The European Parliament’s adoption of the Corporate Sustainability Reporting Directive (CSRD) makes environmental, social, and governance (ESG) reporting mandatory for 50,000 EU companies, quadrupling those now required to disclose sustainability risks, activities, and impact data.
In this article, we look at what that will mean for organizations and for the teams who will have to meet new reporting standards.
Traditionally, there have been no common standards and minimum mandatory regulations for ESG reporting. Individual companies have broadly defined what they consider sustainability to be, leading to a chaotic and inconsistent reporting landscape. Strong voices have questioned the credibility and quality of ESG reporting and the data on which it is based. Greenwashing accusations have damaged companies which are felt to be misleading people by falsely labelling products as "green" or "environmentally friendly."
By forcing more companies to become publicly accountable for their impact on the environment, human rights, and social standards, the new CSRD aims to tackle this problem. More detailed reporting requirements should also help companies to better measure and manage their exposure to ESG-related risks.
CSRD, which will start taking effect in just over one year, is an extension of the Non-Financial Reporting Directive (NFRD). Almost 50 000 companies, whether listed or not, in the European Economic Area (EEA) will be required to submit reports, quadrupling the previous NFRD scope of just 11 600 organizations.
According to the Council, the rules will start applying between 2024 and 2028:
- From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025;
- From 1 January 2025 for large companies that are not presently subject to NFRD (more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
- From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt out until 2028.
Non–EU companies with a significant presence in the EU (with a turnover over 150 million euros in the EU) or with securities listed on an EU-regulated market will become subject to new rules.
The CSRD complements several regulations already in place, such as the Sustainable Finance Disclosure Regulation (SFDR), which applies to the financial markets. It also has much in common with the Taskforce on Climate-Related Financial Disclosures (TCFD), a mandatory framework already implemented in the EU, Canada, South Africa, Japan, and Singapore. New Zealand and the UK have announced they will mandate climate risk disclosures in line with the TCFD by 2023 and 2025.
For CSRD, a key difference is determining what information it is essential to report. The "double materiality" concept means that companies must include both the internal impacts (the organization's performance and position) and the outward impacts (external impacts on communities and the environment).
Furthermore, to improve the quality, reliability, and credibility of the disclosed information, a third party must audit the reported data.
The new reporting requirements are significant - the key message is to start now!
Recent studies have proven that substantial gaps exist within corporate sustainability reporting. For example, the Position Green Group examined 300 Scandinavian companies to assess their reporting quality and to highlight weaknesses in current reporting standards and regulations. They found that ESG reporting varied immensely between companies, industries, and countries, with only half of the companies disclosing plans to achieve net-zero emissions in line with the Paris Agreement and the EU's climate goals.
EcoOnline's own research supports similar conclusions, with 42% of respondents admitting their business has no ESG reporting system. Even more concerning, 50% regarded ESG merely as a box-ticking exercise, indicating significant levels of employee disengagement with and disinterest in this crucial activity.
The new directive aims to help companies navigate myriad ESG frameworks, but they will expand reporting requirements and more companies will need to create official ESG reports. To stand a chance of complying with the CSRD regulations, companies must start by closing existing gaps now.
Connecting the new ESG reporting landscape with the EHS
The new regulations are likely to significantly affect the EHS functions and teams. To better prepare, the following section overviews the different new regulations and how they affect the different ESG topics.
Traditionally, environmental factors have focused on challenges and opportunities in resource and energy use, climate change, waste management and similar areas. As investors and other stakeholders broaden their environmental perspective beyond emission status and reduction targets, companies must report on more than the bare minimum of business travel, waste, and logistics data. Topics in scope will include:
- Climate change and risk; Greenhouse Gas Emissions
- Water and marine resources
- Climate and nature-related risks – Biodiversity
- Green growth; resource use and circular economy.
Additional data such as supply chain emissions (scope 3), climate risks, and decarbonization plans, will become mandatory under CSRD. Companies will also be expected to proactively report on data linked to green transformation growth opportunities in areas such as renewable energy, low-carbon solutions, circular business models, "green" products, services, and technology.
Social topics like health, safety, and equal opportunities have been regulated by law for decades, making it easier for companies to adopt the reporting requirements on risk assessments, incidents, accidents, sick leave, and diversity. However, broader social issues have traditionally attracted less attention, and that is now changing.
Business models centered on social impact are rising in importance as laws, regulations and frameworks focus more on human rights. In 2015 the UK became a pioneer through its Modern Slavery Act, with Australia, France, Germany, the Netherlands, and Norway following in recent years. In February 2022, the EU Commission published its Corporate Sustainability Due Diligence Directive proposal to promote companies' respect for human rights and decent working conditions within their operations and value chains.
These trends mean that topics like these will become increasingly significant:
- Human rights
- Equality, diversity, and inclusion
- Health and Safety
- Workers in the value chain
- Affected communities
- Consumers and end-users
Corporate governance has traditionally covered topics such as anti-bribery, corruption, procurement practices, board composition and independence, incentive structures and systems for risk management and control. The new regulations will require businesses to better understand materiality – what matters most to the stakeholders who matter most.
A critical success factor in mapping materiality will be to understand relevant ESG risks. For example, working conditions and energy consumption are likely to be higher risks for a manufacturer than a law firm. However, for healthcare companies, data privacy and hazardous waste might reflect the principal ESG risks.
Governance reporting will therefore need to include areas such as:
- Materiality assessment
- Governance, risk management, and internal control
- Supply chain monitoring
- Business Conduct; responsible business practices, ethics, anti-corruption, and executive pay fairness
- Corruption risk
EHS is the bridge to successfully manage the CSRD
EcoOnline has previously stated that companies with an established EHS culture will have a competitive advantage as sustainability reporting increases. However, we need to ask whether this will hold true for CSRD and how EHS teams can prepare for a heavier workload to come? The additional data requirements listed above might feel overwhelming, particularly on top of existing EHS and business responsibilities.
The good news is that risk assessments, compliance tracking, monitoring, and reporting standards are daily tasks to EHS professionals. More good news is that increases in other areas of reporting (such as finance) have created data which can support some of the new disclosures – you just have to track it down.
At EcoOnline, we appreciate that ESG reporting comes with technical, operational, and cultural challenges. The key to success is bridging the EHS department with other internal units, like compliance, sustainability, finance teams, IT, and HR. By bringing diverse teams together, the chances are that you already have much data you can reuse and improve when reporting on the new disclosures.
Data is key to making sustainable decisions
As mandatory sustainability reporting regulations take effect, technology solutions will be crucial to measuring and safeguarding consistent and comparable data standards. If you already have a comprehensive, integrated digital EHS tool, you will know how to collect and share data to allocate responsibility for EHS tasks.
On the other hand, you could be one of the many companies still struggling with increasingly complex data in manual spreadsheets. Or, you could have multiple solutions, with data trapped in silos. If so, now is the time to build a business case and budget for investing in a digital EHS Platform for your business.
EcoOnline's top 3 best practices for getting started with corporate ESG reporting:
- Start with the "why" to understand what is most material for your business, and identify which metrics and indicators are most relevant and vital for your organization
- Involve relevant departments and collect your existing data on environmental impact, employee engagement, and compliance processes. You will probably already have access to data which will be key to drive your sustainability strategy and goals.
- Build internal knowledge and engagement. Whilst sustainability is a hot topic, you need to uncover and close gaps in your colleagues' understanding of ESG’s myriad terms and topics.