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After providing an overview of greenwashing and its detrimental effects on companies in our first article of the greenwashing series, we will now delve into the transformative landscape of sustainability reporting. With an increasing emphasis on corporate accountability and environmental stewardship, the CSRD and EU Taxonomy have emerged as powerful toolsets designed by the European Union to promote transparency and equip companies with a vital framework to address the risks posed by greenwashing.
In this article, we will explore how the CSRD and EU Taxonomy contribute to the fight against greenwashing, the challenges that companies may encounter during the transition to these frameworks and provide insights into how they can effectively embrace these standards to enhance transparency, build trust, and drive genuine sustainability practices.
Understanding Greenwashing and the Need for Transparency
In our previous article of the greenwashing series, we examined the characteristics of greenwashing and highlighted the risks it poses for companies. As businesses strive to capitalize on the growing demand for sustainable products and services, greenwashing has become a prevalent concern. However, combating greenwashing requires more than just awareness; it necessitates a commitment to transparency.
Transparency plays a crucial role in addressing greenwashing effectively. Transparent reporting fosters accountability, builds trust, and ensures that sustainability claims align with actual practices. However, achieving transparency in reporting can be challenging without robust regulations and industry standards. Companies may face difficulties in accurately measuring, assessing, and communicating their environmental impact, leaving room for confusion and potential greenwashing traps.
It is precisely in this context that the CSRD and the EU Taxonomy emerge as powerful allies for companies. These initiatives establish a structured and comprehensive framework that promotes transparency and helps companies communicate their environmental performance accurately.
Learn all you need to know about CSRD in our ebook The Essentials of CSRD.
Let's dive deeper into how these initiatives tackle greenwashing risks.
CSRD & EU Taxonomy as Allies against Greenwashing Risks
The CSRD and EU Taxonomy aim to provide safeguards against the risk of greenwashing for companies, encompassing the following protective measures:
A Common Language
Firstly, the EU Taxonomy provides a common language that allows for consistent assessment of the sustainability of companies’ activities. This allows companies to report their sustainability metrics in a uniform manner, ensuring a fair and leveled playing field among competitors.
A Bottom-up Approach
The shift from an industry-lead approach to a bottom-up approach directly from the companies encourages companies to provide a detailed description of how their investment meets the environmental objectives.
A Detailed Quantitative Approach
The implementation of new requirements necessitates a transition towards a more comprehensive and quantitative approach to reporting. This shift promotes increased precision and reduces the potential for subjective interpretation by companies. Moreover, qualitative disclosures are now more structured, as exemplified by the CSRD and its ESRS, which outline specific disclosure obligations related to information collection processes, ultimately enhancing accuracy.
A Mandatory Audit
The phased implementation of mandatory external assurance, starting with limited assurance (adopted no later than October 1, 2026) and transitioning to reasonable assurance (adopted no later than, October 1, 2028), requires companies to subject all their sustainability information and reporting practices to audit and to treat it with the same level of scrutiny as their financial data.
Double Materiality
The new EU regulations emphasize the concept of double materiality, requiring companies to assess and report their impact on the environment and the environmental risks faced by the business with equal rigor and balance. Unlike the traditional approach of simple materiality, where only the impact of the environment on a company is considered, double materiality takes into account both the impact of the company on the environment and the environmental risks faced by the business. This comprehensive assessment ensures that companies cannot engage in greenwashing, as they are obligated to provide a holistic view of the environmental impact and risks of their economic activities.
The EU Taxonomy’s Mechanism
Finally, the EU Taxonomy allows eligible companies to prove their alignment with comparable, detailed and science-based criteria. These requirements will be made stricter which also incentivises companies to take it seriously. Moreover, the “do no significant harm” disclosures force companies to approach sustainability matters in a holistic way. They will not only report on the substantial contribution they provide, but will also have to prove that they do not affect any other sustainability matter taken into consideration in the EU Taxonomy’s objectives.
Overall, while honest mistakes and deliberate attempts to evade rules may still occur, the new EU frameworks on sustainable finance, such as the CSRD/ EU Taxonomy, significantly reduce the chances of such occurrences going unnoticed.
EU Taxonomy & CSRD: Remaining Challenges for Companies to Prevent Greenwashing
While the benefits of the new regulations are clear, companies striving to comply with sustainable finance regulations will inevitably face a range of challenges.
Tackling Short Implementation Deadlines
Companies are faced with the need for swift action. The initial reports under the CSRD must be submitted by 2025 (covering the 2024 fiscal year) for NFRD companies, necessitating the rapid establishment of data collection systems and processes. Regarding the EU Taxonomy, eligibility and alignment exercises are already put in place for climate change mitigation and adaptation. Moreover, the EU Commission just released its draft delegated acts for the remaining 4 environmental objectives for which the eligibility exercise should start from 2024.
Learn all you need to know to get started with the CSRD/EU Taxonomy with the Greenomy Academy, our free educational platform designed to help corporations and financial market professionals stay ahead of Sustainable Finance Regulations.
Consequential Compliance Costs
Companies may encounter substantial costs and encounter time-consuming hurdles when it comes to adjusting their internal information processes and IT tools to collect the required data from their operations.
The Importance of Reliable Data
During the initial years of implementing the CSRD/EU Taxonomy reporting, companies will face the challenges of insufficient data or poor data quality. To mitigate these issues, it is essential for companies to use reliable and sound data to ensure accurate reporting. The new framework sets a higher level of detail and granularity in reporting standards, which requires companies to improve the transparency and traceability of their data collection methodologies. This means that companies need to re-evaluate their entire ESG reporting strategy, including the data collection process.
Insufficient Incentive
Decision makers, managers, or employees within companies may be reluctant to invest the necessary time and effort to understand the new sustainability reporting regulations and their implications. This reluctance can arise due to a lack of incentives or motivation to do so, which can result in incomplete or inaccurate reporting. Therefore, companies should foster a culture that values sustainability reporting and actively encourages everyone in the organization, from the board down, to learn about and understand greenwashing risks and the new reporting standards.
Expertise in High Demand
The new reporting standards require a deep understanding of sustainable finance, which is a relatively new and complex field. There is not enough sustainability expertise in the market to cover the upcoming surge of sustainability reporting. Many companies may therefore lack the necessary knowledge to interpret and implement the new regulations correctly, leading to incomplete or inaccurate reporting. Additionally, there may be a shortage of training or information available to help companies build the necessary expertise. To address this challenge, companies can invest in training programs or seek the guidance of external experts or consultants to provide additional support and expertise.
Need help getting started on your CSRD/EU Taxonomy reporting? Book a call with our sustainability experts for tailored support and guide.
Combatting Greenwashing Through Transparency: How Can Greenomy Help?
The CSRD and EU Taxonomy were designed to enhance transparency and accountability in assessing the sustainability of economic activities. However, understanding and complying with these frameworks can be challenging for organisations. In response, Greenomy is dedicated to simplifying Sustainable Finance Regulations in view of empowering businesses to integrate sustainability into their core operations. Our mission is to accelerate and strengthen the transition to a sustainable economy by providing relevant and reliable information to all stakeholders.
Through our digitalised data capturing and reporting process, Greenomy establishes an all-encompassing sustainability data and analytics ecosystem that facilitates the redirection of funds towards sustainable projects. By leveraging our technology, companies can easily reduce compliance costs and navigate the complexities of a rapidly evolving regulatory landscape. Our solution streamlines reporting, enabling organizations to dedicate more time and resources toward actively improving their sustainability initiatives.
Let sustainability be more than a section in your annual report—make it a core part of your business strategy, corporate culture, and brand identity. Book a call and kickstart your CSRD reporting journey today.
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