The ESG transformation

New regulations prompt companies to act

The Corporate Social Responsibility Directive (CSRD) is casting its shadow: thousands of German companies will soon be obliged to report on sustainability. This will require significant changes in the area of ESG. Viola Möller and Carmen Auer, partners from the Sustainability Services division at BDO, explain the challenges companies face in this regard and how the ESG transformation can succeed.

Around 50,000 companies in the EU are required to prepare their sustainability reporting in accordance with the requirements of the Corporate Social Responsibility Directive (CSRD) for financial years starting on January 1, 2025 - many more will follow from January 1, 2026. What does this mean in detail? 

Viola Möller (VM): With the CSRD, the EU is pursuing the ambitious goal of putting the sustainability reporting of European companies on a par with their financial reporting. For this reason, large and capital market-oriented companies are obliged to prepare comprehensive reports containing information and key figures on the topic of ESG (environment, social, governance). In Germany alone, we are talking about 15,000 companies subject to reporting requirements from the 2025 reporting year onwards if the EU directive will be enacted into national law this year. These companies are now faced with the mammoth task of having to deal with thousands of pages of legal texts and check which of the approximately 1,200 qualitative and quantitative data points in the areas of environment, social affairs and corporate governance are significant for them. This task is very time-consuming and also challenging in terms of content.

Do you think that the companies are well prepared for the new regulatory requirements? 

Carmen Auer (CA): I don't want to make a blanket statement on this. There are companies in which ESG plays a subordinate role and companies that have long understood that ESG is not an issue that should be ignored, as it plays a decisive role in the longevity of a company. However, the CSRD means that even those who are reluctant have no other option than to engage with ESG issues. Companies that deal with sustainability and its relevance to business on their own initiative are of course in a better position.

What challenges do companies typically face when they want to promote the topic of ESG?

VM: I think the biggest challenge as an entrepreneur is first of all to find out: What challenges, but also what potentials, do we face by dealing with ESG regulation and how does this connect to the overarching corporate strategy? The connection to corporate strategy is often not immediately recognizable at first and is also the reason why the topic of ESG has perhaps been treated rather neglected to date. However, a stringent strategy is required in order to meet the demanding reporting requirements. After all, reporting should not be an end in itself, but should reflect the main effects of the company's activities as well as the opportunities and risks in the context of ESG. And this strategy must now be developed. Finances also play an important role here, as transformation is always associated with high investments and ESG can have both positive and negative effects on a company's business performance, results and situation. 

Where there are challenges, there are also opportunities. What opportunities do companies have to use ESG regulation in order to transform processes and structures and thereby make the organization fit for the future? 

CA: First of all, entrepreneurs need to understand that ESG regulation is not a necessary evil, but also an opportunity for transformation - as long as they take it seriously. I can say from my own experience and through the projects with our customers that the famous “aha effect” has always occurred for everyone involved. For example, if you manage to produce your products more sustainably or make an effort to minimize supply chain risks, you will not only win new customers, but also be able to tap into new sources of revenue and mitigate financial risks. The actual opportunities naturally differ from business model to business model. It is therefore important to analyze them carefully: What can we change about our processes and structures from an ESG perspective? And what positive effects on business success will our planned measures have in the long term? 

In your opinion, what is the decisive factor when it comes to sustainable transformation? 

VM: The topic of “sustainable transformation” must become an integral part of the corporate strategy. There must not just be one corporate unit that deals with the issues sporadically and in a project management sense, but it must be understood as a cross-functional task that can only be successfully mastered together - and also firmly anchored in the corporate culture. The transformation will only succeed in the long term if a sustainable mindset is established across the company.

What role does digitalization actually play when we talk about ESG transformation? 

CA: Creating an ESG report requires the reliable compilation of a large number of data points from different areas of the company. It is therefore self-explanatory that companies will have to resort to professional software solutions in the medium term if they want to collect and process data of the high quality required for reporting. However, in-depth data collection is of course not only beneficial for reporting and monitoring ESG measures, but also provides insights into the profitability of sustainability measures and their strategic management.

Do you have any recommendations for companies that have so far only dealt sporadically with the topic of ESG? Where can they start? 

VM: I think the first step must be to take a look: What legal requirements need to be met in the first place? And which stakeholders are needed to meet these requirements? Once these fundamental questions have been clarified, the next steps can be planned all the more efficiently. Then we talk about identifying the so-called topics – the key term here is: double materiality analysis. Finding out which risks and opportunities are associated with them and checking which data or strategies may already be available. Only once all of these steps have been completed, appropriate measures can be taken, which then ultimately lead to the creation of the report. This process can be lengthy and time-consuming. So the sooner you get started, the better.

Thank you very much for the interview!