Role of Board of Directors in the CSRD Era

The CSRD extends the collective responsibility of the administrative, managerial, and supervisory bodies regarding financial statements and management reports to the ESG information contained therein and derived from the concept of double materiality. Hearing testimonies from directors of major European companies eligible to CSRD the like Axa, Rexel, or Engie confirms various best practices already shared in this blog through various articles. Overview from companies working with Ksapa on some of the issues outlined below.

Board of Directors’ Role in the CSRD Era

The board of directors is responsible for overseeing the management of an organization, including making strategic decisions, monitoring performance, selecting and supervising executives, and ensuring regulatory compliance. It represents shareholders and aims to maximize the long-term value of the company. The board of directors plays a crucial role in addressing environmental, social, and governance (ESG) issues. It must establish policies, oversee ESG-related risks and opportunities, integrate these considerations into the company’s overall strategy, and ensure transparency and accountability to stakeholders. However, few boards naturally prioritize these issues for various reasons, such as prioritizing other topics, a lack of diversity ensuring complementary heterogeneous skills in the board covering expertise in ESG, and insufficient regulatory mandates on these issues, which the CSRD addresses.

The CSRD indeed imposes on eligible companies – eventually more than 50,000 throughout the European Union, including many SMEs – to undertake an approach largely guided by EFRAG, ensuring step-by-step and simplified processes here:

• The identification of themes produced by double materiality allows the company – including the board of directors – to understand ESG issues that may affect the conduct of its business and asset protection (financial materiality) as well as to understand ESG issues for which business conduct may impact society at large (impact materiality). All of these themes should constitute the foundation on which to organize the strategy, action plans, and ESG reporting accordingly.
• The CSRD strongly emphasizes governance and the means implemented to ensure the proper consideration of ESG issues arising from double materiality.

Thus, companies are led to rethink their governance model and strategy in light of sustainability in the CSRD era. This question is also at the heart of the implementation of the European directive CS3D.

Identified Best Practices

In response, the board of directors is called upon to address these issues. A set of actions is expected from them. However, some simple best practices are starting to become more widespread or at least good approaches.

Internal Organization and Management

1. Understanding double materiality. It is important to ensure that the board of directors understands both the logic of financial materiality and impact materiality, which together form the foundation for expected governance, as well as the strategic support and even operational involvement of directors where necessary. Based on this, it is then important to ensure a good understanding of the various ESG issues identified within this double materiality for the assets considered.
2. Training on key topics derived from double materiality. It is necessary to conduct training sessions – formats of 2 or even 4 hours may be essential – to ensure a good understanding of key themes driven by double materiality: definition, standards and regulatory expectations, best practices, implications for the governed society (objectives, action plans, animation, means). Topics such as climate, natural resources, biodiversity, and duty of care have become essential. The challenge ensuring the success of these training sessions lies in finding the right calibration to maintain a high level of understanding of these topics while being anchored in the concrete strategic and operational implications of the governed assets.
3. Networking of CEOs and executive committees. In order to align decision-making bodies, it is important to organize networks ensuring regular meetings – monthly or even quarterly – coordinating action or facilitating the sharing of best practices or the pooling of resources in the animation and execution of action plans. Fund administrators even encourage this type of format in managing various portfolio companies, so this practice is not necessarily limited to simple management links within the same company.
4. Networking of procurement directors. Given the critical role played by procurement in managing various aspects of an ESG action plan, it is also important to encourage and supervise similar coordination regarding procurement. In climate-related or duty of care-driven issues, for example, procurement functions play a critical role.
5. Measurement and indicators. Since the CSRD is primarily an ESG reporting process, it is necessary to develop different indicators calibrated according to users, but including members of the board of directors in the same framework of monitoring and performance analysis as executive links.

Organization and Management vis-à-vis External Stakeholders

1. Composition of the board of directors. There is a lack of diversity in the profiles composing the boards of directors. Sometimes, even the same profiles evolve through multiple boards. In light of the thematic conclusions brought about by the work of double materiality, it is important to audit the expertise and networks and take advantage of renewals to seek profiles capable of enriching the board’s ability to take ownership of the subjects, activate the right external networks in providing strategic and operational reflections.
2. Stakeholder committee. Some companies set up a stakeholder committee. Non-decision-making, it allows for regular exchanges with an external collective with a good degree of confidentiality and continuity in exchanges. Before rushing into clichés (“we need NGOs”), it is also important to start from double materiality, audit sensitive or complex issues on which to rely on such a committee, to identify the type of expertise and organizations worth inviting to these formats. The regular participation of board members is essential to ensure alignment in internal governance. Reporting to this committee on how governance bodies approach the subjects and take into account (or not) the recommendations made by these committees is absolutely essential to avoid creating frustration or even conflict situations. In addition to structuring committees, there is nothing preventing, in addition, or instead, organizing exchanges with ad hoc stakeholders.
3. Inclusion of directors in meetings with investors and shareholders on ESG issues is essential. This ensures alignment with financial partners on ESG issues in terms of making strategic decisions, monitoring performance, selecting and supervising executives.

Identified Implementation Barriers and Solution Paths

The CSRD and the use of double materiality can quickly reveal a host of conflicting imperatives, in a context of board-driven issues already heavily burdened by other considerations. By considering the application of identified best practices to address various barriers – such as training, for example – there are at least two remaining barriers that are unavoidable to anticipate and manage:

1. Unawareness and skepticism. The recurring question constantly arises on all ESG subjects. How far should responsibilities be taken and investments made in climate efforts? Doesn’t the duty of care overload the company where the value chain must play an essential role…
2. Divergence of views with investors and asset managers. For convenience, many directors like to reduce this problem to real divergences observed particularly with certain American actors. It’s a bit easy because many European, Asian, or other financial actors do not integrate ESG considerations into their thinking neither to say the least.

Ultimately, these types of barriers simply invite directors to play a critical and strategic role in presenting the clearest business case possible: creating value, managing risks. Promoting the circular economy helps better protect assets in their access to natural resources. Taking into account water issues in operations observing water stress exacerbated by climate change is an element of operational continuity. Taking proactive action on human rights is a crisis management tool.

Conclusion

In the CSRD era, the board of directors sees its role strengthened in a governance framework increasingly accountable for the proper consideration of ESG issues identified in double materiality, and for the proper adaptation of assets accordingly. Ksapa works on these issues and remains an experienced partner with a network capable of accompanying you in these governance reflections.

Frontpage image by yanalya on Freepik