Two speed ESG reporting prolonged
Synopsis
Different progress regionally: significance for UK companies in both domestic regulation and impact of international standards.
EU's CSRD setting the pace, but ambitions tempered and timetable extended. This is likely leading to extended sustainability data gaps and weaker comparability. However, stakeholder pressure and companies' competition to be best-in-class may still counter this.
Our latest edition expands on the theme of non-financial reporting and statutory reporting standards. Progress is now being made against a background of increased political skepticism and economic uncertainty. There are currently three different but complimentary regional strands under development, each at different stages of their journeys (see below).
Countries | Latest progress | Published | Adoption |
EU | CSRD regulation proposed | Jun-23 | Jan-24 |
International (incl. UK) | IFRS S1 and IFRS S2 proposals | Jun-23 | n/a |
USA | SEC rules to enhance and standardise climate-related disclosure | Mar-22 | n/a |
The recently published IFRS S1 and S2 proposals are the most relevant for UK companies with the Financial Conduct Authority stating last year that the International Sustainability Standards Board’s (ISSB) standards would be ‘the backbone of its corporate reporting element.’ Nevertheless, CSRD will eventually cover many UK companies if they have significant operations in the EU.
The European Commission has set the regulatory clock ticking. The latest draft of the Corporate Sustainability Reporting Directive (CSRD), published on 9 June, will initially apply to large public companies (with more than 500 employees), which are already subject to the EU’s Non-Financial Reporting Directive (NFRD). CSRD for these businesses will be adopted for FY 2024 (published after 1 January 2025), with other companies being brought under the scope of CSRD in FY 2025, 2026 and 2027. For UK parent companies with EU subsidiaries with an EU turnover greater than €150m it will impact from FY 2028. Although some of these dates seem a long way off, the increasing levels of disclosure supports the need for early groundwork ensuring a smooth delivery as the deadlines approach.
As it is the first Governmental regulatory response it interesting to note two features about the final CSRD proposals:
The proposed Standard’s ambitions for ESG reporting have been tempered (at least temporarily).
The disclosure timetable has been extended by the introduction of additional phasing options.
Citing the EU’s needs to be competitive and to minimise costs, the proposals are significantly less ambitious than the European Financial Reporting Advisory Group’s (EFRAG) advice published earlier in the year. While some in industry will be relieved by the reduced administrative burden (at least for now) others will be frustrated that the Commission’s approach is likely to prolong two speed ESG reporting between those businesses that adopt a best-in-class approach and those that prefer minimum compliance. The Commission’s more ‘flexible’ approach, while pragmatic, allows different approaches to disclosure thereby weakening comparability. This is less helpful for ESG data users, and as a result the EU’s December 2022 ambition for "The development of mandatory common sustainability reporting standards...[to] a status comparable to that of financial information" remains a long way off. The lack of uniform data will continue to undermine the impact of ESG reporting and investment managers with obligations under SFDR may find their portfolio companies continue not to provide the metrics they require for a while. It will be interesting to see whether the FCA adopt a similar approach to the ISSB Standards in the UK.
CSRD-iluted?
The EU is proud of its ESG credentials and sees it as an area the EU can show world leadership. CSRD is seen as one of the cornerstones to the EU Green Deal, the Sustainable Finance Agenda and wider EU policy to commit companies to respect human rights and reduce their impact on the planet.
Underlying this ambition is the need to provide robust sustainability data, a task set for EFRAG which published its detailed European Sustainability Reporting Standards in January this year. These consisted of two ‘Cross-cutting standards’ and 10 ‘topical’ standards covering the topics of E, S and G. As well as General Disclosures (ESRS 2), and existing EU legislation data points there were proposals for significant additional mandatory disclosures under the topics of Climate Change (ESRS E1) and Own Workforce (ESRS S1).
The European Commission, having listened to additional feedback, has published its draft of the Delegated Regulation. The Commission, while recognising that EFRAG’s suggestions broadly met the mandate of CSRD and policy goals of the European Green Deal, found some of EFRAG’s suggestions challenging especially regarding the areas of biodiversity, own workforce, value chain workers, affected communities, and consumers and end-users.
In streamlining EFRAG proposals, the Commission stressed the need for the impact of the new standards to be proportionate and to be applied correctly as well as minimising additional costs. Their decisions will also have been impacted by the desire to ensure the EU framework was compatible with other frameworks being introduced across the world. These modifications led to a 40% reduction in the proposed disclosure requirements and a 50% reduction in data points.
The changes have mainly come from reducing the mandatory disclosure requirements to just those required under General Disclosures (ESRS 2) with other disclosures subject to a materiality assessment.
The CSRD’s hallmark ‘Double Materiality’ assessment will now determine the basis of many sustainability disclosures. The ‘double’ dimensions are ‘Impact Materiality’ (actual or potential positive or negative impacts on people and the environment) and ‘Financial Materiality’(where a sustainability matter triggers or may trigger a material financial effect). Critics of the new legislation are concerned that this approach will now become the means whereby a number of businesses can avoid publishing information. Thereby creating ‘holes’ in the data, undermining its significance and complicating comparability.
The remaining mandatory disclosures cover the basis of preparation; governance; strategy (including views of stakeholders); impact, risks and opportunities management; and metrics and targets. Although much of Climate Change (ESRS E1) is no longer mandatory ‘Disclosure Requirements E1-4 Targets related to climate change mitigation and adaption’ remain. E1-4 includes Scope 1, 2 and 3 GHG emissions, targets and explanations of transition plans. However another five Climate Change metrics including energy consumption are now no longer mandatory as they are subject to materiality assessments. A headline list of these is given in the footnote below*.
For companies with less than 750 employees certain requirements can be phased in. These deferrals cover Scope 3 and own workforce (no longer necessary in first year of reporting) and biodiversity and elements of the value chain (not necessary in first two years of reporting).
In addition, all undertakings may omit a significant number of non-climate environmental issues, as well as a number of social indicators principally associated with own workforce. Finally, a number of requirements have been made voluntary including an explanation of why the undertaking considers a particular sustainability topic not to be material.
CSRD-effered?
The reduction in the number of mandatory disclosures is the most fundamental change to EFRAG’s recommendations. We expect mandatory disclosures will increase over time as permitted deferrals expire, stakeholders will demand them and businesses see the rewards to be gained from competing to be best-in-class.
Next year the European Commission is expected to extend CSRD’s scope to include large public interest companies (with more than 250 employees, and/or turnover of €40m and/or total assets of €20m) for FY from 1 January 2025. Again it is likely to adopt a phased approach. SMEs will be covered in the following year which means some of these data points, even if material to a business, may not be reported for another five years.
*Climate change metrics no longer mandatory: Energy consumption and mix (E1-5), Gross Scope 1,2 and 3 emissions (E1-6) (boundaries may differ from Scope 1, 2 and 3 under E1-4), GHG removals and mitigation projects financed through carbon credits (E1-7), Internal carbon pricing (E1-8) and Potential financial effects from material physical and transition risks and potential climate-related opportunities (E1-9).
How CEN-ESG can help with CSRD
Tom Lord, Associate Director
Tom joined the team in 2021. He has broad additional knowledge of sustainability from his previous work at World Wide Generation and ISS Corporate Solutions. He holds an MA in Climate Change from Kings College London and BA in Biology from the University of Bristol.
CEN-ESG helps businesses maximise their corporate sustainability potential, performance and ESG disclosure. We identify current impacts, areas for improvement and more effective ESG reporting. Our experienced team can help provide high quality advice with actionable recommendations on how to approach and comply with the CSRD. CEN will help your approach to CSRD using the following steps:
Double Materiality assessment – The double materiality assessment not only determines the scope of the organisation’s sustainability reporting, it also enables an efficient allocation of the resources needed to achieve CSRD compliance. CEN will carry out a double materiality assessment from both a financial and impact perspective to ensure that sustainability reporting focuses on the topics that are most relevant for the organisation and its stakeholders.
Gap analysis of risk management and governance process - We will identify gaps in your governance and risk management process, providing recommendations for best practice.
Risk assessment of material topics - Using the results of the double materiality we will help you understand what the most important risks and opportunities that relate to these topics are. We will do this by defining these issues in terms of the level of impact that they pose to either the organisation or affected stakeholders.
Gap analysis of material topics - We will help you understand the gaps in your current sustainability reporting and strategy and identify what you need to improve in order to comply. We will also analyse gaps in how you are accounting for sustainability in your strategic planning processes and financial decisions.
Recommendations - For every material topic identified we will recommend what measures you need to put in place to manage your environmental and societal impacts. We will recommend not only metrics and targets but also policies and actions plans that will help you achieve these goals.
Disclosure - Finally we will help you report on your progress ensuring that the reporting is focused towards the interests of your key stakeholders and that they have the information needed to make informed decisions about your company. We will ensure your CSRD reporting is not just compliance-related but also a source of value creation.
Happy Birthday CEN-ESG
CEN-ESG celebrates its third anniversary this month and we would like to thank all our team, clients and friends for their support.
Our belief that industry would benefit from a greater focus on reporting and data quality has led to the creation of a unique platform. In our first three years we supported over 50 corporates in their ESG journeys, built our data coverage to c.500 companies and increased team numbers to 40.
Our third birthday has led to the revamp of our website which was released earlier this month. We also increased investment in our own ESG to demonstrate good sustainability behaviour supports the development of a sound business.
CEN-ESG remains a young business, learning all the time and still ambitious. We continue to expand the team and broaden our skills and services. We remain determined to continue to provide practical expert advice founded on in depth analysis of existing and best practice ESG disclosures.
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