Corporate sustainability reporting in the European Union is undergoing a significant transformation with the introduction of the Corporate Sustainability Reporting Directive (CSRD). This new framework represents a major evolution from previous reporting standards, with far-reaching implications for businesses across Europe, including Denmark. This article examines the new EU regulations, their implications, and how Danish companies are navigating this rapidly changing landscape.
The Evolution of Sustainability Reporting in the EU
Sustainability reporting in the European Union has evolved considerably over the past two decades. The journey began with voluntary environmental reporting in the 1990s, progressed to the Non-Financial Reporting Directive (NFRD) in 2014, and has now reached a new threshold with the Corporate Sustainability Reporting Directive (CSRD), which entered into force in January 2023.
The NFRD required large public-interest companies with more than 500 employees to report on environmental, social, and governance (ESG) matters. However, it was criticized for several shortcomings, including a lack of standardization, insufficient detail, and limited scope that covered only about 11,000 companies across the EU.
The CSRD addresses these limitations by significantly expanding both the scope and depth of required reporting, affecting nearly 50,000 companies across the EU, including many Danish businesses that were previously exempt from mandatory reporting requirements.
Key Features of the Corporate Sustainability Reporting Directive
The CSRD introduces several fundamental changes to sustainability reporting in the EU:
1. Expanded scope: The directive applies to all large companies (meeting at least two of three criteria: more than 250 employees, turnover exceeding €40 million, or total assets over €20 million) and all listed companies except micro-enterprises. Many medium-sized Danish companies that were previously exempt will now need to comply.
2. Standardized reporting: Companies must report according to the European Sustainability Reporting Standards (ESRS) being developed by the European Financial Reporting Advisory Group (EFRAG). These standards aim to create comparable, reliable sustainability information.
3. Double materiality perspective: Companies must report on both how sustainability issues affect their business (financial materiality) and how their activities impact people and the environment (impact materiality).
4. Mandatory assurance: The reported sustainability information must be verified by an independent auditor or certifier, initially with "limited" assurance and eventually with "reasonable" assurance (similar to financial audits).
5. Digital tagging: All reported information must be digitally tagged and submitted to a European database, making the data more accessible and comparable.
6. Value chain focus: Companies must report on sustainability issues throughout their value chain, not just their direct operations, introducing significant new data collection challenges.
Implementation Timeline
The CSRD is being implemented in phases to give companies time to adapt:
• In 2025 (for fiscal year 2024): Companies already subject to the NFRD will begin reporting under the new standards
• In 2026 (for fiscal year 2025): Other large companies not previously subject to the NFRD will begin reporting
• In 2027 (for fiscal year 2026): Listed SMEs, small and non-complex credit institutions, and captive insurance undertakings will begin reporting
• In 2029 (for fiscal year 2028): Non-EU companies with significant EU operations will begin reporting
This phased approach gives Danish companies different timeframes for compliance depending on their size and current reporting status, but all affected organizations need to begin preparations well in advance of their respective deadlines.
Danish Context: Building on a Strong Foundation
Denmark has a long history of progressive policies regarding corporate responsibility and transparency. The country introduced mandatory CSR reporting for large companies in 2009, predating the EU's NFRD by several years. This history of sustainability reporting gives many Danish companies a head start in adapting to the CSRD requirements.
Several features of the Danish business environment are relevant to understanding how companies are approaching the new reporting requirements:
1. Strong sustainability culture: Environmental and social responsibility is deeply embedded in Danish business culture, with many companies viewing sustainability as a competitive advantage rather than merely a compliance issue.
2. Active government support: Danish authorities have established resources and guidance to help companies adapt to new reporting requirements, including the CSR Compass tool and various initiatives through the Danish Business Authority.
3. Industry collaboration: Danish industry associations have been proactive in developing sector-specific guidance and sharing best practices for sustainability reporting.
4. SME prevalence: Denmark's economy features many small and medium-sized enterprises that will be newly subject to reporting requirements under the CSRD, creating both challenges and opportunities for these companies.
How Danish Companies Are Preparing
Danish businesses are taking various approaches to prepare for the new reporting requirements, with strategies differing based on company size, sector, and current reporting maturity:
Large Companies with Established Reporting Practices
Companies like Ørsted, Novo Nordisk, and Vestas already have sophisticated sustainability reporting processes aligned with various international frameworks such as GRI, SASB, and TCFD. These organizations are taking the following steps:
• Gap analysis between current reporting and ESRS requirements
• Implementation of more robust data collection systems, especially for Scope 3 emissions and value chain data
• Integration of sustainability data into enterprise systems alongside financial information
• Preparation for the transition from limited to reasonable assurance
• Development of digital tagging capabilities for sustainability information
Ørsted, for example, has been recognized globally for its transparent reporting on its green energy transition. The company is now working to enhance its disclosure on biodiversity impacts and social metrics to align with the comprehensive requirements of the ESRS.
Mid-sized Companies Newly Subject to Reporting
Many Danish mid-sized companies that were previously exempt from mandatory reporting are taking a more foundational approach:
• Conducting materiality assessments to identify the most relevant sustainability topics
• Establishing baseline measurements for key environmental and social metrics
• Implementing basic data collection processes and tools
• Training staff on sustainability concepts and reporting requirements
• Reviewing and potentially restructuring supplier relationships to facilitate value chain reporting
Danish furniture manufacturer Fritz Hansen, for instance, has been expanding its sustainability team and implementing new data management systems to prepare for comprehensive reporting on everything from carbon emissions to responsible sourcing and labor practices.
SMEs Preparing for Future Requirements
Though many smaller listed companies have a longer timeline for compliance, forward-thinking Danish SMEs are already taking steps to prepare:
• Monitoring CSRD developments and attending educational workshops
• Implementing simplified versions of sustainability assessments
• Exploring how sustainability reporting might create business opportunities
• Engaging with industry associations for sector-specific guidance
These companies often face resource constraints but can benefit from the simplified reporting standards being developed specifically for SMEs, as well as from support programs offered by Danish business organizations.
Challenges and Opportunities
The transition to CSRD compliance presents both significant challenges and strategic opportunities for Danish companies:
Key Challenges
1. Data collection complexity: Gathering reliable data across complex value chains is perhaps the most significant challenge, particularly for Scope 3 emissions and social impact metrics. Companies with global supply chains face particular difficulties in collecting consistent, high-quality data from diverse suppliers.
2. Resource requirements: Comprehensive sustainability reporting requires significant investments in systems, expertise, and potentially external consultants. This is especially challenging for mid-sized companies that may lack dedicated sustainability departments.
3. Evolving standards: The ESRS are still being finalized, creating some uncertainty about exact requirements. Companies must stay informed about ongoing developments and be prepared to adapt their approaches.
4. Assurance readiness: The requirement for external verification introduces new processes and documentation needs. Many companies will need to significantly strengthen their controls and evidence base for sustainability information.
Strategic Opportunities
1. Improved decision-making: The comprehensive data collection required for CSRD reporting can provide management with better insights into risks and opportunities across the business and value chain.
2. Competitive advantage: Danish companies that excel at transparent sustainability reporting can enhance their reputation, particularly in international markets where Denmark's green image is already strong.
3. Investor relations: As sustainable finance continues to grow, companies with robust sustainability reporting are better positioned to attract investment from ESG-focused funds.
4. Innovation catalyst: The process of measuring and reporting on sustainability impacts often identifies areas for product or process innovation that can lead to both environmental improvements and cost savings.
Best Practices from Danish Leaders
Several Danish companies are already demonstrating advanced approaches to sustainability reporting that offer lessons for others preparing for CSRD compliance:
Integrated thinking: Companies like Novo Nordisk have moved beyond treating sustainability reporting as a separate exercise to integrating environmental and social considerations into core business strategy and reporting processes.
Stakeholder engagement: Carlsberg and other leading Danish companies conduct regular, structured dialogue with stakeholders to inform their materiality assessments and ensure their reporting addresses the most relevant issues.
Technology investment: Forward-thinking organizations are implementing specialized sustainability data management software to streamline collection, verification, and reporting processes.
Clear accountability: Companies with the most mature reporting practices have established clear governance structures for sustainability, often with board-level oversight and executive compensation tied to sustainability targets.
Scenario analysis: Leaders in climate reporting are conducting robust scenario analysis to assess how their business might be affected by different climate futures, preparing them for the forward-looking disclosures required under the CSRD.
Practical Recommendations for Danish Companies
Based on the experiences of early adopters and sustainability reporting experts, here are practical recommendations for Danish companies preparing for CSRD compliance:
1. Start early: Even companies with later compliance deadlines should begin preparations now, particularly for establishing baseline measurements and data collection processes.
2. Take a phased approach: Prioritize material topics and key metrics for initial focus, then gradually expand the scope of reporting as systems mature.
3. Build cross-functional teams: Effective sustainability reporting requires input from finance, operations, procurement, HR, and other departments. Establish clear collaboration structures across the organization.
4. Invest in training: Ensure that staff involved in sustainability reporting understand both the technical requirements and the business context of the information they're gathering and reporting.
5. Review supplier relationships: Begin discussions with key suppliers about data sharing and possibly collaborate on improving their sustainability performance and reporting capabilities.
6. Consider external support: Sustainability consultants, accounting firms, and specialized software providers can provide valuable expertise and tools, particularly for companies new to comprehensive reporting.
The Future of Sustainability Reporting
The CSRD represents not just a compliance challenge but a significant step in the evolution of corporate reporting. Looking ahead, we can anticipate several developments that will further shape how Danish companies approach sustainability disclosure:
Integration of financial and sustainability reporting: The boundaries between financial and non-financial information will continue to blur, with investors and other stakeholders increasingly viewing these as complementary aspects of company performance.
AI and automation: As reporting requirements become more complex, artificial intelligence and automation tools will play a growing role in data collection, validation, and analysis.
Global convergence: While the EU is leading with the CSRD, efforts are underway to align reporting standards globally. Danish companies operating internationally will need to navigate this evolving landscape of standards.
Impact valuation: Methodologies for quantifying the financial value of environmental and social impacts will continue to mature, enabling more sophisticated integration of sustainability into business decision-making.
Conclusion: Turning Compliance into Competitive Advantage
For Danish companies, the CSRD represents both a significant compliance challenge and a strategic opportunity. Those who approach these new requirements as merely a box-ticking exercise risk missing the substantial benefits that can come from truly integrating sustainability into business strategy and reporting.
Denmark's strong tradition of corporate responsibility, combined with its innovative business culture, positions Danish companies well to turn CSRD compliance into a competitive advantage. By embracing transparent, comprehensive sustainability reporting, these organizations can strengthen their position in increasingly environmentally and socially conscious markets, while contributing to Denmark's reputation as a leader in the green transition.
As the first CSRD reporting deadlines approach, Danish companies across all sizes would be well-advised to view this not just as a regulatory burden but as an opportunity to deepen their understanding of sustainability risks and opportunities, enhance their relationships with stakeholders, and position themselves for success in a future where environmental and social performance will be as scrutinized as financial results.