This has been said time and time again, but we want to insist again because we too often see managers make mistakes without necessarily understanding the consequences.

You own your DMA, it is your responsibility.

The proposed International Standard on Sustainability Assurance, ISSA 5000, explains that materiality is a user-driven concept, focused on the users of the information you will publish – your stakeholders.

A sustainability topic (including omissions of information on such topics), is considered material if, individually or in the aggregate, it could reasonably be expected to influence decisions of intended users taken on the basis of your information.

In other words, if I had known this, would it have influenced my decision to invest, purchase or work in your company…?
Your opinion is important, but it is secondary.

You have to put yourself in the shoes of those who finance your business, buy your products and services, get up every day to go to work for you…

In short, everyone who is affected by what you do – including nature, which is a silent stakeholder needing to be protected and spoken for.

Obligation to act vs. obligation to publish

The EU CSDDD will be an obligation to act – and a minimum safeguard to be able to claim to be aligned with the green taxonomy.
The CSRD and ESRS standards are an obligation to PUBLISH, not to act.

It is the transparency, for the benefit of your stakeholders, that is important. Your stakeholders will then be able to make informed decisions.

Not publishing detailed information about your specific negative impacts and risks connected to sustainability topics, as defined in the ESRS, will be as serious as deciding not to publish the Liabilities page of your balance sheet just because you don’t like to disclose that you have debts.

This information can no longer remain confidential for internal use – even, and especially, if it risks influencing your stock quote.
It’s that simple, and it’s going to take some getting used to. Just as we have become accustomed to publishing financial statements.

To avoid falling into traps, do not hesitate to contact us. The digital templates integrated into the Cleerit ESG solution will guide you, and we will be by your side throughout the process.

#getCSRDready, #CleeritESG

EFRAG has started working on a program that will lead to the issuance of approximately 40 Sector-specific ESRS Standards

The primary focus will be addressing high-impact sectors first.

Given the importance of financial institutions and their role in sustainable finance, these sectors will also be developed in parallel.

EFRAG will put in consultation in 2024 the general approach to sector ESRS and the ESRS Sector classification approach.

The general idea discussed is that companies will have to apply a sector standard for activities that:

(a) generate revenues above 10 per cent of the revenues of all their activities; or

(b) for activities that are connected with material actual or potential negative impacts.

The application of these requirements may result in companies having to apply more than one sector standard.

During a meeting on January 15, EFRAG discussed a draft list of ESRS sectors:

• Agriculture, Farming and Fishing
• Forestry
• Construction and Engineering
• Power Production and Energy Utilities distribution
• Water and Waste Services
• Gaming
• Recreation and Leisure
• Capital Markets
• Credit Institutions
• Insurance
• Health Care and Services
• Accommodations
• Food and Beverage Services
• Construction Materials
• Chemical Products
• Construction and Furnishing
• Defence
• Electronics and electrical equipment
• Food and Beverages
• Machinery and Equipment
• Medical Instruments
• Metal Processing
• Motor Vehicles
• Paper and Wood Products
• Pharma and Biotechnology
• Sporting Equipment and Toys
• Textiles, Accessories, Footwear and Jewelleries
• Tobacco
• Mining, Quarrying and Coal
• Oil and Gas
• Real Estate and Services
• Sales and Trade
• Education
• Marketing
• Professional Services
• Information Technology
• Media and Communication
• Other Transportation
• Road Transport

Source: EFRAG

Yesterday (10/1) EFRAG approved the release for a 60-day public consultation of the draft XBRL taxonomy of the ESRS, including the Article 8 digital taxonomy.

After this consultation period, it plans to issue its final advice in the second half of 2024 in the form of a technical recommendation to the European Commission.

The European Securities and Markets Authority (ESMA) is responsible for developing the draft Regulatory Technical Standards (RTS) on ESEF, that regulates the implementation (i.e. timing, level of tagging) and relies on the taxonomy prepared by EFRAG.
ESMA will also consult on the final digitalisation rules and effective date.

The EU legal process then requires that EC shall adopt a delegated act [RTS] as an amendment of ESEF regulation (Reg. 2019/815 UE) on the basis of the [Draft] RTS proposed by ESMA.

This means that we will not have the formal XBRL rules for yet some time, but we have the working assumptions in the meantime.
If you use Cleerit ESG to prepare your ESRS report you will be well prepared, as the digital templates are based on these working assumptions.

The ESRS digital taxonomy reflects the human-readable version of the ESRS, and includes a set of individual tags to translate in digital requirements the content of ESRS.

The Draft ESRS XBRL Taxonomy can be explored with an XBRL software, or with the Excel file that provides a human-readable illustration.

However, the Excel file will not be used itself to digitally tag ESRS reports. CSRD requires digitalisation of sustainability reporting.

While tagging of quantitative monetary and non-monetary data points is straightforward, designing the optimal tagging for the narrative disclosures requires more attention.

It is worth noting that, differently from financial reporting, where narrative information in most of the cases accompanies and provides context to a quantitative data point, in sustainability reporting narrative statements are in most cases not explanatory of quantitative information, but they are qualitative data points themselves.

And the majority of the data points in ESRS are narrative, so learning to collect, “consolidate” and manage narrative disclosures will be necessary.

An important part of the ESRS taxonomy are the many “Boolean” XBRL elements, used for questions requiring a positive or negative confirmation (the “whether” in the “whether and how” questions).

The boolean gives the advantage to convert the statement into Yes or Not instead of narrative textblock disclosure. This also makes it easy to construct standardized ratings to compare company performance.

If you are not yet ready to manage digital ESRS reporting, you are welcome to contact us to book a demo.

Source: https://efrag.org/Meetings/2311031439057869/EFRAG-SRB-meeting-10-January-2024-?AspxAutoDetectCookieSupport=1

A recent assessment of 100 large companies in France, shows that the road is bumpy and that there is still a lot of work to do:

➡ 83% of the assessed companies present a materiality analysis, but only 14% publish a “double materiality” analysis following the requirements as defined by ESRS 1.

➡ 73% have defined decarbonization objectives validated by the SBTi, but only 17% detail the different decarbonization levers allowing them to achieve their objectives, as required by ESRS E1.

➡ 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.

➡ Less than 10% have defined pollution objectives, only 31% publish water consumption reduction targets and only 13% declare the number of production sites located in or near sensitive areas in terms of biodiversity.

➡ Only 30% have formalized objectives related to the circularity of products and their packaging but 51% declare waste management objectives.

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

The carbon tunnel vision is not helpful

This assessment of large companies in France, shows what we all already suspected: there is a long way to go – both to grasp the holistic vision of the ESRS framework, and to get organized around these reporting requirements.

Many still think that CSRD is mostly about reporting on GHG emissions, and this carbon tunnel vision is not helpful.

Reducing emissions remains a key challenge, but the fact is that even in the ESRS E1 Climate change standard less than 20% of the disclosure points are about reporting on emissions.

Strategy, governance, processes, climate change resilience, and climate-related impacts, risks & opportunities are very much in focus. It is as much about preparing for a different future, and future-proof our businesses, as it is about mitigating climate change.

A game-changer for corporate accountability

CSRD and ESRS are a game-changer for corporate accountability, in the EU and globally. It is not just about a report to fill in, it’s a new way of governing that will take several months – even years – to prepare.

The best time to get started was yesterday. The next best time is today.

With ESRS the devil is in the detail

Step one is understanding – in detail – what will be expected.

This can be done by navigating and learning the standards – every single disclosure point (approx. 990 in ESRS, whereof approx. 250 metrics, subject to materiality assessment).

The CSRD-compliant and ESRS-ready Sustainability Strategy, Governance & Reporting SaaS solution Cleerit ESG – with every single disclosure point digitized – helps you navigate the standards, learn and prepare – to get CSRD-ready.

Download the full article here >>

Under CSRD & ESRS, conducting stakeholder surveys to define what sustainability matters are material to your organization is no longer fit for purpose. Nor is a narrow focus on data collection.

Stakeholder concerns and evidence of actual and potential impacts are now in focus, not ranking the relative importance of different sustainability matters.

ESRS is process oriented. Numerical data only account for 30% of the disclosure requirements.

70% of ESRS is about contextual narrative disclosure, and more than 40% of the disclosures require accounting for policies, targets and actions for material topics, according to detailed Minimum Disclosure Requirements (MDR).

The material topics are to be found in the list of 92 topics provided in ESRS 1 (AR 16) that the company shall consider, together with entity-specific material topics.

When asked, “from a data collection point of view, how should business adapt to meet the requirements of mandatory regulations?”, Chiara Del Prete (Sustainability Reporting TEG Chair EFRAG), answered:

“I wonder whether collection of data is entirely capturing the transformational element of what we are trying to achieve in terms of direction of travel.”

“To the extent that they have policies, targets and actions in place to identify, mitigate, prevent and account for their impacts on people and environment – those data will be the same as those we would like to see coming into reports.”

“This is to say that there is much more than collection of data.”

CSRD & ESRS support the European Green Deal – a new growth strategy that aims to transform the Union into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.

In 2022, McKinsey estimated that to reach net zero emissions, an additional $3.5 trillion a year must be invested in physical assets for energy and land-use systems until 2050.

That is the greatest reallocation of capital in history.

So, surveys and data collection will not be enough. Building awareness, skills and transparency – and closing the gap between sustainability, strategy and execution – will be key to success.

Exit stakeholder questionnaires. Enter robust due diligence processes.

Exit narrow focus on data collection. Enter efficient risk management and strategic plans supported by evidence, actions & resources and KPIs.

And, exit manual spreadsheets and glossy ESG-brochures.

Enter holistic, inclusive, fit-for-purpose system support supporting both sustainability strategy and reporting.

Reporting is necessary, but if we are looking to transform, reporting is only a means to an end, not the end.

In this section and on our LinkedIn page, we publish information aimed at helping you prepare for CSRD and learn to navigate the sustainability reporting framework ESRS.

As with other important legislative acts, ESRS is a new code for sustainability reporting with the EU taking the lead and likely becoming the template for many countries outside the bloc – at least for companies keen to show the world that they have state-of-the-art sustainability commitments.

We have analyzed and digitized the entire ESRS framework and count approx. 1000 disclosure points whereof 30% are metrics and 70% are narrative disclosures.

What you will have to report is subject to materiality assessment – and you will also be invited to disclose your own indicators, in addition to those already listed in the ESRS – so the number of disclosure points will be different for different companies.

But one thing is clear, it will take you at least a year to prepare, so don’t wait, get started now.

There are different types of Disclosure Points

➡ Processes, mechanisms and policies expected to be in place

ESRS lists a certain number of processes, mechanisms and policies, and asks you whether you have them in place or not.

Here you can only answer Yes or No. If you answer yes, you will be invited to describe How.

If you answer Yes without this being true, it will be as unlawful as stating that you do not have any outstanding debts in your balance sheet if you do.

And this will not go unnoticed since your report will be integrated into the annual report and needs to be audited.

➡ Impact, risk and opportunity management

ESRS also asks you to list and describe your material sustainability impacts, risks and opportunities, based on a list of topics, as well as the related policies, targets, actions plans, resources and metrics you have in place to manage these.

You will need to describe this as required by the Minimum Disclosure Requirements set out in ESRS 2 sections 4.2 and 5.

Basically, it means that you need to describe what you do, why you do it, who is responsible, when it’s happening, what resources you allocate for goal reaching, and how you are progressing.

Transparency is a key driver for change and the legislator knows that. So here there is no room for cheating if you do not want to risk being accused of greenwashing.

➡ Metrics

Finally, there are the metrics to show the world how you are progressing. But that’s actually the easy part. And they account for only 30% of all disclosure points.

With ESRS, the devil is in the detail. That’s why we regularly analyze detailed disclosure points

First out in our new series “CSRD & ESRS – How to comply and get high extra-financial ratings” was a close-up on the ESRS metric S1.97.b “Total remuneration ratio”, or “CEO employee pay ratio” or “Excessive CEO pay ratio” as it’s sometimes called.

We had a look at why it’s important, how it’s interpreted and how to set a sustainable target. You can read about it here >>

So, stay tuned and follow our LinkedIn page >>