Key takeaways:

The EU’s CSRD requires detailed reporting on Environmental, Social, and Governance (ESG) issues, enhancing corporate transparency and accountability.
Whilst there is sometimes more focus put on the environmental aspects, companies must address social issues like employee relations, human rights, and community impact, promoting fair treatment and ethical practices across operations and supply chains.
Implementing the CSRD involves navigating complex challenges, ensuring accurate reporting, and adopting robust measures to meet comprehensive sustainability standards.

In a rapidly evolving corporate landscape, integrating sustainability practices has become imperative for businesses worldwide. Acknowledging this, the EU-mandated Corporate Sustainability Reporting Directive (CSRD) has been instituted to build upon its predecessor (The Non-Financial Reporting Directive) and enforce more comprehensive reporting standards with a focus on various Environmental, Social, and Governance (ESG) issues. The European Sustainability Reporting Standards (ESRS), the first set of standards that detail the content of reporting, were adopted by the EU commission in the summer of 2023 and apply to all companies subject to the CSRD.

While the CSRD has many important actions for businesses to consider during sustainability discussions, it is equally vital to delve into the social aspects that underpin responsible corporate behaviour. Under the CSRD, companies are mandated to address a variety of social issues, encompassing employee relations, human rights, community relations, product responsibility, anti-corruption measures, and board diversity. These considerations collectively contribute to fostering a more sustainable and equitable business environment.

Employee relations

The fair treatment of employees is central to sustainable business practices. The CSRD underscores the significance of fair labour practices, encompassing equitable wages, reasonable working hours, and safe working conditions. Moreover, it emphasises employee health and safety, recognising it as a fundamental aspect of corporate responsibility. Adequate training and educational opportunities are also highlighted to empower the workforce and foster professional development.

The directive also extends towards inclusive behaviour. Diversity and equal opportunity initiatives are heavily encouraged, aiming to create inclusive workplaces that value employees' diverse backgrounds and perspectives. In addition, the CSRD emphasises the importance of upholding labour standards throughout the supply chain, ensuring that subcontractors and suppliers adhere to similar ethical standards.

Potential challenges and impacts for companies:

  • Having a good understanding and assessment of the risks existing in the value chain in terms of labour standards. In practice, this means investigating the situation along the full supply chain, paying particular attention to the situation in certain countries as highlighted in International Labour Organisation’s reports.
  • In terms of health and safety, there could be pressure from companies towards their employees to avoid declaring accidents that will be included in the company’s statistics, or to reduce the effective number of working hours lost.
  • In terms of equitable wages, it can be difficult to calculate relevant ratios without first applying the right split between employee categories.
  • Some diversity and inclusion performance indicators can be difficult to collect as there can be restrictions to collect them based on privacy reasons - the number of persons with disabilities among employees, for example.

Human rights

Respecting human rights is non-negotiable for responsible businesses, and the CSRD reflects this by mandating companies to uphold human rights standards both within their operations and across their supply chains. This involves combatting issues such as child labour and forced labour, which are clear violations of fundamental human rights. Discrimination in any form is condemned, and companies are urged to promote equality and diversity within their workforce. Furthermore, the right to collective bargaining is emphasised, recognising the importance of allowing employees to organise and negotiate terms of employment freely.

Potential challenges and impacts for companies:

  • Having a good understanding and assessment of the risks existing in the value chain in terms of human rights. On the field, this requires investigating the situation from the first tier of suppliers and further down the supply chain. Social audits on the field can be organised to obtain a better assessment on the delivery of human rights but those do not always bring to light all of the issues.
  • Some countries and sectors (construction, electronics manufacturing, fashion, agriculture, extracting industry, for example) are typically more at risk for those type of issues.

Community relations

Companies wield significant influence within the communities they operate in. The CSRD underscores the importance of fostering positive community relations by considering the impact of their operations on local communities. This involves engaging in meaningful consultation and communication with stakeholders to address concerns and mitigate negative impacts. Organisations are also encouraged to engage in community investment initiatives, ranging from philanthropic endeavours to sustainable development projects aimed at enhancing the well-being of local communities.

Potential challenges and impacts for companies:

  • Companies are often eager to demonstrate the positive actions that they take in relation to the local communities in their sustainability report. But, potential or actual negative impacts should also be well understood, so that actions can be taken to mitigate them. This requires good stakeholder engagement with those affected communities.

    The ESRS do not include any specific performance indicator for this topic (only qualitative information), nevertheless it can be useful to add company-specific disclosures to illustrate a company’s actions towards affected communities.

Product responsibility

Ensuring the safety and integrity of products is critical for maintaining consumer trust. Under the CSRD, companies are obligated to uphold stringent standards regarding product safety, accurate marketing and labelling practices, and safeguarding customer privacy. By prioritising product responsibility, businesses demonstrate their commitment to consumer welfare and ethical business practices.

Potential challenges and impacts for companies:

  • The ESRS related to consumers and end-users list various potential negative impacts that should be taken into consideration such as harmful products, protection of privacy, products/services for which accurate and accessible information exist, and products/services that concern vulnerable consumers or end-users.
  • Although the standards do not require any quantitative performance indicator on this topic, it can be useful to illustrate the processes and measures taken (customer satisfaction, etc).

Anti-corruption

Corruption poses a significant threat to sustainable development and breaks trust in organisations. The CSRD mandates companies to implement robust anti-corruption policies and procedures to prevent bribery and other corrupt practices. By fostering a culture of transparency and integrity, businesses can mitigate risks associated with corruption and uphold ethical standards in their operations.

Anti-corruption measures safeguard the reputation of businesses and contribute to a level playing field in the marketplace. Through stringent enforcement of anti-corruption policies, companies can deter unethical behaviours, promote fair competition, and ultimately foster economic growth. Additionally, by actively engaging with stakeholders and promoting ethical business practices, organisations can play a vital role in combatting corruption at all levels of society.

Potential challenges and impacts for companies:

  • The exposure to bribery and corruption varies by sector and country. A good understanding of the activities, teams, and areas most at risk is therefore key to implement an efficient anti-corruption policy.
  • A code of conduct or other anti-corruption policy is not sufficient on its own but also requires regular training and monitoring. Setting the tone at the top of the organisation is key in this regard.
  • The ESRS require specific disclosures about sensitive topics which companies usually avoid reporting publicly. Examples include:
    •    Number of convictions and amounts of fines for violation of anti-corruption or anti-bribery laws.
    •    Number of confirmed incidents of corruption or bribery and information about the nature of those incidents.
    •    Number of confirmed incidents in which own workers were dismissed or disciplined for corruption or bribery-related incidents.

Board diversity

Board diversity is not just a matter of social justice but also a driver of corporate performance and innovation. The CSRD recognises the importance of diverse perspectives at the decision-making level and requires companies to report on the diversity of their boards. This encompasses factors such as age, gender, educational and professional background, aiming to foster more inclusive and effective governance structures.

Potential challenges and impacts for companies:

  • Ensuring enough diversity in board composition requires a process in place to select and evaluate board members and to define the profiles that are most needed. This type of regular review is yet to be implemented for a lot of companies.
  • These last years, the business landscape has evolved very quickly and requires new types of knowledge among boards such as ESG, cybersecurity, etc.

By embracing a spectrum of viewpoints and experiences, companies can cultivate a culture of creativity and adaptability, ultimately enhancing their competitiveness and long-term sustainability.

Embedding sustainability into corporate DNA

The framework of the Corporate Sustainability Reporting Directive signifies a monumental shift towards having a larger stage for corporate accountability. There is sometimes a higher focus on the environmental aspects of the CSRD that gain more attention, but addressing these issues is just as important and allows companies to contribute to building a more sustainable and equitable working landscape. Through transparent reporting and adherence to sustainability regulations, businesses can enhance stakeholder trust, mitigate risks, and drive long-term value creation. Ultimately, the CSRD serves as a catalyst for embedding sustainability into corporate DNA, paving the way for a more resilient, risk-averse, and responsible business ecosystem.

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