Getting to grips with your ESG reporting requirements

2024 represents the start of a seismic change for many EU-based businesses with new ESG reporting requirements set to come into effect.

Large, public-interest companies with more than 500 employee have to start meeting ESG (Environment, Social, Governance) reporting requirements from the start of the 2024 financial year.

This will affect approximately 11,700 large companies and groups, with more to follow in the coming years. These changes come as part of the Corporate Sustainability Reporting Directive (CSRD), which came into force on the 5th of January 2023. 

The new Environmental, Social and Governance (ESG) Reporting Regulations will require affected companies in the EU to disclose data on their impact and performance relating to environmental, social and governance factors. 

In this post, we take a closer look at:

• The background to CSRD and ESG reporting 
• The requirements for ESG reporting
• How to get started with ESG reporting
  
  

The background to CSRD and ESG reporting 

The CSR directive aims to put an end to inconsistent reporting and greenwashing in the EU. 

In the past, there has been a noticeable lack of common standards and minimum requirements for ESG reporting. Companies have more or less been able to define what is considered ‘sustainable’. Unsurprisingly, this has resulted in an uneven and chaotic reporting landscape. 

But recently, many have questioned the credibility of ESG reporting and the quality of the data represented. Accusations of "greenwashing" have had serious consequences for companies that mislead people by falsely selling products as "green" or "environmentally friendly". 

For example, Austrian Airlines AG, a subsidiary of Lufthansa group, was found guilty in 2023 of misleading advertising by an Austrian commercial court. This related to marketing claims made by the company in 2022 that flights between Vienna and Venice would be fuelled with 100% sustainable aviation fuel (SAF) when in actuality only 5% derived from renewable resources.

According to Dr. Barbara Bauer, a lawyer at the Association of Consumer Information (Verein für Konsumenteninformation) it “is not technically possible at present to operate CO2-neutral flights with 100 % SAF”. 

The CSR Directive introduces more detailed reporting requirements to help companies better manage and measure ESG-related risks. By forcing more companies to be publicly accountable for their impact on the environment, human rights and social standards, the new directive aims to end greenwashing. 

The CSRD is an extension of the Non-Financial Reporting Directive (NFRD). The NFRD was brought in as part of the EUs strategy to encourage corporate social responsibility. The new directive requires all large companies, whether listed or not, to publicly account for their impact on people and the environment. 

Around 11,700 companies in the EU have been affected by the NFRD. That number will now be increased to around 50,000 companies that will face the requirements of the new CSRD. 

Important dates for CSRD 

Here are several key dates in the rollout of the CSRD:

Non-EU companies with a significant presence in the EU (with a turnover of more than €150 million in the EU) or with securities listed on an EU regulated market will also be subject to the new rules. 

Similar regulations to note: 

The CSRD complements several existing regulations. For example, it supports the EU’s Sustainable Finance Disclosure Regulation (SFDR), which applies to financial market participants. It also has much in common with the international Task Force on Climate-related Financial Disclosures (TCFD), which is a mandatory framework already implemented in the EU, Canada, South Africa, Japan, Singapore and South Africa.  

New Zealand and the UK have announced that they will make it mandatory to disclose climate risk information in accordance with the TCFD by 2023 and 2025. 

Note that the TCFD has disbanded as of November 2023, with the International Financial Reporting Standards (IFRS) Foundation taking over its remit. 

In the US, the Security and Exchange Commissions (SEC) proposed climate - related disclosure rule will mean that companies will have to provide certain data including emissions and environmental risks for investors. 

CSRD reporting requirements 

Although not all companies are directly affected by the above requirements and dates, the new requirements have the potential to affect the entire value chain of an organization, including even the smallest companies. There will be increasing demands for suppliers to provide ESG data to large organizations. 

To comply with the reporting requirements of CSRD, you must adhere to the disclosure requirements and data points in the European Sustainability Reporting Standards (ESRS). The ESRS standards were published in July 2023 and can be adopted by all companies subject to CSRD. 

5 requirements your business must fulfil:

1. Environmental examples: Performance related to climate change, circular economy and pollution, as well as greater transparency on how you address biodiversity loss and reductions in resource and water use. 
   
   
2. Social examples: Treatment of employees throughout the value chain, health and safety in the workplace. 
   
   
3. Business management examples: Business behavior policies, including prevention of corruption and bribery, supplier relationship management, lobbying and payment practices. 
   
   
4. Through the concept of 'double materiality', you need to include both internal impacts (the organization's performance and position) and external impacts (external impacts on communities and the environment). 
   
   
5. In addition, to improve the quality, reliability and veracity of the information published, it is required that the reported data be audited by a third party. 
   
   

The elements of ESG 

Let's take a look at what each 'letter' covers. Can you see any overlap with your current operations? 

Areas related to 'Environment': 

• Climate change, greenhouse gas emissions 
• Climate risk 
• Pollution 
• Water and marine resources 
• Biodiversity  
• Green growth, resource utilization and circular economy 

Traditionally, environmental factors relate to resource use, climate change, energy consumption, waste management and other physical and environmental challenges and opportunities. 

Much of this based of the Green House Gas Protocols (GHG) Corporate Standard, which classifies a company’s GHG emissions into 3 ‘scopes’. 

Scope 1: Direct emissions from owned or controlled sources 
Scope 2: Indirect emissions from the generation of purchased electricity 
Scope 3: Indirect emissions that occur in the value chain of the reporting company 

Today, we face a broader environmental perspective. Investors and other stakeholders are looking for information on more than emissions status and reduction targets, and therefore companies will also start reporting on more than the bare minimum of data on business travel, waste and logistics. 

Through CSRD, additional data such as supply chain emissions (scope 3), climate risks and decarbonization plans will become mandatory. The new regulations will also require your organization to take a proactive approach to reporting on data related to growth opportunities in the green transformation. This can include renewable energy, low-carbon solutions, circular business models, 'green' products, services and technology. Another growing focus is on climate and nature-related risks, such as biodiversity. 

Areas related to 'Social': 

• Human Rights 
• Equality, diversity and inclusion 
• Health and safety 
• Workers in the value chain 
• Affected communities 
• Consumers and end users 

Social issues cover many themes and have traditionally attracted less attention than environmental factors. However, as we see an increase in regulations and frameworks that focus on human rights, there is also growing interest in business models that are centered on social impact. 

Topics such as health, safety and equality and opportunity have been regulated by law for decades. Therefore, it often seems easier for companies to comply with reporting requirements on risk assessments, incidents, accidents, sickness absence and diversity. 

In recent years, there has been an increased focus on the impact of business on human rights, resulting in a growing number of laws and regulations. In 2015, the UK pioneered the Modern Slavery Act. Australia, France, Germany, the Netherlands and Norway have followed suit in recent years. 

In February 2022, the European Commission published its proposal for a Corporate Sustainability Due Diligence Directive. Its purpose is to promote companies' respect for human rights and decent labor conditions within their operations and value chains. 

Areas related to 'Governance': 

• Materiality analysis 
• Governance, risk management and internal control 
• Supply chain monitoring 
• Business conduct, responsible business practices, ethics, anti-corruption and fair remuneration of employees 
• Corruption risk 

Traditional corporate governance deals with issues that are fundamental to ensuring reasonable control in a company, such as bribery, corruption, procurement practices, equal treatment, board composition and independence, incentive structure and risk management system, and internal control. 

With the new rules, organizations now need to better understand their materiality. And a critical success factor here is getting an account of the company's ESG risks. For example, labor conditions and energy consumption are more relevant as high-risks for a manufacturer than for a law firm. And for companies in the healthcare sector, data protection and hazardous waste may be the areas of highest ESG risk. 

How do you get started with ESG reporting? 

Like many organizations, you may be left with the questions: how to get started with ESG reporting? 

Studies have shown that there are huge differences between companies' CSR reports - in quality and content. Many have critical gaps; many don't have a system or process for reporting at all; and many just see it as something to tick off a list. 

With the new requirements listed above, you may feel overwhelmed by having to manage ESG on top of your existing EHS and business responsibilities. 

But the good news is that for EHS professionals, compliance and reporting standards are part of daily tasks. For example, tracking, reporting and monitoring near misses, incidents, accidents, emissions and risk assessments are necessary measures that will benefit any ESG strategy. 

We recognize that ESG reporting presents technical, operational and cultural challenges for many. The key to success is to bridge the gap between the EHS department and other internal units, such as sustainability, finance teams, IT and HR. By bringing different teams together, chances are you already have a lot of data that you can reuse and improve when reporting on ESG. 

Link ESG and EHS and start with what you already do 

ESG = Environment, Social & Governance 

EHS = Environment, Health & Safety 

Do you see the connection? 

If your company is already working with EHS, occupational health and safety and/or the environment, you're well on your way, and some of the focus areas may even be familiar to you. Many companies are already doing things that are actually ESG to one degree or another. These may be things you are aware of and need to make adjustments and improvements. But it can also be things you may not have realized are part of ESG. 

See how you can gather all ESG and EHS efforts under one roof 

Our top 3 tips for getting started with ESG reporting:

1. Start with the 'why' - why do ESG reporting? 
   
   Of course, you're doing it largely to comply with regulations. And we shouldn't neglect that incentive. But CSRD is not just designed to impose more regulations on us. It's also designed to help us maneuver through the opportunities inherent in ESG. 
   
   With data and reporting, we not only show things externally, but we also learn internally about what's going well, where we need to improve and the opportunities that lie ahead. Therefore, the first thing you should do is decide what you want to get out of your ESG reporting internally and what that requires. 
   
   If you understand what matters most to your organization, you can more easily identify which metrics and indicators are most relevant and critical to you and start there. 
   
   
2. Involve relevant people and teams
   
   Make sure to involve relevant people and departments and collect existing data on environmental impact, employee engagement and process compliance. Chances are you already have a lot of data that can be valuable input for your ESG strategy and goals. 
   
   
3. Build internal knowledge and commitment
   
   It's essential to build commitment, understanding and support internally. While sustainability seems to be on everyone's lips, be aware of and work to close the gap between your colleagues' understanding of the different terms and topics under the ESG umbrella. Only if they understand the what and why can they contribute to the work in the best possible way. 
   
   

Conclusion

This blog post has given you a very broad overview of what requirements your business will have to meet if you are based in the EU, or have significant business interests there.  

There is a lot of information to take in, a lot of terms, acronyms, and initialisms to wrap your head around. And that’s before you even get to the actual reporting aspect! 

ESG reporting doesn’t have to be an overwhelming experience. At EcoOnline we have significant experience in assisting businesses like yours to accurately report on their climate impact, with our software helping you to stay compliant with all major directives. 

If you want to learn about how you can utilise your existing EHS reporting practices to support ESG reporting, check out our blog below: