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 >>

France has transposed the CSRD into its national law, becoming the first EU member state to do so (the deadline for member states is July 2024).

CSRD puts sustainability reporting and governance processes at the top of the agenda. Do you have a system in place to meet these new requirements?

According to French law, the new article L. 821-2 in the trade code states that the auditor shall follow

• the process of developing sustainability information (including in its future digital form)
• the process implemented to determine the information to be published in accordance with the standards for reporting on sustainability (the double materiality assessment).

Where appropriate, the auditor shall make recommendations to ensure the integrity of these processes.

The French corporate governance report must now also contain a description of the main characteristics of the company’s internal control and risk management systems as part of the financial reporting process.

In addition, the disclosure requirement GOV–5 in ESRS 2 mandates the company to describe:

• the scope, main features and components of the risk management and internal control processes and systems in relation to sustainability reporting
• the risk assessment approach followed, including the risk prioritisation methodology
• the main risks identified and their mitigation strategies including related controls
• a description of how the company integrates the findings of its risk assessment and internal controls as regards the sustainability reporting process into relevant internal functions and processes – including
• a description of the periodic reporting of these findings to the administrative, management and supervisory bodies.

If you have not yet set up a system to manage these new obligations, do not hesitate to contact us. The Cleerit ESG solution will get you compliant in just a few days for only €65 per month and user.

The CSRD has been transposed into French law (2023-1142 dated 6/12/2023). It replaces the previous non-financial reporting rules (“DPEF” in France), and the French “SAS” companies are now also included in the scope of the directive.

This obligation responds to the growing need for sustainability information expressed by financial institutions and many other stakeholders, including customers, social partners, public authorities and non-governmental organizations.

The required information will represent a strong incentive for companies to take virtuous actions in the areas concerned.

In the event of non-compliance

A person who has been unable to obtain the sustainability report from a company will have the right to ask the president of the court, ruling in summary proceedings under penalty, to order the company to communicate the report. Procedural costs, where applicable, will be charged to the company.

Economic actors who do not meet their obligation to publish a sustainability report will also be excluded from public procurement procedures and concession contracts.

Mandatory audit

The directive mandates that the sustainability report be audited, initially with limited assurance (i.e. covering the absence of material misstatement).

Previously, the auditor simply had to verify the presence of the “DPEF” in the management report, without controlling its content.

The certification report must be communicated to the shareholders within six months from the closing of the financial year.

A director of a legal person or entity required to have its sustainability report certified, is punishable by imprisonment of 2 years and a fine of 30,000 euros, if an independent third party organization registered on the list of professionals authorized to carry out the sustainability audit has not been appointed.

Obstructing the verification, or refusing to communicate on site all documents useful for carrying out the audit mission, is punishable by imprisonment of 5 years and a fine of 75,000 euros.

French text:

La CSRD est désormais transposée en droit français par l’ordonnance no 2023-1142 du 6/12/2023. Elle remplace les règles relatives à la DPEF, et les sociétés par actions simplifiées sont intégrées dans le champ de la directive.

Cette obligation répond au besoin croissant d’informations en matière de durabilité exprimé par les institutions financières et par de nombreuses autres parties prenantes, dont les clients, les partenaires sociaux, les pouvoirs publics et les organisations non-gouvernementales.

Les catégories d’informations demandées représentent ainsi une incitation forte pour les sociétés concernées à engager des actions vertueuses dans les domaines concernés.

En cas de non-conformité

Toute personne n’ayant pu obtenir la production, la communication ou la transmission des documents ou informations prévus, aura le droit de demander au président du tribunal statuant en référé soit d’enjoindre sous astreinte à la personne ou à l’organe compétent pour la production, la communication ou la transmission des documents ou informations de les communiquer, soit de désigner un mandataire chargé de procéder à cette communication.

Les frais de procédure sont, le cas échéant, mis à la charge de la personne ou de l’organe compétent.

Est également introduit dans la partie législative du code de la commande publique un nouveau dispositif d’exclusion des procédures de passation des marchés publics et des contrats de concession pour les opérateurs économiques qui ne satisfont pas à leur obligation de publication d’informations en matière de durabilité.

Audit obligatoire

La directive prévoit également que les informations en matière de durabilité publiées soient obligatoirement auditées, dans un premier temps, selon une norme d’assurance limitée – c’est-à-dire portant sur l’absence d’anomalie significative.

Auparavant, le commissaire aux comptes devait simplement vérifier la présence de la DPEF au sein du rapport de gestion, sans en contrôler le contenu.

Le rapport de certification doit être communiqué aux associés dans le délai de six mois à compter de la clôture de l’exercice comptable.

Est puni d’un emprisonnement de deux ans et d’une amende de 30 000 euros le fait, pour tout dirigeant d’une personne morale ou entité tenue de faire certifier ses informations en matière de durabilité, de ne pas provoquer la désignation d’un organisme tiers indépendant inscrit sur la liste des professionnels autorisés à procéder à l’audit de durabilité.

Est puni d’un emprisonnement de cinq ans et d’une amende de 75 000 euros le fait de mettre obstacle aux vérifications ou de refuser la communication sur place de toutes les pièces utiles à l’exercice de la mission d’audit.

Source : https://www.legifrance.gouv.fr/download/pdf?id=fOTM7ilGbxcYwc159WYE-xxp0eSIBFgHonwOt6OlvQA=

In a vote in the European Parliament on 18 October, MEPs reaffirmed the commitment to the European Sustainability Reporting Standards (ESRS), mandatory under the Corporate Sustainability Reporting Directive (CSRD), which will apply from January 2024 onwards as initially planned.

With over 90% of the commitments made in the 2019 Political Guidelines delivered, the EU Commission also reaffirmed the commitment to reduce reporting requirements by 25%, in line with the strategy to boost the EU’s long-term competitiveness and to provide relief for SMEs, without undermining the policy objectives of the concerned initiatives.

Examples of the expected simplifications include:

➡ A 2-year delay of the date of adoption of the sector-specific ESRS, currently required in 2024, to allow companies to focus on the implementation of the first set of sector-agnostic ESRS adopted on 31 July 2023.

➡ A 2-year delay of the date of adoption of the ESRS to be used by certain non-EU companies with business in the Union.

Considering that the reporting requirements for these non-EU companies only apply from financial year 2028, this will allow more resources to be dedicated to the development of effective and proportionate sector-specific ESRS, while still giving enough time for these non-EU companies to prepare ahead of financial year 2028.

➡ An increase in the size criteria in the Accounting Directive by 25% to account for the effects of inflation. This would reduce the scope of application of the presentation, audit and publication requirements for financial statements, and also the scope of application of the CSRD and the EU Taxonomy Regulation (Art. 8).

The classification of companies into “micro”, small”, “medium” or “large”, is based on meeting two out of three size criteria: two monetary size criteria, the “balance sheet total” and “net turnover”, and the average number of employees.

Over a period of 10 years from 1 January 2013 to 31 March 2023, the cumulated inflation reached 24.3% in the euro area and 27.2% for the EU27.

Initially, all large EU companies meeting two of the following three criteria: more than 250 employees, a net turnover exceeding €40m and/or a balance sheet total exceeding €20m, were required to report according to ESRS for financial year 2025 at the latest (report due in 2026).

With this adjustment, the monetary size criteria will to increase to a net turnover exceeding €50m and/or a balance sheet total exceeding €25m.

Source: IMMC.COM%282023%29596%20final.ENG.xhtml.1_EN_ACT_part1_v5.docx (europa.eu)

CSRD is about future-proofing your business.

ESRS is where sustainability meets strategy and sets the stage for real transformation and profitable business.

The European Sustainability Reporting Standards, ESRS, mandatory for companies subject to CSRD, specify the information that the company shall disclose to allow for readers to understand its material impacts on people and environment, and the material effects of sustainability matters on the company’s development, performance and position.

Future-proofing is the process of anticipating the future and developing methods of minimizing the effects of shocks and stresses of future events – on the company’s development, performance and position.

The ESRS strategy disclosure requirements, SBM, focus on how the company’s strategy and business model interact with, and addresses, its material sustainability impacts, risks and opportunities.

• The term “impacts” refers to positive and negative, actual or potential, sustainability-related impacts that are connected with the company’s business, as identified through an impact materiality assessment.
• The term “risks and opportunities” refers to the company’s sustainability-related financial risks and opportunities, including those deriving from dependencies on natural, human and social resources, as identified through a financial materiality assessment.

But, it’s not only about mitigating adverse impact and risks, it’s also about pursuing new opportunities, as laid out in EU’s new growth strategy the Green Deal.

What does ESRS say about opportunities?

To start with, when reporting on material opportunities, the reader should be able to understand if the opportunity is currently being pursued and is already incorporated in the company’s own general strategy, or if it is just general opportunity for the company or the sector it operates in. (ESRS-1.109)

ESRS also lists 5 opportunity levers the company can consider: Resource efficiency, Markets, Financing, Reputation and Resilience.

Resource efficiency, e.g.,

• Transition to more efficient services and less resource-intense processes.
• Decrease quantities of substances used or improve efficiency of production process to minimise impacts.
• Eco-design for longevity, repair, reuse, recycle, by- products, take-back systems, decoupling activity from extraction of materials, intensifying circular material use, creation of a system that allows for dematerialization (e.g., digitisation, improving utilisation rates, weight reduction).
• Practices to ensure products and materials are collected, sorted, and reused, repaired, refurbished, remanufactured.

Markets, e.g.,

• Development of less resource-intense products and services.
• Diversification of business activities.
• Demand for less resource-intense products and services, and new consumption models such as product-as- a-service, pay-per-use, sharing, leasing.

Financing, e.g.,

• Access to green funds, bonds or loans

Reputation, e.g.,

• Positive stakeholder relations and engagement as a result of a proactive stance on managing risks.
• Preferred partner status.

Resilience, e.g.,

• Diversification of resources and business activities (e.g., start a new business unit to recycle new materials)
• Investing in green infrastructures
• Adopting recycling and circularity mechanisms that reduce dependencies.
• Increase the capability to safeguard future stocks and flows of resources.

ESRS is as much about strategy as it is about reporting, so you will need CSRD-ready sustainability strategy & reporting digital support to succeed.

What better way to start than to see ESRS on your screen, fully digitized? Ready to navigate, learn, share and get ready.

The science-based SaaS solution Cleerit ESG helps you

• factor in risk exposure,
• identify, assess and manage material topics,
• unlock the potential of your materiality assessments,
• cascade ambitious targets and
• create actionable roadmaps for strategic success –
• while preparing CSRD and
• automating your sustainability reporting with ESRS-ready templates.

And secure, modern SaaS technology makes it all easy and affordable.

You have rarely had such a high Return On Investment. Why wait?