The recognition of gender diversity, inclusion and pay equity as important dimensions of corporate sustainability performance is not only a matter of fairness, but also of economic analysis confirming that it drives growth, innovation and competitive advantage.

These indicators are also relevant to the UN Sustainable Development Goal 5 “Gender equality” and 10 “Reduced inequalities”.

They focus on measuring vertical inequality associated with the distribution of income, wealth and other economic resources among individuals, and horizontal inequality between social groups, differentiated, for example, by race, ethnicity and gender.

Traditional social relations and cultural norms may undermine gender equality within organizations, and there are increasing pressures not only to disclose but also to explain and address differences related to gender imbalance and pay gaps.

As regards gender diversity, there can be different ways of thinking about targets. One would be to assume that the appropriate target for gender balance should be determined by demographic balance, that is, 50-50.

Another would be to factor in persistent core issues – such as segmented labour markets, cultural bias and the gender division of labour associated with caregiving – underpinning gender inequality from a structural perspective.

Women’s paid work is often concentrated in low-paid, low-quality jobs, advancement and career structures remain constrained by cultural norms and bias, and they tend to spend around 2.5 times more time on unpaid care and domestic work than men (UN Women 2018).

Despite progress made over the years in achieving gender equality, many challenges remain to women’s equal enjoyment of human rights in all spheres. Women continue to experience multiple forms of discrimination, disadvantage and exclusion, and they are underrepresented in decision-making positions.

Among high-income countries, the widening of the gender pay gap is particularly evident at the upper end of the wage distribution, while in low- and middle-income countries this is more apparent at the low end of the distribution (ILO 2018).

The right to equal pay for equal work is one of the EU’s founding principles enshrined in Article 157 of the Treaty on the Functioning of the European Union. However, the practical implementation and enforcement of this principle remains a challenge. In 2021, according to the EU Commission the gender pay gap was still 12,7% in the EU, varying from 0.7 % in Luxembourg to 22.3% in Latvia.

In 2022, as part of the EU Gender Equality Strategy 2020-2025, the European Parliament formally adopted the new EU law on gender balance on corporate boards. By 2026, companies will need to have 40% of the underrepresented sex among non-executive directors or 33% among all directors by 30 June 2026.

This figure is situated between the minimum of the ‘critical mass’ of 30%, which has been found necessary in order to have a sustainable impact on board performance and full gender parity, 50%. (European Commission, 2012)

So, targets within the range of 30 to 50%, and the specific goal of 40%, seem to constitute current benchmarks for gender diversity.

With regard to the gender pay gap, there seems to be considerable agreement that parity is the ultimate goal. A possible benchmark could be the performance of companies or countries identified as leaders or top performers.

According to the OECD (2018), top-performing countries are those with gender pay gaps of less than 10%. The Equileap scorecard method, for example, which is used for identifying and ranking the best performers in terms of gender equality, singles out companies with a mean gender pay gap of 3% or less (Equileap 2018). Interestingly enough, mandatory reporting in Great Britain has revealed that 24% of employers have no gender pay gap, or one that favours women. (*Report published by the UN Research Institute for Social Development – UNRISD)

Parity is the obvious normative goal for the gender pay gap. And one could conclude that should the disparity exceed 3% it’s time to get really worried.

It’s also important not to mask the scale of disadvantage in one category. Data disaggregated by multiple hierarchical or occupational categories can reveal where disparities are located.

Gender equality in the workplace, and more generally, has since gained greater global attention due to the SDGs and specific SDG targets as well as new UN guidance published in 2019 on Gender Dimensions of the Guiding Principles on Business and Human Rights (supported by the Government of Sweden). You can access the document here: https://www.ohchr.org/sites/default/files/Documents/Issues/Business/BookletGenderDimensionsGuidingPrinciples.pdf

(*) Report: Sustainability Accounting. What can and should corporations be doing? Research and writing by Peter Utting with Kelly O’Neill. The United Nations Research Institute for Social Development (UNRISD)

The French Accounting Standards Authority has released an educational publication on the subject: “Climate matters: what are the links between financial statements and the sustainability statement?”

• Topic: What coherence and complementarity can be expected from the information presented in the sustainability statement (ESRS standards) and the financial statements (IFRS standards or French standards)?
• Objective: Better understand the articulation between these two pillars of corporate information in order to support stakeholders in the appropriation of these complex and evolving subjects.

Summary:

Climate matters and sustainability statements

Climate disruption generates physical and transition risks affecting the assets, liabilities and activities of companies and their value chain(s).

Physical risks result from acute climatic hazards (e.g. storms, floods) and chronic (e.g. rising sea levels, prolonged droughts).

Transition risks, on the other hand, are linked to regulatory, technological, market or reputational developments as part of the transition to a low-carbon economy (e.g. stricter emissions standards, emergence of new technologies making existing technologies obsolete, change in the perception of companies based on their sustainability strategy).

These risks lead to current and future financial effects.

The commitments made and plans implemented by companies to mitigate climate change and adapt to its consequences require investments and financial resources today and tomorrow.

When they are material, climate risks (as well as opportunities), commitments, and their financial effects must be published in the sustainability statement.

These financial effects include the impacts on the financial position, financial performance and cash flows in the short, medium and long term (e.g. value of assets exposed to physical risk, turnover related to exposed activities).

The sustainability statement is established according to the European sustainability reporting standards, ‘ESRS’, for companies subject to the ‘CSRD’.

This sustainability statement is subject to mandatory verification.

Climate matters and financial statements

At the same time, these same climate risks and commitments are part of the contextual elements, assumptions, or input data considered in the preparation of financial statements established according to international financial reporting standards (‘IFRS’ or “International Financial Reporting Standards”) or French accounting standards (‘PCG’ or General Accounting Plan).

Depending on their nature, and depending on the applicable accounting principles, certain climate issues may have an impact on the financial statements in the form of recognized items or information in the appendix (e.g.: the revision of the useful life of certain assets), others do not generate any immediate effect or information presented in the financial statements.

The accounting (IFRS, PCG) and sustainability (ESRS) regulatory frameworks have differences

Although financial materiality is defined in the same way (information is material if its presentation or omission can influence the decisions of investors/lenders), its conditions of application may vary depending on the reporting scope, time horizons, and evaluation and reporting criteria and thresholds.

Furthermore, financial statements generally reflect rights and obligations existing at the closing date, while the sustainability statement also provides a large amount of prospective information (e.g. emissions targets, future financial effects, etc.).

What is presented in the ESRS sustainability statement is therefore not necessarily intended to be included in the financial statements, and vice versa.

Connectivity between the sustainability statement and the financial statement

According to EFRAG, connectivity refers to the ability to integrate and articulate information from the different sections of the annual report to create a set of coherent and complementary information that allows users of the reports to make informed decisions.

Connectivity is specifically required in the sustainability statement by the ESRS, in connection with the financial statements.

The analysis of standards and illustrative cases shows that, although the two pillars of information each respond to distinct rules, their connection, rather than their juxtaposition, highlights their coherence and complementarity.

This provides a holistic view of how the company addresses, and is affected by, climate matters.

Food for thought for companies

Some companies are implementing an integrated approach to facilitate the management of climate matters and inform strategic, financial or operational decisions (e.g.: definition of action priorities and financial plans).

This approach can be organized at several levels, including: governance (e.g.: awareness of the requirements, limits and interconnections of reporting frameworks), organization (e.g.: coordination of reporting and operational teams on climate issues), and internal control.

This integrated approach facilitates the alignment of the assumptions for developing the two reports (e.g.: concerning investments and financial resources allocated to climate mitigation and adaptation actions, global warming scenarios, regulatory developments).

The ESRS therefore require that any points of convergence or divergence be explained in the sustainability statement and that direct links (i.e. amounts coming directly from the financial statements) or indirect links (i.e. aggregation or decomposition of the amounts presented in the financial statements) be highlighted.

Food for thought for all stakeholders

To promote better connectivity, the following possibilities for improvement are proposed to the authorities, to the extent that this reflection goes beyond the operational framework of companies and involves broader considerations at the national and European level:

• raise awareness and train stakeholders in the connectivity between financial statements and sustainability statements,
• use the analyses of the first publications to contribute to reflections at the national, European and international levels,
• integrate specific financial effects into future sectoral sustainability standards (e.g. research and development expenditure for low-carbon products),
• continue reflection on the evolution of accounting standards in relation to climate issues, and promote the incorporation of climate risks into company valuation

The full document (in French) can be downloaded here >>>

#getCSRDready, #CSRD, #ESRS

On 31/1 the German DRSC submitted five proposals for the European Commission’s #Omnibus initiative on the evolution of CSRD and ESRS.

The Accounting Standards Committee of Germany (DRSC in German) is the national standard setter in the area of group financial reporting in Germany. As such, it’s the equivalent to the French ANC.

Here’s a recap of the key takeaways from the German DRSC proposal.

Introduce graduated requirements for “mid-cap” companies, harmonize the size thresholds with the scope of the CSDDD and postpone their reporting by at least one year.

Approx. 550 German 1st wave CSRD companies are currently in the final phase of the first preparation of ESRS sustainability reports on financial year 2025.

It is to be expected that, despite the lack of a German implementation law, many of these companies will voluntarily report fully or partially in accordance with the ESRS.

Approx. 14,000 German 2nd wave companies are required to report according to ESRS for the first time for on financial year 2025 financial. They have already begun preparations.

The vast majority of these companies have no experience with non-financial or sustainability-related reporting obligations, as there has not been a legal obligation to date.

They need clear and proportionally designed reporting requirements based on the capacities and capabilities of these companies, with special relief for “mid-caps”.

A definition of “mid-caps” could be based on companies with more than 250 and up to 3,000 employees, or on the CSDDD threshold (1,000 employees; EUR 450 million turnover). The EC should carry out “field tests” on the capabilities of these companies, in order to achieve an appropriate definition.

ESRS Set 1 should be simplified building on the LSME standard, and making sure that the necessary information is available to users (SFDR, CRR and CRD for financial institutions).

Sufficient preparation time is required for the implementation or adaptation of (implementation) projects. Therefore, the initial reporting for these companies should also be postponed by at least one year.

Relieve “smaller” large limited liability companies from mandatory reporting.

Allow them to apply the voluntary VSME standard given their limited resources.

Simplify ESRS Set 1 and adopt a “Climate first” approach closer to the climate reporting requirements set by IFRS S2 (ISSB).

ESRS Set 1 represent “disproportionately high report volumes, which is likely to make it more difficult for users to find information relevant to decision-making, due to the sometimes extremely granular requirements and the associated extensive interpretations and explanations”.
The European Commission should give EFRAG a priority audit mandate to analyse the initial reporting practice, as well as subsequent reporting cycles, with a view to possible simplifications and improvements.

The requirements of the ESRS E1 are much more granular than the information required in IFRS S2. This can result in immediate approaches to reducing the requirements in ESRS Set 1

Pause the development of sector standards until we know if they are really needed.

There are general doubts about the need for sector-specific ESRS. A short DRSC survey among the DAX 40 companies in summer 2024 showed that, in addition to the list of topics listed in ESRS 1.AR 16 or according to paragraph 11, hardly any other company-specific reporting topics were identified by application practice. This indicates that additional sector-specific topics and disclosure requirements are not expected to be covered to any significant extent.

Industry associations should be enabled to develop industry guidelines for their member companies as a starting point.
Delay the reporting for the 2nd wave of companies by at least one year to provide ‘planning security’.

Reporting companies need a stable legal framework in order to implement reporting requirements in a legally secure manner. Constant ‘trial and error’ in regulation should be avoided.

Clearly defined legal requirements from the Omnibus initiative are needed quickly, with sufficient lead time for implementation – meaning at least one more year for effective implementation.

Source: https://www.drsc.de/news/drsc-unterbreitet-fuenf-vorschlaege-zur-omnibus-initiative-der-europaeischen-kommission/

You can also read more about the French ANC’s proposal here: https://www.linkedin.com/posts/leilahellgren_omnibus-activity-7285536308968509440-5pko?utm_source=share&utm_medium=member_desktop

Today 29/1, the European Commission presented the Competitiveness Compass, providing a strategic framework to steer the Commission’s work.

Key takeaways on the subject of sustainability reporting 🌿:

⭕ Simplify but stay the course

Europe has set out an ambitious framework to become a decarbonised economy by 2050. It will stay the course, including through the intermediate 2040 target of 90%.

Regulatory burden has become a brake on Europe’s competitiveness. The Commission will therefore aim to achieve the agreed policy objectives in the simplest, most targeted, most effective and least burdensome way.

⭕ Reduce the cost of administrative burdens

The set burden reduction targets refer to the costs of all administrative burdens, and not only reporting requirements.

The targets are to reduce recurrent costs by at least 25% for all companies, and at least 35% for SMEs through dedicated measures for SMEs.

This will start next month with the first of a series of Simplification Omnibus packages.

The first Omnibus will, among others, cover a far-reaching simplification in the fields of sustainable finance reporting, sustainability due diligence and taxonomy.

The sustainable finance framework is aimed at mobilizing investment in the clean transition. The Commission will ensure better alignment of the requirements with the needs of investors, but also

✔️ proportionate timelines,
✔️ financial metrics that do not discourage investments in smaller companies in transition, and
✔️ obligations proportionate to the scale of activities of different companies.

⭕ Address trickle-down effects

The trickle-down effect will be addressed to prevent smaller companies along the supply chains from being subjected in practice to excessive reporting requests that were never intended by the legislators.

⭕ Define a new category of company size: small mid-caps

To ensure proportionate regulation adapted to companies’ size, a new definition of small mid-caps will soon be proposed. By creating such a new category of company, bigger than SMEs but smaller than large companies, thousands of companies in the EU will benefit from tailored regulatory simplification in the same spirit as SMEs.

The Commission is also preparing a simplification of the Carbon Border Adjustment mechanism for smaller market players.

⭕ Digitize reporting

Digitalisation will go hand in hand with simplification to reduce the reporting burden.

Wherever possible, reporting must move to digital formats based on standardised data.

Companies and public authorities must be better accompanied when it comes to implementing EU legislation through stepped up support, capacity building and technical assistance.