The three biggest CSRD challenges for banks – and how to overcome them

CSRD: A new era of sustainability reporting

In 2024 and 2025, the Corporate Sustainability Reporting Directive (CSRD) will come into force for many banks operating in the EU. For the first time, they will be legally required to include reliable and auditable sustainability data alongside financial information in their annual reports.

CSRD builds on the Non-Financial Reporting Directive (NFRD), which applies to around 11,600 companies with over 500 employees. In contrast, CSRD will apply to about 49,000 companies that meet at least two of the following criteria:

• More than 250 employees
• More than €40mn in turnover
• More than €20mn in total assets

CSRD also introduces new concepts like “double materiality.” This means organizations must assess both their impact on society and the environment, as well as how these factors affect them.

This increased complexity raises a number of unique challenges for banks. 

CSRD challenges for banks 

Banks face three main challenges in meeting CSRD requirements:

1. Determining materiality across the value chain
2. Ensuring auditability of materiality
3. Navigating a lack of sector-specific guidance

Let’s explore each of these in more detail.

CSRD challenge 1: Materiality in the value chain

The first step toward CSRD compliance is carrying out a Double Materiality Assessment (DMA). This requires organizations to review their entire value chain and identify relevant disclosure requirements.

Why it’s complex for banks

Banks face unique difficulties. Since they finance other businesses, most of their materiality lies within their portfolio companies. For example, when conducting a DMA, a bank must consider the greenhouse gas (GHG) emissions and climate-related risks of their portfolio companies.

Many KPIs require banks to drill down and analyze data at a granular level. This includes examining individual customers including SMEs, loans and collaterals.

CSRD challenge 2: Ensuring Auditability

Banks not only need to identify materiality, but also measure it. The data must be traceable, verifiable and auditable.

A high bar for detail

This demands a high degree of granularity. Consider a bank financing a car rental company. It may need to calculate the emissions of every vehicle that’s leased out, factoring in model type and mileage. Europcar, for example, operates more than 200,000 vehicles in Europe. That means measuring the individual emissions of 200,000 vehicles just to account for a single company.

Banks with other complex portfolio companies face a similarly huge task. And this is all made harder by the fact that most will be gathering this data for the first time. They’ll need to collaborate with their portfolio companies to do this and implement new systems to ensure future compliance with other companies.

CSRD challenge 3: Lack of sector-specific guidance

CSRD requirements were designed with corporates in mind, not financial institutions. The European Financial Reporting Advisory Group (EFRAG) was expected to release bank-specific standards by the end of 2024, but these have been delayed.

Uncertainty around key topics

There’s no central source of guidance for financial institutions on how to navigate CSRD. For example, biodiversity is often seen as material but the legislation doesn’t specify how banks should measure nature-related risks.

Emerging frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) and the Partnership for Biodiversity Accounting Financials (PBAF) are promising for the future, but they are currently still in development. This leaves banks uncertain and at risk of noncompliance.

Overcoming CSRD challenges  

As banks grapple with the reality of CSRD, many are realizing their current resources won’t suffice. Teams are small and often still rely on basic tools like word processors and spreadsheets.

This is especially true given the scale of data management and cross-functional integration required.

What needs to change

For example, tier 1 banks must prioritize the following to meet CSRD demands:

• Operationalize materiality assessments
• Improve data collection
• Ensure audit-ready disclosures

Intelligent software can help address all three of these challenges, making CSRD reporting less complicated and time-intensive.

How intelligent software can help overcome CSRD challenges

1. Accurately measuring quantitative KPIs

Once banks have identified the materiality in their value chain, they must then calculate KPIs such as financed emissions and physical risks. Typically, this involves analyzing large volumes of data from multiple sources—a task that is slow and prone to errors if done manually.

Software can automate this process. By reading huge data sets and making accurate calculations, it helps banks track important metrics such as CO₂ emissions and environmental risks.

2. Improved auditability through a single source of truth

Auditability requires consistent and accurate reporting. Carbon accounting must be treated t he same way as financial accounting. This includes audit logs to understand changes in data, user-based data rules, and scenario analyses and data stress tests.

Software can centralize data management and storage, creating a reliable single source of truth. This has a cumulative benefit as reliable data is also valuable in the future when measuring trends and calculating year-on-year changes.

3. Flexibility in an evolving regulatory environment

Regulations evolve constantly and banks must stay agile. But a lack of sector-specific guidance makes it difficult to know what the impact of future regulatory changes will be for banks.

Standard software can integrate regulatory changes automatically, so banks don’t have to worry about them so much. For example, if CSRD expands its GHG disclosure requirements, the software could adjust data templates accordingly to capture the additional information.

By comparison, banks using customized software would have to handle these updates manually—a large, time-consuming and likely error-prone process.

Collaborating for best practices

Banks might also find it useful to collaborate with other financial institutions and industry bodies to establish benchmarks and share best practices for reporting.

Groups like the Partnership for Carbon Accounting Financials (PCAF) and the Net-Zero Banking Alliance (NZBA) offer valuable insights and benchmarks for ESG reporting.

Conclusion: Preparing for CSRD success

CSRD reporting is a long, complex process. It requires detailed analysis, cross-functional coordination and a proactive approach.

Banks must act now. Materiality analysis is just the first step. To succeed, banks must:

• Train existing staff appropriately and hire ESG experts to fill knowledge gaps
• Collaborate with peers and industry bodies to stay up to date
• Invest in intelligent software to automate manual tasks

SAP Fioneer is helping many banks and financial institutions streamline CSRD reporting with our ESG KPI Engine. By leveraging our extensive experience, we’re developing best practices to support all in-scope institutions.