Adapting to CSRD: Regulatory and Investor Pressure Drive Green Transformation

The investment management landscape is evolving rapidly, driven by stringent regulatory changes and increasing investor demands for sustainable practices. A significant development is the European Union's implementation of the Corporate Sustainability Reporting Directive (CSRD), which came into effect at the beginning of 2023 and requires companies to start reporting from January 2024.

This new directive expands the scope of mandatory sustainability reporting, compelling companies to reveal how environmental and social issues affect their business operations and disclose their impact on the wider environment and society. This directive marks a significant expansion from the previous Non-Financial Reporting Directive (NFRD), now encompassing all large enterprises and public interest entities within the EU.

According to a recent survey from Workiva, evolving regulatory landscape will increase pressure on companies to transform their operations, with 87% reporting that they will find it challenging to adapt reporting processes to comply with new regulations, and 83% indicating that collecting accurate data to meet the CSRD requirements will be a challenge for their organisations. Interestingly, the firm’s 2024 Global ESG Practitioner Survey also found that 81% of respondents not covered by the CSRD are planning to comply with new EU double-materiality disclosures.

A recent update from Norges Bank Investment Management (NBIM), the manager of the Norwegian Government Pension Fund Global, provides an example of how investment managers proactively adapting policy serves to deepen the changes brought about by the CSRD. With assets amounting to $1.5 trillion and investments across nearly 9,000 companies globally, NBIM is renowned for its commitment to transparency and effective governance and is also at the forefront of integrating ESG practices into its investment strategy.

In response to evolving market conditions and regulatory expectations, NBIM updated its Climate Action Plan. This plan is aggressive in its targets, aiming for net-zero emissions by 2050 across its portfolio. It lays out clear expectations for companies concerning ESG practices, including:

• Board Oversight: NBIM expects company boards to thoroughly understand and oversee climate risks and opportunities, integrating these into their corporate strategy and risk management frameworks. This includes detailed governance structures and activities that involve direct board engagement.
  

• Comprehensive Emissions Reporting: Companies are expected to report their scope 1, scope 2, and significant scope 3 greenhouse gas emissions in compliance with the Greenhouse Gas Protocol. Moreover, NBIM demands that companies seek reasonable assurance for at least their Scope 1 and Scope 2 emissions to ensure accuracy and reliability.
  

• Detailed Transition Plans: Firms must develop and disclose detailed transition plans to achieve their emission reduction targets. These plans should be time-bound, quantified, and annually reviewed against established KPIs to ensure they are on track to meet their environmental commitments.
  

Failure to meet these expectations can have direct consequences. NBIM uses these criteria to inform its voting decisions at shareholder meetings. For instance, if a company fails to demonstrate adequate management of climate risks or to align with the net-zero 2050 target, NBIM may vote against the re-election of board members, reflecting its disapproval and prompting corporate governance reforms. Additionally, NBIM is prepared to support or file shareholder resolutions to promote better ESG practices.

As regulatory complexities increase, investment managers like NBIM are driving demand for insights and strategy advisory services to navigate the wave of new disclosures from companies globally. Pimlico Strategy & Insights offers such expertise, equipping managers with the tools to evaluate and engage to change with companies in their portfolio. Using methodologies like FASTER™ and TRACK™, Pimlico helps clients anticipate market and regulatory trends, ensuring they remain at the forefront of sustainable investing.

The ongoing evolution of ESG standards requires investment managers to stay agile and informed. By collaborating with advisory firms like Pimlico Strategy & Insights, they can ensure compliance with current regulations while positioning themselves for future success in the realm of sustainable investment.

Let’s make sustainability move FASTER™ together.

Contact one of our consultants today!