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The Impact of CSDR Directive on ESG Ratings and Investments

Monday, 25 March 2024

by Achille Deodato, CEO Indigita SA



The European Commission's introduction of the Corporate Sustainability Reporting Directive (CSRD) marks a significant step towards integrating sustainability into corporate reporting practices. This directive, which entered into force on January 1st, along with other regulatory initiatives like the Sustainable Finance Disclosure Regulation (SFDR) and taxonomy, underscores the European Union's commitment to advancing sustainable finance as a core component of its Green Deal agenda.

Who is Affected


The CSRD targets a broad spectrum of companies, extending its reach beyond EU borders to include Swiss companies and foreign entities with significant operations in the EU. Initially applicable to listed companies on European regulated markets, the directive gradually encompasses unlisted companies and SMEs based on revenue thresholds. The creation of European Sustainability Reporting Standards (ESRS) further standardizes reporting practices, enhancing transparency and comparability across sectors.

The CSRD applies to entities already subject to the SFRD and listed on a European regulated market, with initial reports due in 2025, reflecting 2024 data.

Beginning in 2025, the CSRD will extend to unlisted companies meeting two of the following criteria: annual revenues exceeding €40 million, a balance sheet total surpassing €20 million, or employing more than 250 individuals. These companies will undergo review in 2026, based on 2025 data. From 2027, SMEs listed on a regulated European market that do not meet any of these conditions will issue their CSDR reports based on 2026 figures. By 2028, the CSRD will also encompass foreign companies, including Swiss entities, generating revenues of at least €150 million, with a subsidiary or branch in the EU generating revenues exceeding €40 million. Their reports are anticipated in 2029, reflecting 2028 data.

The Impact on ESG Ratings


ESG ratings assess a company's performance across environmental, social, and governance factors. These ratings aid investors in evaluating a company's sustainability and ethical practices, assisting them in making informed investment decisions. Environmental factors consider a company's impact on the environment, while social factors assess its interactions with stakeholders. Governance factors focus on the company's leadership and internal controls.


ESG ratings help investors understand a company's overall sustainability practices and potential long-term risks.

The CSRD's implementation has a dual impact on ESG ratings. Firstly, it compels companies to provide more comprehensive sustainability disclosures, thereby enriching the pool of available data for ESG analysis. However, the proliferation of unharmonized data poses challenges for rating agencies in assessing and benchmarking companies' ESG performance. Financial institutions, acting as intermediaries between investors and credit markets, are tasked with navigating this complexity and guiding investors through the maze of ESG regulations and ratings.

Financial Institutions' Role


Financial institutions play an important role in driving the integration of ESG considerations into investment decisions.


As gatekeepers to credit markets, banks and asset managers leverage ESG ratings to filter investments and align portfolios with the sustainability objectives of their clients. Moreover, they serve as educators, translating complex ESG standards and regulations into accessible information for investors.

Despite the challenges posed by heterogeneous ESG frameworks, the CSRD's mandate accelerates the adoption of sustainable finance practices, aiming at propelling the industry towards greater transparency and accountability.

Conclusion


The CSRD represents a landmark initiative in advancing sustainability reporting and ESG integration within the corporate landscape. While it presents challenges in data harmonization and regulatory compliance, it also offers opportunities for companies to enhance their ESG performance and access to capital. Financial institutions, in turn, play a critical role in facilitating this transition, guiding investors towards sustainable investment opportunities and driving positive change in global financial markets. As the momentum towards sustainable finance continues to build, the CSRD serves as a catalyst for a more inclusive and resilient financial system.

What do we do at Indigita


At Indigita, we are committed to supporting professionals in understanding and navigating the complexities of ESG regulations. We offer a comprehensive and evolving set of courses on ESG, mostly developed in partnership with Prometeia. Our courses are designed for banking executives, relationship managers, and compliance/sustainability officers. Our courses cover the main concepts related to ESG and the main existing regulations, with a focus on Switzerland and the European Union. Additionally, through our inApp solution, we provide ESG rating answers on listed financial products on the go, empowering professionals to make informed decisions in the rapidly evolving landscape of ESG investments.

For more information on ESG ratings, consult the article on Monde Economique, by our Head of Client Delivery and Partnerships, Nabil Hatimy: ESG ratings of financial products: Don’t dismiss a good idea for its challenges.

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