STRATEGY & ORGANISATION

SUSTAINABILITY & ESG

No more strutting around in borrowed green feathers

The new requirements for ESG reporting make it harder for companies to appear more green, inclusive or LGBT-friendly than they actually are.

Illustration of buildings with green feathers symbolizing environmental efforts and ESG.

Most people will probably remember the Danish biotech giant Chr. Hansen due to its controversial decision to abruptly withdraw support for the LGBT+ community last year.

The company which was renowned for its support for LGBT+ rights and previously named the most diverse company by Danish newspaper Børsen suddenly withdrew all its support for the LGBT+ community after being subjected to criticism from commercial and conservative forces in USA.

This led to massive criticism in Denmark, and the company has been accused of both hypocrisy and pinkwashing.

This example is not unique because new research shows that companies that appear very sustainable and responsible publicly often end up in a backlash due to failing compliance with requirements of responsibility.

Behind this research is Christina Kjær,, who just defended her PhD thesis at the Center for Corporate Governance at CBS.

The lack of standards and transparency created a chaotic environment where companies could obtain great ESG scores without in reality being green or responsible.

Christina Kjær, Ph.d and Head of research at the business think tank Axcelfuture

More rhetoric than substantive action

Christina Kjær compared the ESG scores of companies hit by ‘shitstorms’ with their ESG scores. Together with CBS Professor Tom Kirchmaier, Christina examined 113 companies with known ESG scandals and found that these companies in general had better ESG scores than average.

“The essential issue was the lack of comparable standards for measurement of ESG. Moreover, ESG was not centrally embedded in the daily operations of the company and its way to think business. The lack of standards and transparency created a chaotic environment where companies could obtain great ESG scores without in reality being green or responsible,” explains Christina Kjær.

One of the reasons is that the ESG assessment agencies primarily based their evaluations on questionnaires that the companies had to answer. This enabled companies to achieve flawless scores merely by using fancy language rather than taking action.

Most companies will take this very seriously, as no one wants to hit the headlines and be exposed to public contempt. Cases like this may incur significant reputation cost.

Christina Kjær

For the benefit of companies as well as society

This is not the case anymore. The new EU directive, CSRD (Corporate Sustainability Reporting Directive), has tightened the requirements for documenting corporate sustainability. First, companies with more than 500 employees will have to account for their imprint on society, people and the environment, including how they address risks and possibilities. This means that it will not be as easy as it has been to strut around in borrowed green feathers.

Second is the next wave of companies.

A lot of companies find the new rules difficult. They will have to hire new people and spend many hours on reporting.

However, according to Christina Kjær, this directive might actually help companies if they find the right approach, both in terms of setting up a sustainable framework for their business and ensuring a higher degree of embeddedness of CSRD in top management and boardrooms.

”It is no longer easy to boast sustainability without being able to document it. With the implementation of CSRD, companies must be able to explain and be held accountable of the data points included in the new sustainability reports. Most companies will take this very seriously, as no one wants to hit the headlines and be exposed to public contempt. Cases like this may incur significant reputation costs,” says Christina Kjær.

Responsibility lies with top management

Christina Kjær recommends that companies see this new directive as more than just a compliance task; it is in fact a way of enhancing their business.

“Working on your ESG is a unique opportunity to map new business potential and create value,” she says, emphasising that multiple conditions must be met for this to happen.

First, Christina Kjær points to the importance of top management taking responsibility for integrating sustainability principles in all decision-making processes.

“If not championed by top management, I struggle to see how this can create real value. It requires a radical change in corporate culture where responsibility is not just an add-on but an essential part of the company DNA.

In this process, change management can play an important part. It is important to ensure the commitment of the entire organisation so that these efforts permeate all the activities of the company and not just some.”

Christina Kjær offers some advice: ”It may prove necessary to translate ESG-specific terminology to something that companies understand,” she concludes and emphasises that even though the bottom line may be impacted negatively in the short term, investing in corporate sustainability will prove very advantageous in the long term. Not only does it create value for the company’s reputation, it also contributes to long-term sustainable growth.

Newly appointed head of research at the business think tank Axcelfuture, the self-proclaimed think tank of the business community. In partnership with accountancy company EY, she will help Danish companies to navigate the new Corporate Sustainability Reporting Directive.

Former investor relations officer at Novo Nordisk.

PhD from the Center for Corporate Governance at CBS with focus on ESG scores and corporate sustainability management.

CBS Department of Accounting PHD fellow Christina Kjær

Professor of Governance, Risk, Regulation and Compliance at the Centre for Corporate Governance. He is a Professorial Fellow at the Centre for Economic Performance, London School of Economics. Tom is interested in empirically understanding problems of organisational performance and governance, exploiting the now available large datasets (‘big data’).His primary research areas involve Law and Economics, Policing and Crime, Banks, Money Laundering (AML) and Organised Crime, as well as Boards (Gender)

The directive is called Corporate Sustainability Reporting Directive and directs companies in the EU to report sustainability within social impact, climate and human rights as well as ESG factors and due diligence requirements.

The directive replaces the current EU requirements on social responsibility in the directive on non-financial reporting.

The new sustainability reporting requirements will come into force incrementally:

The CSRD reporting requirements for large, listed companies with more than 500 employees and large governmental companies with more than 500 employees will come into force for financial years starting in 2024, which means they will start reporting in 2025.

Other large companies: Companies that in two consecutive financial years overrun two out of three criteria: a balance sheet total of DKK 156m, a net turnover of DKK 313m and more than 250 employees, will have to report according to CSRD for financial years starting in 2025 or later. They will thus have to report from 2026 at the earliest.

Listed SMVs (except listed micro-companies) will subsequently have to meet the requirements for financial years starting in 2026 but are allowed to not report until 2028. They will thus have to report from 2027 at the earliest.

Source: The Danish Business Authority

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No more strutting around in borrowed green feathers

The lack of standards and transparency created a chaotic environment where companies could obtain great ESG scores without in reality being green or responsible.

Most companies will take this very seriously, as no one wants to hit the headlines and be exposed to public contempt. Cases like this may incur significant reputation cost.

Christina Kjær

TOM KIRCHMAIER

HOW CSRD COMES INTO FORCE

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