Keeping up with the ESG frenzy

Developments in the field of Sustainability are moving at extraordinary speeds. Almost every day we are introduced to new principles, frameworks, methodologies, standards, policies, regulations and guidelines, and we must learn to adapt and put them into practice at the same speed. In order to remain relevant, businesses must invest in education and training around the area of ESG (Environmental – Social – Governance), a term that has recently gained a lot of prominence. It has also become a bit of a trend, but that’s not always a bad thing because it means that it has been placed high on the agenda of Boards and is being discussed seriously by leadership. Sustainability is no longer viewed as a discretionary, optional part of the business agenda. ESG is becoming more engrained in the strategies and core ethos of organisations, with top management teams viewing it as a significant priority. If applied in the right way and for the right reasons, sustainability can be the perfect way to regain consumer trust, which is one of the biggest challenges facing both business and the society at large.

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An organisation’s sustainable development depends on many factors such as its sensitivity on environmental issues, it’s social contribution as well as its governance policies (ESG). It is important to understand how all these factors affect an organisation and use clear Key Performance Indicators that provide the metrics to facilitate decision making. All this requires consistent and reliable data on the performance of an organisation regarding its footprint on the environment and society and that is why Non-Financial Reporting has been made mandatory for large sized companies (meaning with over 500 staff) and public organisations since 2017, through the NFRD (Non-Financial Reporting Directive).

In 2021, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the NFRD. The proposal extends the scope to all large companies that meet 2 out of the 3 following criteria:

1. They have over 250 personnel and/or

2. Have over 40 mln in revenue and/or

3. Show 20 mln on their balance sheet.

In addition to this, the proposal includes all companies listed on regulated markets including banks and insurance companies or other large organisations in regulated industries. That means that about 55,000 companies in the EU must comply with this new directive in relation to 11,000 beforehand. That is 5 times more.

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The new CSRD requires the audit (external assurance) of reported information, it introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards. It also requires companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European single access point. The draft EU Sustainability standards will be developed by the European Financial Reporting Advisory Group (EFRAG). The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives. The first set of standards are expected to be adopted by October 2022.

The CSRD also introduces the Double materiality concept that requires an organisation to measure not just its own effect on the environment and society but also vice versa. What risks might arise from the climate crisis (both socially and financially)? As temperatures rise because of global warming, so does your electricity bill as you try to keep customers cool with air conditioning. If carbon tax is eventually enforced, investing in renewables makes a lot of sense as a potential future investment. The new CSRD is very forward looking, as it will require companies to disclose their climate targets as well as their progress against those targets every year. If no progress is reported and targets are not met, then that affects the company’s profitability as that would mean the company is not accountable, reliable or trustworthy and surely investors, customers and other stakeholders will not respond well to those attributes.

So businesses need to be very careful what they commit to. Setting realistic targets is much more prudent than being too optimistic and having to face the consequences of being unsuccessful in achieving your goals. If your organisation has been reporting for several years, it is in a favourable position, as it can track a pattern of its performance and set goals that are more achievable.

As criteria is becoming stricter and stricter, it means that almost all companies will need to be made aware of these new directives and guidelines in order to be able to comply and meet these new requirements as set by the EU. Even companies that are not yet required to issue a sustainability report, still need to be aware of these issues as business partners will require them to provide information regarding their sustainability practices, policies and performance as part of their supply chain due diligence process. In an effort to create an integrated, inclusive, and progressive approach on due diligence, the EU is imposing new due diligence rules to curb environmental and labour abuses in corporate supply chains. This new EU regulation puts the ultimate responsibility for due diligence on each individual company, while equipping victims of abuses and their representatives to hold companies accountable.

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Additionally, the sustainable corporate governance initiative forms part of the European Union (“EU”)’s Green Deal and is a key deliverable in several of the EU’s recent strategies. This new initiative will require all companies operating in the EU to commit to the “do no harm” principle by setting out harmonized minimum due diligence obligations and imposing strict duties on corporate directors to integrate sustainability interests into their business decisions. It is likely that such obligations and duties will not only extend to harm that may be caused to a company’s own operations but also their value chains. In this way, the EU intends on tackling global environmental, social and human right risks and impacts. More specifically, the EU aims to tackle the problems associated with “short-termism”, a term coined by the Commission in its impact assessment to describe how pressure to focus on short-term financial performance instead of long-term development and sustainability.

In view of this rapidly changing environment around Sustainability and ESG, even smaller family-run businesses will need to prepare by setting up the basics of their Sustainability strategy such as by performing a Stakeholder Engagement and a Materiality Analysis. Stakeholder engagement is the process used by an organisation to engage relevant stakeholders for a clear purpose to achieve agreed outcomes. It is now also recognised as a fundamental accountability mechanism, since it obliges an organisation to involve stakeholders in identifying, understanding and responding to sustainability issues and concerns, and to report, explain and answer to stakeholders for decisions, actions and performance.

The central point of sustainable development is the materiality analysis process that is based on the principle of raising the material issues for each stakeholder group. Material issues are those that reflect significant economic, environmental and social effects of the organisation or significantly affect the assessments and decisions of the interested parties (stakeholders). In order to do that, one must consider the company’s vision and strategic direction, the needs and expectations of its stakeholders (obtained through consultations with them), as well as the KPI’s proposed by internationally recognised organisations and initiatives for sustainable development such as the Global Reporting Initiative.

There is a mass of sustainability information out there. That is why the EIMF in collaboration with Grow Sustainability Consulting are offering a wide range of courses around ESG which aim to equip professionals best cope with these new challenges, help cut through the information overload and focus on the right things in the right order with the right level of ambition to allow you to effectively manage these new responsibilities.

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