The ESG report will have to take into account some 500 key criteria, which makes it a really serious item. It’s not surprising that many people see it as another unpleasant obligation imposed on business! Meanwhile, as well as being a huge amount of work and no small investment, ESG brings a number of benefits. Whether we view ESG reporting as an unpleasant obligation or as an opportunity for growth, the unprecedented, broad, non-financial reporting on matters previously perceived as non-business has the potential to change the way we think about business and its functioning in the social fabric.
ESG reporting is a relatively new concept that is rapidly gaining in popularity. ESG (Environment, Social, Governance). It is a model that aims to measure and assess the sustainability performance of companies. Below is a brief explanation of each of these three categories:
Environmental: includes issues such as energy consumption, greenhouse gas emissions, waste management, water consumption, etc. Companies are assessed in terms of their environmental impact.
Social: focuses on a company's social and employee relations. It covers aspects such as working conditions, diversity and inclusion, customer and supplier relations, employee safety, as well as community involvement and philanthropy.
Governance: concerns the governance structure of the company. It covers issues such as the structure of governing bodies, transparency, ethics, application of corporate rules, independence of the board and other aspects related to responsible governance.
Non-financial reporting, and consequently ESG assessment, is becoming increasingly important for investors who want to invest in sustainable, socially responsible and well-managed companies. Companies are increasingly trying to align themselves with these criteria, both for ethical reasons and because of growing investor interest, consumer preferences and regulatory requirements.
The EU CSRD stipulates that from 2024 this non-financial reporting obligation will apply to companies and groups that have so far submitted sustainability reports in accordance with the NFRD. These are companies that meet the following criteria:
From 2025, this non-financial reporting obligation will apply to companies that meet 2 of the 3 criteria:
From 2026, this reporting obligation will be joined by small and medium-sized companies that are listed on a regulated market and meet 2 of the 3 criteria:
What about companies outside the European Union? As early as 2027, companies based outside the EU with a subsidiary or branch that have annual revenues of more than €150m within the EU will be subject to reporting obligations.
The European Commission's introduction of the new CSRD (Corporate Sustainability Reporting Directive), replaces the previously existing NFRD and is an absolute breakthrough in the way European companies think about corporate social responsibility. Until now, only the largest corporations were required to file non-financial information and the content of these documents was often arbitrary and subjective. While some companies focused on inclusivity, or the fight against discrimination, others emphasised equal pay between men and women, greater participation of women on boards of directors, while still others described environmental initiatives such as planting trees or establishing beehives.
The directive will cover some 50,000 companies in Europe, as well as those outside the EU with significant turnover in the EU market. It introduces strict environmental, social and governance reporting standards. Companies will be obliged to publish detailed and reliable information on specific subjects, measuring them in a uniform and precise manner.
Under the new legislation, regulators, investors, customers and other stakeholders will be able to benchmark companies not only on their financial viability, but also on their actions to reduce negative environmental and social impacts. The CSRD puts an end to the voluntary and selective approach to CSR by imposing uniform standards to increase the transparency and accountability of companies.
This initiative has the potential to change not only companies' approach to sustainability, but also to influence the way society assesses their contribution to environmental protection, social policy and corporate governance. The CSRD poses challenges for European companies but, at the same time, opens up new opportunities for building social responsibility and sustainable business.
As I have already mentioned, the guidelines for ESG reporting include around 500 indicators that provide guidance on what needs to be included in non-financial reporting as well as how such a report should be prepared. The most important provisions can be found in the General Requirements (ESRS 1) and in the General Disclosures (ESRS 2). The others deal with specific issues of non-financial business performance related to the environment, human rights, labour rights, social relations and the company's relationship with the business environment. Disclosure of these standards depends on the results of a previous dual materiality analysis:
Note that the structure and scope of the ESRS will be regularly reviewed and possibly modified which may, in practice, result in further expansion.
As you can see from my very 'technical' description of the topic, several issues arise that are extremely important from both a business and non-business point of view - although both are closely linked and contribute to a company's bottom line. For most companies, it will probably be a novelty to take such a broad view of their own activities and their impact on the near and far environment. For people, it may become an important point in the future to assess the ethical dimension of business’s activities. In turn this may be linked to decisions on whether or not to cooperate with or purchase the products of a given company. All this involves opportunities and challenges. It may even change the way we have thought about business, making money and spending it for over a hundred years. But I will write about these issues in my next article.