6 minutes 04/08/2024
By Atso Andersen, Director ESG, Advisense
The requirements for sustainability reporting are becoming stricter, more practical and are soon to be implemented. It's crucial to understand that this is no longer optional; it's mandatory. Without reporting capabilities, businesses risk decline.
Intensity of reporting and related activities will continue to increase. While progress has been made in mitigating climate change, it is unlikely that it will be fully brought under control in the near future. Therefore, it is advisable to take the importance of ESG seriously.
It starts with reporting, but the real impact on management and even the profitability of the organisation will follow in the years to come. Bank regulations lead them to use ESG reporting in their financing decisions. To put it simply: in the future banks are guided to allocate loans according to ESG performance. After all, green transition is about money and investments.
Driven by the need to address the climate crisis and incorporate social and governance considerations, ESG-related regulations will reshape financial reporting practices. Expectedly, the transformative momentum ESG regulation has within the economic system remained steadfast and has led to a more comprehensive, intricate, and binding implementation process.
Where other regulations often focus on disclosures, the CSDDD (Corporate Sustainability Due Diligence Directive) introduces a requirement for large companies operating in the EU to conduct due diligence across their supply chains. This is to identify, prevent, mitigate, and account for actual and potential adverse impacts on human rights and the environment. European Parliament members are advocating for fines amounting to a minimum of 5% of a company’s global turnover for non-compliance with the CSDDD. This mirrors the evolution of the GDPR's enforcement, which initially faced some disregard but gradually gained traction as turnover-based fines were imposed.
Upcoming ESG disclosure and reporting regulations are set to become mandatory over the next few years. As CSDDD obligations become tangible for corporate and finance managers, the prospect of fines and personal accountability introduces new dimensions to the ESG landscape. This governance structure parallels accounting legislation - but extended responsibilities are new features. After dramatic last-minute renegotiations, the CSDDD will advance to EU parliament vote in the Spring 2024.
Regulatory push is real
Throughout last year, a range of other announcements indicate significant advancements in ESG regulation.
European Sustainability Reporting Standards (ESRS) based on Corporate Sustainability Reporting Directive (CSRD)
The publication and endorsement of the ESRS by the EU Commission in July 2023 was pivotal. The structure and content were established, with added flexibility in timelines based on company size. Opting out is also possible during the transition period.
Companies with over 750 employees are the first to adopt ESRS, and requirements will extend to their subcontractors, due to the inclusion of impacts, risks, and opportunities across the value chain. The EU Commission has also linked the ESRS to other regulations, especially concerning the finance sector. This reflects the pivotal role the ESRS reporting will play in driving capital reallocation, for example in the way banks are required to operate based on reported ESG information.
EU Taxonomy
In June 2023, the EU Commission introduced a new EU Taxonomy package that extends to include:
1) sustainable use and protection of water and marine resources
2) transition to a circular economy
3) pollution prevention and control
4) protection and restoration of biodiversity and ecosystems
Moreover, the package expands the list of economic activities contributing to climate change mitigation and adaptation that were not included until now, primarily focusing on the manufacturing and transport sectors.
The EU taxonomy provides a baseline activity list and criteria related to green activities. However, it falls short of encompassing other activities in society which might have impact on environment, leading to the anticipation of future packages. The EU Taxonomy complements ESRS implementation by providing essential definitions and concepts and it's worth noting these interlinkages between EU Taxonomy and ESRS.
The European Single Access Point (ESAP)
The ESAP emerges as a “registry” for ESG documents and reports, akin to trade registers for financial statements.
Negotiators from the Council and the European Parliament reached a provisional agreement on the ESAP. Under the agreement, the ESAP platform is projected to be accessible starting in the summer of 2027, with a gradual roll-out to ensure robust implementation. Moreover, it outlines that member countries will establish their ESG reporting services, feeding material into the European-level ESAP. Interestingly, ESAP is mandated to operate independently rather than as an extension of existing trade registers.
The ESAP is a logical step in establishing a new reporting practice. Meanwhile, investors will face high reporting expenses as data needs to be collected by other means.
International Standard Setting
The global reach of the ESG message is evident.
In June 2023, IFRS (ISSB) published the first two global disclosure standards designed to communicate sustainability-related risks and opportunities. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face across short, medium, and long-term horizons. IFRS S2 sets out specific climate-related disclosures to complement IFRS S1. Over the summer, the International Organization of Securities Commissions (IOSCO) endorsed the standards and is now calling on its 130 member jurisdictions to consider how to implement the new standards into their regulatory frameworks.
The real challenge
The ESG momentum in Europe remains unwavering. The ripple effects are significant, as even the smallest subcontractors will be impacted by the ESG regulations, via the inquiries and demands from large client companies and banks.
The real challenge is that all disciplines, including administration, IT, risk management and management will need to adjust to the new demands and practices. New professions, such as ESG auditor/assurer have emerged in response to the developments.
However, the real challenge is the content. Just an example to consider: ESRS E4 asks narrative about company activities in or near biodiversity-sensitive areas. Do we know exactly what a biodiversity-sensitive area is, as an accountant would like to see it, and where the company operates? The presentation also needs to be based on some facts. However, some of these facts still need to be established.
How can I prepare for the CSRD reporting obligation?
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With the large time commitment and amount of data from across multiple geographies required for a CSRD report, a cloud-based software like the AMCS Sustainability Platform can:
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Update methodologies used to comply with internationally accredited frameworks
Customize reports to meet the requirements of individual ESG standards including ESRS
The time to start preparing for your CSRD deadline is now. If you’re ready to begin, schedule a meeting with an AMCS solutions advisor today to learn how we can help streamline your sustainability reporting and climate disclosure program.
