Sustainability reporting: How the 2023 CSR Directive affects business in Malta

Sustainability reporting for businesses: is your business ready for the incoming Corporate Sustainability Reporting Directive (CSRD)?

2023 will see more businesses, including SMEs, compelled to publish details about their efforts toward sustainability. Reports will be in XHTML, meaning they will be available to anyone with access to the internet.

The CSRD builds on the existing Non-Financial Reporting Directive (NFRD) which came into force in 2018. Offering a generous degree of latitude with how companies reported on the environmental and social impact of their business, the directive was a gentle introduction to sustainability reporting. Offering a more translucent than transparent overview of sustainability, the NFRD inadvertently led to some businesses facing accusations of greenwashing.

The new directive is set to take off the training wheels and establish a standard reporting structure, making it easier for interested parties to compare performance between businesses and industries.

Using sustainability to attract the best

As a post-COVID world gets back to work, businesses are keen to minimise unnecessary overheads, including those arising from staff turnover. In 2019, businesses in Malta saw worker replacement rates of between 20 per cent and 62 per cent. These figures represent a downturn in productivity, rising L&D costs and a negative impact on service quality. Here, the CSRD offers a meaningful way to address employee wellbeing and reduce employee turnover by up to 50 per cent.

Transparency around sustainability also offers a way to attract the best talent, 76 per cent of whom will look at a company’s environmental and social commitments before deciding where to work.

The sustainability challenge for businesses is not simply about EU directives, employee satisfaction and consumer confidence – as if those were not enough. Investors too are adopting a more conscious approach to where they devote their capital. A poll by McKinsey & Co found that 83 per cent of investors agreed that standardised sustainability reporting would help companies manage risk more effectively. That same poll, saw 68 per cent of executives recognise that reporting would enhance their organisation’s ability to create value.

A routine part of success

The CSRD has already drawn criticism over the burden that reporting might cause, especially for SMEs. While it is true that there will be a period of business process reengineering, the pains will be short-lived for those who lead the way. Templates will be generated, best practices will be shared and standards will be learned and understood.

Experts in corporate social responsibility, Weave Consulting Ltd, will be there to assess and guide SMEs and other organisations who want to prepare for the changing environment. Sustainability reporting will become a routine part of success rather than a barrier to it.

Critics also point to the irony of non-fiscal reporting incurring a financial cost as businesses adjust to the new normal. But to stop there would be short-sighted. As with a qualitative marketing strategy, there is a positive balance of net returns over the long term. In the case of sustainability reporting: investing in the business of change is an investment in the sustainability of the business.

Use the CSRD to showcase value

Without sustainability audits or assessing best practices, SMEs and other organisations will be at a distinct disadvantage when the directives come into force in 2023. Penalties for non-compliance could go way beyond fines, and some industry leaders have recognised that customers increasingly want to know ‘how green is my choice?’ or if workers along the supply chain are treated fairly. Inspection of a business’s credentials are a web click away and subject to the same level of scrutiny that regularly shames and damages global brands for using sweatshops and strip-mines.

Embracing a new strategy can never guarantee success or profitability, but the CSRD offers a path to develop a more locally and internationally attractive business model. CSRD standards offer businesses an opportunity to expand their value proposition and to show clear advantages to their clients, partners and investors.

The growing culture of stakeholders to question the impact of their own economic choices means that business leaders now have only one question to ask themselves: ‘How ready am I?’