Corporate Sustainability Reporting Directive: Is the life sciences industry ready?

The EU’s Corporate Sustainability Reporting Directive (CSRD), effective from the beginning of 2023, brings significant implications and challenges for the biotech industry. This directive aims to embed Environmental, Social, and Governance (ESG) elements as fundamental components of annual corporate reporting, necessitating a range of requirements and adjustments for companies in the life sciences sector. But how do we navigate the CSRD directive and its implication, and is the biotech industry, and more broadly the life sciences sector ready in this area?

What is the CSRD?

Prior to the CSRD, the Non-Financial Reporting Directive (NFRD) was the key legislative framework in the EU for non-financial reporting. Implemented in 2014, the NFRD required large public-interest companies with more than 500 employees to disclose certain non-financial information. This information included environmental protection, social responsibility, treatment of employees, respect for human rights, anti-corruption and bribery matters, and diversity on company boards. However, the NFRD was often criticized for its lack of specificity and consistency in reporting standards, leading to varied and sometimes incomprehensive reporting practices.

The CSRD, which came into effect at the beginning of 2023, significantly expands and strengthens the requirements of the NFRD. The CSRD extends the reporting requirements to all large companies and all companies listed on regulated markets (except listed micro-enterprises). This increases the number of companies affected from around 11,000 under the NFRD to nearly 50,000 under the CSRD.

The CSRD requires more detailed reporting on sustainability matters, including how sustainability issues affect the company’s business model and strategy, and how the company affects people and the environment.

One of the most significant changes is the introduction of mandatory EU sustainability reporting standards. These standards aim to provide more consistent and comparable data, addressing one of the major shortcomings of the NFRD. Under the CSRD, there is a requirement for the sustainability information to be audited, providing an additional layer of credibility and reliability to the reports.

In essence, the CSRD marks a shift towards more comprehensive, standardized, and reliable sustainability reporting within the EU. It reflects a growing recognition of the importance of environmental, social, and governance factors in corporate decision-making and accountability. For industries like life sciences and more precisely biotech, the CSRD not only imposes additional reporting requirements but also presents an opportunity to embed sustainability more deeply into their strategic and operational frameworks.

Who is concerned by the CSRD?

Although it was implemented in early 2023, it is in the financial year 2024 that the sustainability of biotech companies will be evaluated by the CSRD. This year, these reports will only concern the companies that were already within the scope of the NFRD.

Starting in 2025, all EU-listed large biotech companies that fall within the definition provided by the CSRD directive will have to report accordingly. This concerns companies with business in Europe with a net turnover of €40 million ($43 million), a balance sheet of €20 million ($22 million), and more than 250 employees over the financial year. However, the CRSD will progressively include more companies in its scope as EU-listed SMEs will send their first sustainability reports in 2026.

As companies already subject to the NFRD are used to reporting about the sustainability challenges they are facing and solutions they are implementing, large companies and SMEs will have to prepare in order to comply and improve the industry’s sustainability.

One of the key challenges for biotech companies in implementing CSRD is the complexity of the industry, which is highly regulated and involves numerous stakeholders. The industry faces the task of collecting relevant, high-quality sustainability data from various sources, including third parties. This data collection process is crucial for aligning with the European Sustainability Reporting Standards. Additionally, developing and implementing a robust ESG risk management strategy is essential for compliance with the directive.

What aspect of a biotech company does the CSRD cover?

Under the CSRD, biotech companies will need to provide a comprehensive account of their business activities in several key areas related to sustainability. These areas encompass environmental, social, and governance aspects and are designed to offer a holistic view of a company’s impact on society and the environment:

• Environmental Factors: This includes a company’s impact on the environment. Companies will need to report on their policies, actions, and results concerning environmental issues like climate change, resource use, pollution, and biodiversity.

• Social factors: Here, companies will report on their social impact, which covers topics like employee rights, working conditions, diversity and inclusion, and community engagement. It’s about understanding how the company’s operations affect its workers, customers, and the communities in which it operates.

• Governance factors: Governance relates to how a company is managed and controlled. Reporting in this area includes information about the company’s governance structures, business ethics, compliance, risk management strategies, and internal controls.

• Business model and strategy: Companies must disclose how sustainability issues affect their business model and strategy. This includes how they plan to adapt to or mitigate sustainability risks and capitalize on sustainability opportunities.

• Supply chain information: The CSRD emphasizes transparency in the supply chain. Companies must report on how they ensure that sustainability standards are maintained throughout their supply chain, including how they address issues like labor rights and environmental impacts in their procurement processes.

• Impact assessment: This involves evaluating and reporting the impact of the company’s activities on sustainability matters. Companies need to assess their direct impact as well as the indirect impacts that are a consequence of their business relationships and supply chains.

• Risk management: Companies must disclose how they identify and manage sustainability risks, including long-term risks such as those related to climate change or social unrest.

• Targets and progress: Companies should set targets related to sustainability and report on their progress towards achieving these targets. This includes both short-term and long-term goals.

The CSRD’s goal is to ensure that sustainability reporting by biotech companies is as rigorous and reliable as financial reporting, providing stakeholders with a clear understanding of a company’s total impact on society and the environment. By doing so, it aims to promote transparency, accountability, and sustainable practices in the corporate sector.

What are the requirements under the CSRD?

The goal of CSRD is to take sustainability reporting a step further. Companies that have already been reporting and recording some data regarding their CO2 emissions are in a good position, but will need to improve their feedback in most cases.

More precisely, companies will have to answer the 11 core questions of the Task Force on Climate-related Financial Disclosures (TCFD) in their report. These 11 questions are organized into four categories: Governance, strategy, risk management, and target and metrics.

• Does your disclosure describe board-level oversight over climate?

• What about management-level oversight?

• Does your disclosure describe your climate-related risks?

• What about the likely impacts of those risks?

• What about expected resilience in likely climate scenarios?

• Does your disclosure describe how you identify and assess new climate risks?

• What about processes for managing those risks?

• Are those processes integrated into your normal risk management structures?

• Does your disclosure describe the metrics you use to assess climate risks?

• Does it list out all your current emissions?

• What about your climate targets?

According to Josh Prigge, chief executive officer (CEO) of Sustridge Sustainability Consulting, aligning with TCFD requirements will already be a significant step forward for a lot of companies.

The CSRD requirements do not stop at answering these eleven questions as biotech companies will have to report precise data on their energy consumption and also their greenhouse gas (GHG) emissions. This is where most difficulties will come from as the scope of the data on GHG emissions expected from companies is much broader than before. Indeed, biotech entities falling under CSRD will report on scope 1 to 3 GHG emissions.

Scope 1 concerns direct GHG emissions from facilities or installations controlled by the reporting company. Scope 2 includes all indirect emissions such as heat or electricity generated by the company’s activities. Finally, scope 3 are the indirect emissions generated through purchasing which often represents more than 60% of a company’s total GHG emissions according to the Global Climate Initiative.

One of the biggest innovations of the CSRD is the implementation of a double materiality assessment for biotech companies. “Traditionally, when a company would do a materiality assessment, it would consider what is financially material, it is looking more inward. The double materiality also looks outward, that is to say, what are the material impacts that the company has on society, people, and of course the planet,” said Prigge. 

This assessment is essential to identifying the pain points in the sustainability strategy of a company and to know what data will be relevant when reporting and what goals to set for the future. Indeed, CSRD reporting isn’t only about ticking boxes for biotechs, the disclosure must include GHG emissions reduction targets for 2030 and 2050, stating any action taken by the company to mitigate or prevent negative sustainability impacts.

How can biotech companies prepare for the CSRD?

Alix Partners recently analyzed five undisclosed healthcare companies to assess if they were ready to comply with CSRD reports. It emphasizes that these biotech firms show varying levels of readiness for CSRD compliance, with some areas needing significant improvement. While climate-related reporting appears relatively advanced, other environmental aspects like water management, biodiversity, and circular economy practices are less developed. Social aspect reporting also shows only partial maturity. This suggests that these companies should conduct thorough reviews of their current reporting practices against CSRD standards, and consider industry best practices for effective sustainability reporting.

A KPMG report confirms that complying with CSRD standards will be challenging for most companies: “Obtaining relevant sustainability data can be challenging for many players in the industry due to their lack of experience in where, how, and when to source meaningful data (or even how to define it). Technical systems are simply not ready and the short time frame to prepare it can be a significant problem.”

Josh Prigge recommends implementing software to be more efficient in collecting and analyzing sustainability data. “ESG sustainability carbon accounting management software can be essential for companies to streamline the whole process. Where in the past, we would be emailing individuals across the organization, software can make sustainability a part of the company’s process.” Companies that are a step back can highly benefit from software with application programming interface (API) capabilities as they will help automate the data collection and even identify which are the focus points in a company’s sustainability strategy and monitor the progress along the way.

Starting to report on sustainability under the CSRD will require a lot of work; doing the double materiality assessment, identifying the focus points of the company, and streamlining the process, but these are just the first steps. The heavy lifting will start when setting goals and coming up with solutions to reach them.

The best advice Josh Prigge can give companies is to not forget the business value that will come out of the process: “Companies with a demonstrated commitment to sustainability are outperforming their peers.  There are so many areas where engaging in sustainable practices adds value, maybe not in an immediate return on investment but in the long run, reducing energy, waste, and water, reduces operating costs and increases efficiency. Sustainability is also a growing concern among potential employees, and plays a role in talent attraction and retention.”

Sustainability and CSRD compliance must then be seen as an opportunity for the biotech industry to become more efficient in the long run. Seeing biotechnology innovation through the lens of sustainability could also bring new solutions while engaging more environmentally conscious practices.