Why the right policies, processes, and procedures are going to be central to ensuring your organization complies with The EU's new Corporate Sustainability Reporting Directive (CSRD)
By Prashant Dubey The EU's Corporate Sustainability Reporting Directive (CSRD) is a major new regulation that will require companies from across the globe to disclose more information about their environmental, social, and governance (ESG) performance. The CSRD represents a significant increase in the scope and complexity of sustainability reporting requirements and companies need to start preparing now to ensure compliance.
What does the CSRD cover and how can companies comply?
The CSRD expands the scope of reporting requirements to include approximately 50,000 companies, which range from large enterprise organizations to listed small and medium-sized enterprises, as well as large operations of businesses established outside the EU.
The new regulations require companies to disclose a granular set of information about their ESG performance, including their impact on social, governance, and environmental factors, as well as the influence of these factors on the company itself. This is known as "double materiality" reporting, which will be a new concept for many companies, but it is essential for understanding the full range of ESG risks and opportunities. Companies will therefore need to implement the necessary changes to their contracts, systems, and operational methodology to ensure compliance with the CSRD.
CSRD is broadly in line with the UN Sustainability Development Goals, to be achieved by 2030. This means that companies can use the CSRD reporting requirements as a framework to advance their sustainability goals. Companies can gain a clear advantage over their competitors by demonstrating their commitment to sustainability through compliance with the CSRD. This is because investors and other stakeholders are increasingly demanding transparency on ESG issues.
Policies, processes, and procedures
In an environment of constantly changing regulations, organizations can ensure compliance by focusing on policies, processes, and procedures. This is a tried-and-true approach that has been used successfully in other domains, such as compliance with reporting directives around payment terms.
When it comes to ESG compliance, regulators are initially looking for "limited assurance" that organizations are "demonstrating good faith." This can be demonstrated by having a policy in place that outlines the organization's sustainability goals and a roadmap for achieving them.
Once an organization has a policy in place, it needs to develop processes and procedures for capturing how it is behaving per the policy and reporting on this behaviour. This process should be well-defined and involve all relevant stakeholders.
Contract Lifecycle Management (CLM) systems can be used to automate and streamline many of the policies, processes, and procedures involved in ESG compliance, such as capturing obligations, integrating with other systems, and generating reports. For example, CLM systems can be used to capture obligations under ESG regulations, integrate with other systems such as finance/ERP systems and reporting dashboards, and generate in-depth reports on ESG performance.
Effective contract management also enables in-house legal, sales, and procurement teams to understand who is compliant, who is liable, and who is meant to do what, when, and at what cost. Having that sort of information at your fingertips is invaluable.
A fully flexible, configurable CLM system can make that process even easier by enabling teams to create bespoke workflows that fit each reporting criteria while providing fully auditable reports. Whether they are dealing with CSRD (ESG), Schrems II (data privacy), or the new Digital Operational Resilience Act (DORA) (financial services), a CLM provides a full audit trail, precise controls, and automatic notifications across all agreements.
Vendor portals can also hold suppliers accountable for compliance and provide red-flag notifications when documents or clauses are not compliant.
Today’s leading, flexible CLM systems employ cognitive technologies, such as natural language processing (NLP) and AI machine learning, allowing Legal, Finance, and Operations to automate global governance and regulatory compliance. That means they will spend a fraction of the time, money, and resources they might expect to maintain compliance and stay CSRD audit ready.
As a result, CLM systems will become an essential tool in any compliance, procurement, or legal team’s arsenal. A CLM system can help companies track their sustainability obligations across their entire supply chain. This can help companies meet their sustainability goals and avoid compliance risks. A sustainability reporting framework can help companies define sustainability goals, collect data on sustainability performance, and report their sustainability data in a consistent and transparent way.
About the Author
Prashant Dubey is Chief Strategy Officer and Research Chair at Agiloft, the global leader in agile contract lifecycle management (CLM) software.
Prashant has been in the legal technology and services industry for over 20 years, and has authored a number of books such as “Litigation Readiness” (Oxford) and “The Generalist Counsel” (Oxford), Prashant holds an MBA in Strategy & Finance and a BA in Economics from The University of Chicago. #PrashantDubey #sustainability #directive #EU #CLM #compliance #reporting #data