The New EU Directive Compels You to Conduct Climate Scenario Analysis
It's more than just a regulatory update; it's a clarion call for companies to embrace climate scenario analysis.
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The EU’s rollout of the Corporate Sustainability Reporting Directive (CSRD) is not merely about expanding sustainability reporting; it's a visionary shift that demands companies to envision the future. While the directive centres primarily on a company's environmental impact, it goes beyond regulatory compliance. CSRD mandates a forward-thinking approach, compelling businesses to assess how climate change might affect their operations through different climate scenarios. If your business hasn't yet integrated foresight into its processes, now is the ideal time to start.
What is CSRD?
In the simplest terms, the Corporate Sustainability Reporting Directive (CSRD) outlines the legal framework for reporting obligations on corporate sustainability. The reporting must be done in accordance with the European Sustainability Reporting Standards (ESRS) – in other words, it provides the roadmap for CSRD compliance.
Reporting as per the CSRD will include a vast variety of themes, including strategy, risks, targets, etc., but also environmental, social and financial sustainability matters. Significantly, it also includes an obligation to conduct regular climate risk analysis.
Once fully rolled out, the CSRD will impact 49,000 companies within the EU – a significant expansion from its predecessor, the NFRD. This is why there is much talk about the CSRD reporting requirements and some not-unfounded worry regarding whether it can be incorporated by all the impacted businesses within the given timeframe.
Indeed, the timeframe is ambitious, with the CSRD coming into effect for:
Listed companies with more than 500 employees from January 2024.
From January 2025, listed and unlisted companies that meet at least two of the following criteria: more than 250 employees, €20M in total assets, or more than €40M in turnover.
Listed SMEs from 1 January 2026.
Third-country companies with turnover over €150M from January 2028.
Corporate Sustainability Reporting Directive, Source: Mason Hayes & Curran Lawyers
Climate risk analysis? How about the risk of not doing one?
For businesses subject to CSRD reporting requirements, non-compliance risks administrative penalties or exclusion from investment portfolios. But what if your company isn't on the CSRD list? The changes may still affect you, for example, if your company provides subcontractor services to businesses falling under the scope of CSRD.
In fact, a 2023 survey conducted in Finland showed that 82.6% of large companies are under pressure to tighten subcontractor requirements due to their sustainability commitments, and 45.3% believe they will change subcontractors for sustainability reasons in the future.
Hence, to stay ahead of the curve, even companies not directly under the current CSRD’s scope must prepare for tightening subcontractor requirements. Proactivity is key; it's better to ride the wave than be submerged by it.
What is CSRD scenario analysis and why is it relevant for CSRD reporting requirements?
How well does your company fare in the 2-degree world? What substantial challenges will it face in the apocalyptic 4-degree world? And most importantly, what steps can be taken now to ensure resilience, even in an extreme scenario?
The new CSRD requires companies to conduct climate scenario analysis to address these questions in their climate change reporting. In practice, this entails identifying the climate-related risks and opportunities the company may face over the short, medium, and long-term future and exploring them in detail through different climate scenarios.
Each scenario should describe the different potential climate impacts on operations, finances, markets, and supply chains, among other factors. Together, the analysis will need to assess the resilience of the company’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario – as well as the more calamitous ones.
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What is scenario analysis?
As a method, scenario analysis is a vital component of strategic foresight that involves building, exploring and comparing different future scenarios in a systematic way. Unlike single-future forecasting, scenario analysis explores the diverse ways the future could unfold through a set of scenarios that are each distinct yet plausible.
This exercise prepares your business to weather unexpected storms, but it's not just about surviving climate change. It's about building resilience to any future disruption or uncertainty with a proactive approach. This is where the new CSRD sets the stage for a new, future-focused era in sustainability reporting.
Fostering Future Resilience with Strategic Foresight
CSRD compliance is essential, but focusing solely on it obscures the broader benefits of foresight and scenario planning for your company. As the world continues to change rapidly and unpredictably, it's not just climate risks that threaten your business. Factors like biodiversity loss, technological acceleration, demographic shifts, and more also pose significant challenges.
Moreover, climate risks extend far beyond mere temperature variations. They encompass a wide range of factors, including macroeconomic trends, political and regulatory influences, technological developments, and societal consumption trends. Hence, before diving into scenario analysis, it's crucial to scan your operational environment, identify key trends, and analyse their trajectories and potential impacts. Only after these steps can you proceed to scenario building.
Foresight is the overarching approach that involves proactively anticipating, analysing, and preparing for future developments. It encompasses various methodologies, including horizon scanning and trend analysis, that will guide you throughout this process.
By integrating foresight into your business practices, you're not just preparing for the future; you're actively shaping it. The unknown may be daunting, but with the right strategies in place, it becomes a realm of endless possibilities.
GET STARTED WITH CSRD SCENARIO ANALYSIS TODAY
Ready to take the first step in your climate scenario analysis? With Futures Platform’s all-in-one strategic foresight tool, you'll have access to 1500+ trend and scenario analyses by futurists and a collaborative scenario-building tool to guide you and your team in the scenario analysis process.
Request a free demo now and see how easy it is to is to start building a shared vision of alternative futures with your team.
To stay ahead, organisations must widen their lens, exploring not just their own industry but what’s happening on the edges.