Author Archive: Cleerit

Corrigendum to the ESRS

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A corrigendum to the ESRS was published in the Official Journal of the European Union on Friday April 19.

The corrections do not call into question the requirements spelled out in the ESRS, mandatory under CSRD, but mainly rectify mistakes in paragraph numbers, misspellings and unclear wordings.

In some cases, the wording matters more. For example:

➡ The corrected wording in ESRS 1 Annex I now specifies anticipated, as opposed to potential, financial effects.

➡ The wording in ESRS S1 is now consistently own ‘workforce’ and not own ‘workers’.

➡ In ESRS 2, the DR IRO-1 covers the process to identify and assess material impacts, risks and opportunities – and not the ‘processes’.

➡ On page 96, in Annex I, ESRS E1 ‘Climate change’, Appendix A ‘Application requirements’, paragraph AR 34, table, first column, last row, the total energy consumption (MWh) is calculated as the sum of lines 6, 7 and 11 (and not 6 and 11).

➡ On page 178, in Annex I, ESRS S1 ‘Own workforce’, paragraph 100, it is now specified that the company shall disclose ‘any related fines’ and not only ‘material’ fines.

➡ On page 217, in Annex I, ESRS S3 ‘Affected communities’, table of contents, DR S3-4, the correction specifies that it is about ‘managing’ material risks as opposed to ‘mitigating’ material risks.

⭕ You can download the corrections in English, French and Swedish here:

Corrigendum to the ESRS (en) >>
Rectificatif aux ESRS 19-04-2024 (fr) >>
Rättelse till ESRS 2024-04-19 (sv) >>

⭕ You are welcome to contact us if you need a solution and support to implement CSRD and ESRS reporting in your organization.

How to drive stronger valuations with sustainability disclosures

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Deloitte research: How to drive more cost-efficient access to capital, stronger valuations and earn investor trust with sustainability disclosures – an opportunity for corporate leaders.

Sustainable investing is the present, not the future.

Investors are increasingly incorporating sustainability factors into investment decisions:

⭕ 83% of surveyed investors incorporate sustainability information into fundamental analyses.

⭕ 79% of respondents have sustainability policies in place, compared to 20% five years ago.

⭕ Only 1% state they don’t have any plans to develop sustainable investing policies in the future – these results are consistent globally and across investor types.

Investors are seeking to minimize risks and capitalize on opportunity, with huge investments in global economic growth projected between 2021 and 2070 if the world economy transforms to achieve net-zero emissions.

They are looking for clear, consistent, evidence-based sustainability data and use ratings to gain a more comprehensive view of risk.

Despite growing demand for sustainability data, investors struggle with often inconsistent, unclear, and unreliable information:

❌ Unclear corporate sustainability strategies
❌ Incomparable data from ratings agencies
❌ Frequent lack of measurable outcomes from corporate reports

They believe regulations will ultimately clarify many of the data challenges investors face by bringing consistency and standardization to corporate sustainability disclosures.

Four actions that can help earn investor trust in corporate sustainability commitments:

➡ 1. STRATEGY & GOVERNANCE: Strengthen sustainable governance capabilities through greater coordination across the C-suite, to reliably execute on sustainability commitments.

➡ 2. SYSTEM SUPPORT: Invest in sustainability measurement, reporting systems, and compliance solutions to enable more robust, higher-quality disclosures.

➡ 3. ASSURANCE: Corroborate sustainability disclosures with third-party assurance. Investors trust assured disclosures as much as their own proprietary data.

➡ 4. ENGAGEMENT: Lead with investor engagement to address issues and foster transparency and accountability.

—

Deloitte and The Fletcher School at Tufts University embarked on a global study, executed between January and December 2023, to understand how companies can enhance investor trust in their sustainability disclosures.

The research was based on a survey of 1,000+ investors, including asset owners, asset managers, and investment advisers in North America, Europe, and Asia. The quantitative data was supplemented by 10 interviews with sustainability investors.

Source: How can the enterprise earn investor trust through sustainability disclosures?

CSRD, the north star of sustainability reporting – Harvard Law School Forum on Corporate Governance

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⭕ Why does Harvard Law School Forum on Corporate Governance write that CSRD is the north star of sustainability reporting?

➡ As CSRD represents the most comprehensive sustainability reporting framework to date, ambitious organizations beyond its scope of applicability will see it as their north star.

➡ The comprehensive double materiality approach for the European standard will largely fulfill the materiality requirements of other regulations.

➡ The expanded scope of CSRD – designed for use by a wider group of stakeholders beyond investors – means that EU companies with business ties in jurisdictions covered by ISSB that are already making CRSD-compliant disclosures (according to the European Sustainability Reporting Standards, ESRS), including those related to climate change, should in principle satisfy any non-EU requirements.

With mounting regulations, there is a clear imperative for companies to prepare in advance for legal compliance and, in equal measure, stakeholder expectations.

⭕ Priorities: where to start?

Strengthen sustainability governance.

Disclosures around procedures, controls and practices for the oversight and management of sustainability matters are central elements of both ESRS and the ISSB’s standards.

⭕ How can proactive companies take advantage?

Design one operating model to comply with multiple regulations, especially for companies captured by several regulatory regimes, with different phase-in requirements.

Design robust governance, processes and controls to support implementation, particularly as the quality of these is likely to be scrutinized under the applicable assurance engagements.

⭕ No regrets actions: early adoption vs regulatory imperative

The regulatory direction of travel is clearly towards increasingly robust sustainability reporting requirements.

Companies that act now will benefit from early progress towards looming reporting deadlines, avoiding potential delays caused by operational constraints.

Early adopters will benefit from additional time to understand their material topics and develop the appropriate metrics, processes and controls to report on those topics, with future assurance requirements in mind.

Early adopters will find it easier to retain and attract talent.

⭕ Achieving CSRD excellence

You are welcome to contact us if you need a solution to achieve sustainability strategy, governance and reporting excellence – to protect and grow your business.

 

Source: A Global Baseline? How to Navigate Interoperability Across Sustainability Reporting Rules

The EU CSDDD explained

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The Green Deal, EU’s growth strategy, sets out that all EU actions and policies should pull together to help the EU achieve a successful and just transition towards a sustainable future.

It also sets out that sustainability should be further embedded into the corporate governance framework.

The Corporate Sustainability Due Diligence Directive (CSDDD) is a key component of this strategy, along with the Corporate Sustainability Reporting Directive (CSRD).

CSRD is an “obligation to publish”, while CSDDD is an “obligation to act”. As such, they are complementary. Companies complying with CSRD will not need to report separately on due diligence, nor on its transition plan for climate change mitigation.

CSDDD in-scope companies, in short

  • EU companies with more than 1000 employees (calculated on a full-time equivalent basis) and a net worldwide turnover of more than 450 M€ in the last financial year
  • EU companies under franchising or licensing agreements in the EU, with royalties of more than EUR 22,5 million, provided that the ultimate parent company had a worldwide net turnover of at least 80 M€ in the last financial year
  • Non-EU companies, including ultimate parent company of a group that on a consolidated basis generated a net turnover of more than 450 M€ in the EU in the last financial year
  • Ultimate parent companies are jointly liable with their subsidiary for a failure of the latter to comply with its CSDDD obligations

Entry into force

  • 2027: > 5 000 employees and > 1 500 M€ net worldwide turnover
  • 2028: > 3 000 employees and > 900 M€ net worldwide turnover
  • 2029: > 1 000 employees and > 450 M€ net worldwide turnover

Due diligence obligations

Companies shall conduct risk-based human rights and environmental due diligence by carrying out the following actions – coherent with the six steps defined by the OECD Due Diligence Guidance for Responsible Business Conduct:

  • Integrate due diligence into their policies and risk management systems in accordance with Article 5.
  • Identify and assess actual or potential adverse impacts in accordance with Article 6 and, where necessary, prioritise potential and actual adverse impacts in accordance with Article 6a.
  • Prevent and mitigate potential adverse impacts, and bring actual adverse impacts to an end and minimize their extent in accordance with Articles 7 and 8.
  • Provide remediation to actual adverse impacts in accordance with Article 8c.
  • Carry out meaningful engagement with stakeholders in accordance with Article 8d, in particular to gather the necessary information on actual or potential adverse impacts.
  • Establish and maintain a notification mechanism and complaints procedure in accordance with Article 9.
  • Monitor the effectiveness of their due diligence policy and measures in accordance with Article 10.

And:

  • Publicly report on due diligence in accordance with Article 11, by publishing on the website an annual statement, or by complying to sustainability reporting requirements under CSRD. From 2029, companies need to make the reporting digitally accessible on the European Single Access Point (ESAP)
  • Retain documentation regarding the actions adopted to fulfill their due diligence obligations for the purpose of demonstrating compliance, including supporting evidence, for at least 5 years or as long as there is an ongoing judicial or administrative proceeding under the CSDDD.

The company shall

  • Take appropriate measures to identify and assess actual and potential adverse impacts arising from their own operations or those of their subsidiaries and, where related to their chains of activities, those of their business partners.
  • Map their own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in order to identify general areas where adverse impacts are most likely to occur and to be most severe.
  • Based on the results of that mapping, carry out an in-depth assessment of the own operations, those of their subsidiaries and, where related to their chains of activities, those of their business partners, in the areas where adverse impacts were identified to be most likely to occur and most severe.
  • Prioritise requesting such information, where reasonable, directly from business partners where the adverse impacts are most likely to occur.

As a last resort, company shall be required to refrain from entering into new or extending existing relations with a business partner in connection with or in the chain of activities of which potential adverse impacts has arisen that could not be prevented or adequately mitigated.

Scope of responsibility, in short

The CSDDD contains a risk-based approach: an in-scope company has the obligation to take measures if it is directly responsible for the CSDDD-risks and actual impacts.

Otherwise, the responsibility extends to a general duty of care of the in-scope company.

The CSRD applies to a company’s value chain whereas the CSDDD applies to a company’s ‘chain of activities’ meaning:

  • activities of a company’s upstream business partners related to the production of goods or the provision of services by the company,
  • including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or the service, and
  • activities of a company’s downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

The CSDDD does not cover the disposal of the product, nor the activities of a company’s downstream business partners related to the services of the company.

Combating climate change (article 15)

Companies shall adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the:

  • transition to a sustainable economy
  • limiting of global warming to 1.5 °C in line with the Paris Agreement
  • objective of achieving 2050 climate neutrality targets.

The transition plan shall be updated every 12 months and include a description of the progress the company has made towards achieving the targets.

Companies that report a transition plan for climate change mitigation in accordance the sustainability reporting requirements under CSRD shall be deemed to have complied with the adoption obligation.

The design of the transition plan referred to in the first subparagraph shall contain:

  • time-bound targets related to climate change for 2030 and in five-year steps up to 2050 based on conclusive scientific evidence and including, where appropriate, absolute emission reduction targets for greenhouse gas for scope 1, scope 2 and scope 3 greenhouse gas emissions for each significant category;
  • a description of decarbonisation levers identified and key actions planned to reach targets referred to under point (a), including where appropriate changes in the undertaking’s product and service portfolio and the adoption of new technologies;
  • an explanation and quantification of the investments and funding supporting the implementation of the transition plan;
  • a description of the role of the administrative, management and supervisory bodies with regard to the plan.

System of control, penalties and liability

  • An administrative supervision and sanctions, including “naming and shaming” and maximum penalties of not less than 5% of the net worldwide turnover of the company in the financial year preceding the fining decision (article 20).
  • Strong possibilities for civil enforcement, as in-scope companies will be liable for damages caused by a breach of their obligations under the CSDDD (article 22).

An in-scope company can be held liable for damages caused to a natural or legal person, provided that the in-scope company intentionally or negligently failed to comply with the obligations under the CSDDD, and as a result of such failure to comply, damages to the natural or legal person’s legal interest protected under national law was caused.

An in-scope company cannot be held liable if the damage was caused only by its business partners in its chain of activities.

You are welcome to contact us if you need to put a policies and risk management system in place to comply with – and report on – CSDDD and CSRD.

Source: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:ST_6145_2024_INIT

#getCSRDready, #CSRD, #ESRS, #CSDDD, #ESG, #Strategy, #Governance, #SustainabilityReporting, #Digitalisation, #Cleerit

The U.S. Securities and Exchange Commission (SEC) adopted rules for climate-related disclosures

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After a two-year delay and intense political debates, the U.S. Securities and Exchange Commission (SEC) – Wall Street’s top regulator – has today adopted rules for climate-related disclosures by public companies and in public offerings.

The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a company’s operations and how it manages those risks, while balancing concerns about mitigating the associated costs of the rules.

The final rules will, among other information, require a company to disclose:

⭕ Climate-related risks that have had or are reasonably likely to have a material impact on the company’s business strategy, results of operations, or financial condition – including the material impacts of such risks on the company’s strategy, business model, and outlook;

⭕ Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the company’s material climate-related risks;

⭕ Any processes the company has for identifying, assessing, and managing material climate-related risks and, if the company is managing those risks, whether and how any such processes are integrated into the company’s overall risk management system or processes;

⭕ For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions – including an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;

⭕ The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;

⭕ The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a company’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and

⭕ If the estimates and assumptions a company uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

Source: SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors

Option to omit information if you are less than 750 employees

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Companies or groups with less than 750 employees do not have to report on these ESRS standards for the first 2 years of preparation of their sustainability statement under CSRD:

➡ E4 Biodiversity and ecosystems
➡ S1 Own workforce
➡ S2 Workers in value chain
➡ S3 Affected communities
➡ S4 Consumers and end-users

But does that mean that it’s ok to forget about these standards for 2 years?

The answer is no.

Especially if the company has identified actual or potential adverse impacts related to the topics covered by these five standards.

Under ESRS 2 (17), the company still needs to report the list of matters covered by these standards in AR 16 ESRS 1 Appendix A, that have been assessed to be material as a result of the company’s materiality assessment.

For each material matter, the company also needs to report a brief description of:

⭕ how the company’s business model and strategy take account of the impacts of the company related to those matters;

⭕ any time-bound targets the company has set related to the matters in question;

⭕ the progress it has made towards achieving those targets;

⭕ whether its targets related to biodiversity and ecosystems are based on conclusive scientific evidence;

⭕ the company’s policies in relation to the matters in question;

⭕ the actions the company has taken to identify, monitor, prevent, mitigate, remediate or bring an end to actual or potential adverse impacts related to the matters in question;

⭕ the result of such actions;

⭕ the metrics relevant to the matters in question.

You are welcome to contact us if you need help to get started

With Cleerit ESG you get collaborative platform tailored to each user profile, so that you can work together while preparing to get CSRD-ready.

Every single ESRS disclosure point has been digitized – to help you navigate the standards, learn, prepare and create your first CSRD report.

We look forward to helping you get CSRD-ready.

Ready to disclose your climate-related risks under CSRD?

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Climate change risk assessment is a challenge we need to master under CSRD, as global economic losses from disasters are increasing, and insurers are starting to get cold feet.

ESRS E1 (AR 11) requires the company to explain:

➡ whether and how it has identified climate-related hazards, and screened whether its assets and business activities may be exposed to these hazards;

➡ whether and how this screening has been informed by high emissions climate scenarios such as “Hot house world” or “Too little, too late”;

➡ whether and how it has taken into consideration the likelihood, magnitude and duration of the hazards, as well as the geospatial coordinates specific to the company’s locations and supply chains.

We have 3 years to learn to quantify these risks in monetary amounts, but we need to qualify and disclose on them from year one in the CSRD report.

A recent study showed that only 46% of all large companies currently assess, quantify and publish (or declare that they take into account) their physical climate risks – and 78% do not include their climate transition risks.

This is a real challenge. It will be a key area of scrutiny for the financial market and insurers, as there has been a sevenfold increase in reported losses from climate disasters since the 1970s.

Extreme weather is causing loss of property, destruction of assets and business interruptions, with financial effects hitting our businesses.

Storms have been responsible for 33% of the climate costs, heatwaves for 16% and floods and droughts for 10%.

⭕ To get your climate-related physical risks under control, you need to create a register with all your physical assets (offices, factories, warehouses, etc.) and indicate the GPS coordinates for each location.

⭕ When you’ve come this far, there are easy-to-use tools and science-based data available to help you get the overview you need to understand, manage and disclose on your climate-related physical risk exposure in your CSRD-report.

You are welcome to contact us if you need help to get started.

Public consultation on the Draft ESRS Set 1 and art 8 XBRL Taxonomy

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As members of the EFRAG Digital Community, we have been asked to help spreading the news that EFRAG has today opened its public consultation on the ‘Draft ESRS Set 1 XBRL Taxonomy’, as well as on the draft XBRL Taxonomy for Article 8 disclosures.

The digital taxonomies enable the marking up (‘tagging’) of sustainability reporting in machine-readable XBRL format.

The consultation period will run until 8 April 2024, and EFRAG invites all stakeholders to provide comments through online consultation questionnaires.

The purpose of the consultation is to receive feedback from constituents on the proposed draft version of the Taxonomy.

The feedback will be considered by EFRAG in the finalization of this deliverable and, when appropriate, adjustments will be made in the final version of the Taxonomy.

EFRAG is consulting on the most appropriate approach to transpose the content of the ESRS into a digital format.

EFRAG is not consulting on the content of the ESRS itself, their structure and the articulation of disclosures in datapoints in those standards.

➡ How to provide feedback on the Draft XBRL ESRS Set 1 Consultation Document

Comments need to be received by 8 April 2024 by completing the questionnaire available here >>.

All comments will be on the public record and posted on EFRAG’s website at www.efrag.org unless the respondent requests confidentiality.

Provisional EU agreement on ESG rating activity regulation

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The EU has reached a provisional agreement on a proposal for a regulation on environmental, social and governance (ESG) rating activities.

The objective is to boost investor confidence in sustainable products.

ESG ratings have an increasingly important impact on the operation of capital markets and on investor trust in sustainable products.

The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of ESG ratings providers and preventing potential conflicts of interests.

⭕ Under the new rules, ESG rating providers will need to be authorized and supervised by the European Securities and Markets Authority (ESMA) and comply with transparency requirements, in particular with regard to their methodology and sources of information.

⭕ The agreement clarifies that ESG ratings encompass environmental, social and human rights or governance factors.

⭕It foresees the possibility to provide separate E, S and G ratings. However, if a single rating is provided, the weighting of the E, S and G factors should be explicit.

ESG risks are drivers of traditional financial risks, so ESG factors are not new to credit assessments.

According to Fitch, ESG considerations have been themes of credit analysis for many years, but until recently have not drawn specific attention.

➡ We are just learning how to change the lens through which we look at companies.

The European Banking Authority’s June 2021 report states that “ESG risks can also impact the financial system and economy as a whole, with potential systemic consequences”.

Fitch underlines that this illustrates why ESG is so pertinent in the credit world today.

Fitch also reminds us that “governance is key”, and has always been of fundamental importance in the credit decision process.

➡ “Governance overall is the most dynamic ESG factor from a credit perspective. Poor governance could severely impact aspects of a company’s risk profile.”

The paper concludes that “it is therefore of critical importance for companies to take a strategic view of governance factors and risks, and incorporate these widely into their long-term planning”.

Therefore, it comes as no surprise that the EU, CSRD and the reporting standards ESRS, focus so much on governance and risk management.

➡ If you are aiming for a good ESG and credit rating, get your IROs (impacts, risks & opportunities) under control.

Sources: EU Press release and FitchLearning

CSRD-readiness assessment for Top Management & Board

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Are you ready to assume personal responsibility under CSRD?

Do you have skills, processes, systems, policies, action plans and allocated resources in place to oversee sustainability impacts, risks and opportunities?

How do you oversee the setting of targets related to material sustainability impacts, risks and opportunities (IROs), and how do you monitor progress towards them?

Your company will have to answer these questions, and many more, when you fill in ESRS 2, mandatory for all companies subject to CSRD. Here are some examples.

The undertaking shall disclose:

⭕ the identity of the management and supervisory bodies (such as a board committee or similar) or individual(s) within a body responsible for oversight of IROs. (ESRS2.22.a)

⭕ how each body’s or individual’s responsibilities for IROs are reflected in the undertaking’s terms of reference, board mandates and other related policies. (ESRS2.22.b)

⭕ a description of management’s role in the governance processes, controls and procedures used to monitor, manage and oversee IROs, incl whether dedicated controls and procedures are applied to the management of IROs and, if so, how they are integrated with other internal function. (ESRS2.22.c.iii)

⭕ how the management and supervisory bodies and senior executive management oversee the setting of targets related to material IROs, and how they monitor progress towards them. (ESRS2.22.d)

⭕ a description of how the management and supervisory bodies determine whether appropriate skills and expertise are available or will be developed to oversee sustainability matters, incl how those skills and expertise relate to the undertaking’s material IROs (ESRS2.23.b)

⭕ including whether the bodies and/or its members have access to other sources of expertise, such as specific experts and training and other educational initiatives to update and develop sustainability-related expertise within these bodies. (ESRS2.AR5)

A recent assessment of large companies in France carried out by the leading network of entrepreneurs in France, MEDEF, together with Deloitte and EY showed that:

➡ Not even half of the companies publish (or declare that they take into account) the analysis of at least one climate scenario and quantify their climate risks – and 4 out of 5 do not include climate transition risks.

➡ Only 31% publish water consumption reduction targets, 13% declare the number of production sites located in or near sensitive areas in terms of biodiversity, 30% have formalized objectives related to the circularity of products and their packaging.

➡ Only 53% publish indicators related to the gender pay gap of their employees at group level, and 8% provide information to compare low wages to decent wages.

❓ Do you still manage ESG performance with Excel? (Do you also manage your financial performance with Excel…?)

You are welcome to contact us to get CSRD-ready with robust Sustainability Strategy, Governance, Performance Management and Reporting capabilities.