How CSRD Will Change Strategic Planning

The hidden impact of CSRD on strategic planning. How mandatory sustainability reporting nudges them companies towards long-term thinking. You've heard of CSRD, the Corporate Sustainability Reporting Directive, at least in passing. As a new reporting requirement, It calls for your company to submit annual non-financial information, starting in just a few years' time. As someone who cares about long-term environmental and social impacts, you like where this is going. But you are concerned that it will turn into a bureaucratic slog, in which laudable goals are lost in a tsunami of reporting requirements. Far from inspiring staff to do the right thing, you imagine it becoming a war of attrition between staff and some faceless regulators. After all, you've seen this happen before, so you have every right to expect that the same thing will happen again. In this article, we'll look at concrete ways for your firm to benefit from CSRD and its impact on strategy. There are many early actions to take to prepare, but they have something in common. They all rely on your understanding of the intent behind the framers of the standard, the European Financial Reporting Advisory Group . In this article, I'll suggest this standard is a nudge in a positive direction which can empower your leadership team, strategic planning staff, and all stakeholders. The context. The new program is a direct replacement for a prior 2014 requirement targeted to less than 10,000 companies. The Non-Financial Reporting Directive . Over time, it is intended to involve most companies who do business in the EU, starting with the biggest undertakings, which is just the directive's word for companies. The reporting requirements are serious. Some 50,000 large undertakings will be the first to submit reports on over with 1,000 data points each. Over time, the programme will even include micro-enterprises of less than 10 employees. But these are not just policies driven by politicians. They are the EU citizens' way of asking companies to transform themselves. For example, a recent survey in Ireland showed that there was widespread support to curb greenwashing. This practice is engaged by companies who falsely present their businesses and products as environmentally friendly. Therefore, 9 out of 10 Irish people support CSRD, which is intended to curb the practice. But furthermore, some 38% of respondents actively avoid buying products made by greenwashers. The younger the person, the greater the aversion. But citizens of all ages support the European Green Deal, which includes the goal of achieving carbon neutrality or net zero in the continent of Europe by 2050. The CSRD calls for companies to publicly disclose their contribution to this effort, or lack thereof. Why? Well, this isn't just a data-gathering exercise. Instead, the hope is that gathering and disclosing data publicly will lead to important behavior changes. Unfortunately, this logic hasn't worked out as planned in the past. But let's not throw out the baby with the bathwater. This program is one of the biggest ever attempted corporate behavior change efforts, and it might work. This is important to keep in mind when your staff are doing the mundane work of setting up CSRD reports. They'll ask, "Why are we doing this?" Answers such as "because it's the law" may work for a while, but eventually they won't. In other words, you need to define a greater purpose from the start. A bigger intent. If this situation involving an outside standard feels a bit familiar, it should. The world's largest companies implemented far-reaching regulations in 2005, IFRS, and 2002, Sarbanes-Oxley. Unfortunately, the overwhelming response to those standards was compliance first. In other words, undertakings did, and still do, the minimum to get by. Some believe that this new standard will require more work to remain compliant than both these cases combined. To prevent the worst from happening, it's best to discern the requirements for what they are: a massive nudge in corporate strategic thinking. A nudge, according to Thaler and Sunstein's book by the same name, is any form of choice architecture that alters people's behavior in a predictable way without restricting options or significantly changing their economic incentives. But that's not how the requirements are presented in rather dry material CSRD documentation. Here are some excerpts which apply to strategy. Excerpts from CSRD. The draft European Sustainability Reporting Standards General Disclosures include the following statements about your company, the undertaking. SMB 1, number 36. The undertaking shall disclose its market position, the elements of its strategy that relate to or impact sustainability matters, its business model, and its value chain. SMB 2 No. 41. The undertaking shall disclose how the interests and views of its stakeholders are taken into account by the undertaking's strategy and business models. SMB 3 No. 44. The undertaking shall disclose its material impacts, risks, and opportunities and how they interact with its strategy and business models. IRO 2 No. 57. When reporting on opportunities, the disclosure shall consist of descriptive information allowing the reader to understand the opportunity for the undertaking or the entire sector. When reporting on opportunities, the undertaking shall consider the materiality of the information to be disclosed. In this context, it shall consider, among other factors: whether the opportunity is currently being pursued and is incorporated in its general strategy; as opposed to a general opportunity for the undertaking or the sector; and b) whether the inclusion of quantitative measures of financial effects is appropriate, taking into account the number of assumptions that it could require and consequential uncertainty. These requirements are being phased in for different companies starting with data gathered in 2024. While there are financial penalties planned for non-compliance, The objective of CSRD is not to be punitive, and it's also not a mechanism for governments to collect revenue from recalcitrant firms. Yes, these are mandatory requirements, but prior voluntary reporting mechanisms were largely ignored. Also, these are not minor reports. They require some thinking, as they can't simply be copied and pasted from existing documents. This isn't a matter of simply sharing accounting data. Instead, the standard seems to be deliberately vague and intrusive at the same time. But this may not be by accident. This is just the way EFRAG has chosen to nudge companies. Instead of simply providing empty forms to be filled out, it's offering a series of questions for your undertaking to interrogate itself. Why CSRD asks difficult questions. What could be the purpose of the approach CSRD is taking towards strategic planning activities? Let's start with its overall purpose, as shared in europa.eu: EU law requires all large companies and all listed companies, except listed micro-enterprises, to disclose information on what they see as the risks and opportunities arising from social and environmental environmental issues, and on the impact of their activities on people and the environment. This helps investors, civil society organizations, consumers, and other stakeholders to evaluate the sustainability performance of companies as part of the European Green Deal. As I mentioned before, this logic hasn't worked out as planned in prior efforts. Perhaps the authorities know this fact but hope that more will happen. For example, in the worst case, undertakings could become very good at CSRD, but this could just help them become better at greenwashing. After reading a host of CSRD documents, I draw a different conclusion as it applies to corporate strategy. I believe the standards are a nudge for companies to leave short-termism behind. Why would proponents of the European Green Deal want this particular outcome? First, some background. The business world has seen several shifts in the past few decades, the primary one being a steady abandonment of long-term thinking and planning. While doing research for this article, I came across a quote: "The planning operation is regarded by some observers as unrealistic in conditions of rapid change and increasing competition." This is a very popular sentiment in 2023 C-suites. But the quote is actually from 1991. For example, if Amazon.com had followed that piece of wisdom, arguably it would not have navigated the dot-com recession of 2000, 9/11 terrorist attack, the financial meltdown of 2008, plus other global business disruptions. But they're not typical. There's some evidence from McKinsey Company that most companies don't have a long-term strategic plan. In this context, it's no mystery why climate change, a scientific fact first measured in the 1970s, has never been addressed at scale. In retrospect, the Earth's corporate leaders have not been ignorant of the facts or stupid. Instead, they were short-term oriented, and this is the mindset which CSRD seeks to reverse. As such, I conclude that new regulations are intended to nudge corporate leaders away from the short-termism they have become accustomed to. The difficult questions it raises and the reporting it requires are intended to cause a cultural or mindset shift in C-suites of all sizes and locations, starting with the largest concerns within the EU. But this is no small commitment. Despite the best efforts of nonprofits like Focusing Capital on the Long Term , Chief Executives of Corporate Purpose , and other nonprofits, C-suite seems to be moving in the wrong direction. Why? In publicly traded for-profits, short-term investors have hijacked executive attention on earnings calls. Also, CEOs are compensated in 1 to 5 year stock options and tend to have short tenures. Plus, there's plain old greed. Therefore, there's little encouragement to face long-term challenges, even if they endanger undertakings' best interests. But many executives are aware of the problem. The before-mentioned McKinsey survey found that 86% of respondents believed that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation. Also, one survey found that 55% of CFOs would avoid undertaking an NPV-positive investment if it meant falling short of the quarter's consensus earnings per share. And in another study, 78% of executives said they would take actions to improve quarterly earnings at the expense of long-term value creation. The fact is, undertakings are harming themselves, investors, and all their stakeholders. Whatever the reasons why, it's not hard to see that long-term problems related to environment, social, and governance are ignored. In essence, the CSRD hopes to overturn these bad habits. Why? Hopefully, companies will be nudged to develop new muscles for the long term in two ways. One, CSRD reporting compels companies to supply data about their long-term plans. It asks the following questions, among many: Will their strategic plans have an impact on the environment and on society, or vice versa? Also, what about their long-term business model? Is it sustainable when viewed from multiple dimensions? These and other challenging questions make a dubious assumption: that companies actually have long-term plans. However, if the trends are to be believed, they don't. The CSRD does not ask whether such plans exist, nor does it offer any advice on how to craft them. Instead, it simply presumes they do, and then it asks companies to share how these plans will play out in the future and to report their conclusions to the public. My estimation: most companies will either scramble to offer such insights or be forced into a new form of greenwashing. Most will fall someplace in between. Mandatory reporting equates to a very strong nudge in the brand new area of corporate strategy. Number 2: If CSRD works as intended, more companies will do long-term planning. But that's not all. In my company's ongoing study of 50+ long-term strategic planning retreats, we've noticed something interesting. When companies extend their planning horizons, they tend to pay more attention to ESG topics. This finding is supported by the following quote from the Method of Production of Long-Term Plans from Tomlinson and Kayser's article at the Harvard Law School Forum on Corporate Governance: The cross-team collaborations required to develop an effective long-term plan had helped to take sustainability issues out of the corporate silo and connect them to strategy. This was part of a broader movement in which sustainability issues were being seen as core to business operations and an increasingly urgent focus for large institutional investors. The good news is that such thinking occurs quite organically in practice. The opposite is also true. When the planning horizon is reduced to less than 5 years, the exercise devolves into an exercise in maintaining the status quo. Usually, financial metrics dominate as the plan becomes dominated by short-term survival tactics. There certainly is no room in these tactics for Big Hairy Audacious Goals , such as a climate-neutral continent by 2050. The path the CSRD has taken to perform these two big behaviour nudges may be overly focused on data reporting. The strategy could be incomplete as it compels undertakings to focus on ESG topics they would otherwise ignore. It may also be too indirect and rely too much on asking difficult questions. But beyond these direct behavior changes lies a more subtle shift I encourage your firm to consider: creating a mindset of long-term value. The sad truth is that EFRAG's focus on topics related to environmental, social, and governance concerns may not be enough. For example, some companies have already expanded the 3 letters into 4: ESGH and ESGT . These are welcome developments. We can expect that further dimensions of long-term interest will be added as they emerge. But rather than continue to add new letters, it makes sense to pay attention to Alex Edmonds, Professor at the London Business School. His recent article, "The End of ESG," created quite a stir as he made the point that the acronym was a temporary limited placeholder for a much larger concern: long-term value. As such, companies needed a new mindset. With it, I conclude, they could take care of all sorts of things, such as CSRD reporting requirements. I haven't seen any mention of his work in EFRAG's regulations. They're also quite dull, focusing on the mechanics of reporting than all the reasons why. Instead, they innocently require the kind of reporting that makes short-termism impossible, or at least uncomfortable. But there are some smart companies out there. Even if they don't greenwash, can they be terrible at creating long-term value but excellent at playing the CSRD game? In other words, will they skip the mindset but still offer the public great reports? This could be the downfall of the way CSRD is constructed. In fact, this is what Kenneth Pucker says is already happening in his 2021 Harvard Business Review article. Lots of reporting but very little actual change. We need to go further. And there's a lot to be learned from Pucker, Edmonds, Tomlinson et al. About the ways CSRD may be followed to the letter but gutted in practice. What should your company do in response? Peter Gassmann and Will Jackson Moore offer a cheeky "choose your level" self-assessment in their article, "The CEO's ESG Dilemma." They offer 4 levels of responses: conformist, pragmatist, strategist, idealist. At one end of the spectrum, ESG is seen as a means, but at the other, it's season and end. Essentially, their message is that you get to choose your response and act accordingly. Add in this bit of truthful self-analysis to your decision-making and you can begin to see your choices. Based on this assessment, if you happen to either abhor greenwashing or intend to be idealistic, I recommend the following 4 steps. They're based on the findings of my company's study of interwoven short and long-term strategic planning retreats. Step 1: Build support for a long-term thinking project. Search for and gather the proponents of long-term thinking, planning, and acting. I recommend you look within a number of stakeholder groups. Keep evangelizing the idea until there is a critical mass. But be prepared for a range of reactions, even among those who are interested. Case in point: board members may see this as an obvious part of their jobs. Younger staff may have a personal mission to benefit the planet. Those who are about to retire could be interested in creating a legacy. A few may appreciate that doing CSRD reports without having a long-term value mindset can lead to greenwashing. Before the next step, engage in consultations with your stakeholders. It's the best way to get quality inputs and also to create a sense of inclusion. Some organizations have attempted to outsource the task of actually creating a long-term strategic plan to teams reporting to their Chief Sustainability Officer or even their Chief Strategy Officer. I don't recommend either approach as it moves responsibility away from the company's leadership. Instead, I ask leaders in the C-suite to make decisions together in real time during a corporate retreat. Step 2: Conduct a retreat. Once a critical mass of stakeholders have been engaged— has been engaged. Step 2: Conduct a retreat. Once a critical mass of stakeholders has been engaged, Schedule a planning meeting with a view to producing an interwoven short- and long-term strategic plan. But this is not an ESG plan. Instead, taking advice from Edmunds, it's all about creating long-term value for all your stakeholders, in financial, social, and other dimensions. Before the event, be prepared to bring decisions related to CSRD to the forefront at the appropriate moments. These should be introduced in an inorganic way, not as an afterthought. For a more detailed description of the steps in the entire exercise, visit the Jump Leap newsletter. But here is a one-paragraph summary of a 20+ hour intense retreat involving 18 to 22 top leaders. Start the event by forging a baseline of the current reality. Then choose a target year more than 15 years away. Define a detailed vision for your target year encompassing several BHAGs. When that's done, backcast your way from the future to the present and have that become your long-term strategic plan. Then use it to craft a strategy map for your short-term strategy. That's the only way a deep long-term strategy can be used to respond to CSRD. Step 3: Share the strategic plan. Once you've completed your interwoven short and long-term strategic plan, Share it with your stakeholders. They're expecting you to return to them with the decisions the team has made. Look for feedback before moving into implementation. Step 4: Do the reporting. This step may be conducted alongside the prior one. If you paid attention during the retreat, you will have made most of the decisions required by your CSRD reports. But be aware, as of 2024, not a single report will have been completed, and EFRAG is leaving it up to companies to decide much of the contents. The point at this stage in our journey is for your firm to become a company which does the long-term thinking the regulations are nudging you towards. Part of what it will ask you to report is your undertaking's impact on the external environment, plus the opposite. The so-called double materiality doctrine is easy to fulfill with a detailed, long-term strategic plan completed. Without one, you face an uphill battle. In fact, you may be forced to fit sustainability elements into your strategy well after the fact. I don't recommend this approach, even though many will find themselves scrambling to avoid penalties with this last-minute tactic. Why? The sad fact is that EFRAG is asking companies to do more long-term thinking for CSRD purposes than they have ever done for themselves. Summary. Follow these steps and you'll find yourself in the same arena as EFRAG and those bodies in the EU which instigated this effort. Trust them. They did not create their regulatory standards to harass companies. While they took a roundabout route and don't exactly explain why they've done so, their desire to nudge your company towards long-term value creation can be discerned. Smile! CSRD is a major improvement over prior efforts to gain the attention of corporate leaders around sustainable thinking. Also, you will now be able to rally your stakeholders around a grander vision of the company's future. They may not all believe in ESG or even in being CSRD compliant, but you do, and you'll be hitting several birds with a single stone. Finally, you will have arrived at your final destination without deprecating the entire reporting activity. While others are cursing the bureaucratic quagmire they find themselves in, you will have anticipated it and flown above it. As Warren Earhart once said, "The context is decisive." Now, the new context you have forged will serve your highest aspirations.