managing compliance across these frameworks without creating redundancies or inconsistencies will be challenging.
Technology IT infrastructure gaps. The effective management of sustainability data requires advanced digital tools that many companies currently lack. Traditional ERP systems and software, built to manage reporting of structured financial data, may struggle with the unstructured data typically produced by sustainability metrics.
There are three significant factors justifying a more ambitious approach.
Moving beyond a compliance mindset
The scale of these challenges can be daunting for companies that feel ill-prepared for mandatory reporting. Consequently, they may batten down the hatches and aim for compliance and nothing more. But this risks missing an opportunity. By demanding a more ambitious approach to new sustainability reporting regimes, CFOs can put their companies in a much stronger position to deal with future shocks.
There are three significant factors justifying a more ambitious approach.
1. The Strategic CFO
By embedding sustainability into financial strategy, CFOs position their companies as forward-thinking, addressing both risks and growth opportunities and thereby reassuring investors and stakeholders that they are alert to all potential market developments.
As businesses begin to explore value beyond traditional metrics, CFOs must lead these conversations to reinforce their strategic influence. Robust sustainability reporting assures investors and partners that a company is giving a transparent account of its position and is aware of the measures required to prepare for emerging challenges, from climate risk to resource scarcity. The WEF’s Global Risks Report 2024 highlights the urgency: environmental risks may soon become irrevocable facts, further emphasizing the significance of corporate resilience.
By using the CSRD framework, CFOs can showcase progress on decarbonization and alignment with policies such as the EU Green Deal. A clear and transparent approach not only strengthens the company’s investment case but also supports its reputation as a responsible corporate citizen.
Key takeaway: This is an opportunity CFOs should not overlook. Sustainability is no longer a niche topic; it has become essential to a company’s success in attracting investors, suppliers, talent, customers, and, ultimately, regulatory approval.
“An ambitious approach to the CSRD can also open the opportunity to modernize the finance function.”
2. Advancing the finance function’s role
An ambitious approach to the CSRD can also open the opportunity to modernize the finance function. By embracing advanced technology as part of the transition to a more analytical and insight-driven outlook, CFOs can enhance the efficiency and precision of both financial and non-financial reporting and underscore the strategic expansion of the role to contribute to the broader goals of the organization.
Tools such as AI, machine learning (ML), and data analytics support proactive, precise monitoring of sustainability performance, equipping CFOs to influence key data-driven decisions and positioning the finance function as a hub for continuous innovation and performance enhancement.
Key takeaway: By owning and becoming the champions of ESG data and disclosures, CFOs can drive conversations around long-term value creation. CFOs who embrace this shift can position themselves as strategic leaders, influencing not just financial outcomes but also how the organization defines its broader societal impact.
In a world where stakeholder opinion is putting pressure on markets, CFOs can build in the resilience and adaptability needed to support regulatory compliance and competitive positioning by taking a proactive stance.
3. Preparing for a regulated future
As policymakers around the world intensify efforts to address climate change, biodiversity loss, and social inequality, they will inevitably put further regulations in place. Companies that establish strong sustainability reporting measures now will adapt more easily to future regulatory shifts.
In a world where stakeholder opinion is putting pressure on markets, CFOs can build in the resilience and adaptability needed to support regulatory compliance and competitive positioning by taking a proactive stance.
The CSRD offers CFOs a pivotal opportunity to go beyond compliance, reinforcing their role as key drivers of long-term value and stewards of risk resilience.
Adopting an ambitious, proactive approach to regulatory developments allows CFOs to establish accurate sustainability reporting as a pillar of efforts to reach broader strategic goals and cements the CFO’s role as a vital force in shaping their organization’s future.
Key takeaway: By aligning the company’s financial strategy with long-term sustainability goals, CFOs not only ensure compliance with today’s standards but also build a framework that is flexible and scalable for future needs.
Authors
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