First of all, in this blog post be talk specifically about Corporate Sustainability Reporting Directive and related standards - the European Sustainability Reporting Standards (ESRS). Why I'm mentioning this? Because EU recently have multiple initiatives related to The European Green Deal.
Here are 4 aspects, how EU regulation significantly changes the reporting landscape form companies operating in Europe:
(1) The entire value chain is being considered
You heard it right, having (a large) value chain means that other entities besides your company contribute to its total environmental footprint, which can be as high as 80% of the company's environmental impact.
The CSRD places a strong emphasis on the importance of value chains in accurately assessing a company's carbon emissions and overall environmental impact. They believe that this information should be as thorough, clear, and accurate as possible, and not solely rely on average environmental impact estimates. To achieve this, it is important to gather as much primary environmental data from your value chain as possible, with suppliers being a major source of this information.
(2) Double materiality
The concept of 'double materiality' is included in the CSRD, meaning that businesses must report not only on how sustainability issues could potentially pose financial risks to the company (financial materiality), but also on their own impact on people and the environment (impact materiality).
Conducting a double materiality assessment can be a complex and resource-intensive (read 💶) process, but it is in a company's best interest to do so. By proactively identifying and managing potential sustainability issues, a company can protect its ability to create long-term value and address the concerns of its stakeholders.
A materiality assessment is a process that helps a company identify these material issues and rank them based on their impact on the company's long-term value creation and stakeholder demands. Additionally, a double materiality assessment is crucial for developing a company's long-term sustainability or ESG strategy, setting sustainability goals, and defining structured and data-driven KPIs.
(3) Transparency on methodology & 3rd party assurance
Due to the growth of ESG investing, companies are increasingly focusing on considering sustainability in their practices and operations. Approximately 80% of CEOs recognize the importance of demonstrating a commitment to society through sustainability ratings, and the amount of assets that rely on ESG information has increased by 34% over the years. However, despite the growing popularity of ESG, the reporting standards for ESG metrics are still developing, and ratings from different agencies can differ significantly, making it easier for companies to choose the ratings that present them in the best light. This can lead stakeholders to be skeptical of standard ESG disclosures if they are not supported by adequate evidence and reporting, with 52% of investors finding it difficult to trust a company's actions on society and the environment.
EU CSRD is all about increased transparency.
Regarding assurance
According to the CSRD, a company's statutory auditor, another auditor (as determined by the Member State), or an independent assurance services provider (IASP) (as determined by the Member State) must provide limited assurance on the company's reported sustainability information. Member States should establish equivalent requirements for IASPs regarding quality, independence, and oversight in accordance with the Audit Directive. There is also the possibility of eventually moving toward the standard of reasonable assurance, which is used for financial information.
(4) Expansion of data capacity
Companies that fall within the scope of the CSRD will need to make some significant changes to how they prepare and disclose sustainability information. That means the companies will need to collect more data. A lot more data. Just one example: imagine what it takes to assess your entire value chain and properly collect data...
Reporting on sustainability information will pose new challenges for many companies simply because their information systems are often insufficiently equipped to collect and process the new and necessary information.
☝🏼 Our suggestion - do not delay and do not underestimate the importance of the preparatory phase.
Comments