The Evolution of ESG: Mandatory Reporting

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by Aaroshi Rathor
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Investors, stakeholders, customers, and organisations have been discussing environmental, social, and governance (ESG) issues extensively. While some think that huge corporations are using ESG as another greenwashing strategy, others understand it is indeed a crucial step in the direction of sustainability. ESG can no longer be disregarded. 

With ESG as a central tenet of the economy, the legislative mechanisms necessary to operate it are now taking shape. ESG reporting and disclosure used to be restricted to large organisations that met specific criteria, including public corporations or market-listed companies. All publicly traded companies within the European Union (EU) will now be required to disclose their sustainability reports as part of the new mandatory ESG reporting requirements. 

Why Do We Need Mandatory Reporting? 

ESG has become prevalent in many different industries, from tech companies and sustainable finance corporations, sustainable fashion. Yet, under the guise of environmental sustainability, many businesses have continued to expand greenwashing activities. For example, Lufthansa, one of the world’s largest airlines, has been outright greenwashing customers with ‘Green Fares’ offerings. Similarly, the food and beverage sector has seen false promises in the advertising of product sustainability. Starbucks' "Straw-Less Lid" is one example of the food industry's greenwashing

Mandatory obligations to report audited details on resource use flows is the first step in establishing clear data to both with, and to use as reference when dealing with such sustainability claims.

What is Mandatory Reporting? 

Due to the sudden rise in greenwashing incidents and bogus sustainability claims, the EU passed the world’s most far-reaching mandatory ESG reporting regime. The major goal of the Corporate Sustainability Reporting Directive (CSRD), which governs ESG reporting across a broad spectrum of public and private organisations, is to establish comprehensive, audited, public, and comparative reporting procedures. 

The CSRD was adopted by the European Union Council on November 28, 2022, with the aim of increasing the frequency, consistency, and standardisation of corporate sustainability reporting. It will be applicable to both publicly traded and privately held businesses, and with this new EU regulation, businesses will be required to disclose their ESG reports, which will allow stakeholders and investors to assess non-financial performance of companies.   

CSRD Details

According to the proposed draft, the CSRD will establish the requirements for how close to 50,000 EU corporations must disclose their environmental and climate impact. The Non-Financial Reporting Directive (NFRD) will be replaced and expanded upon by the CSRD, which has been adopted by the European Commission in November 2022. It will achieve this by adding more specific reporting requirements and increasing the number of businesses that must comply. It is crucial to remember that the CSRD also applies to businesses with a presence in the EU that are headquartered outside of the EU. 

The relative differences between the CSRD and NFRD are available for comparison here.

Material Concerns

‘Double materiality’ is one of the CSRD's main principles, this being where companies will be required to disclose both the substantial effects that their operations have on people and the environment, as well as the financial impact that ESG concerns have on their operations. Fundamentally, the ESG risks are connected to their business and how their firm or business is affecting the environment and society in general.  

Accurate reporting of a company's ESG performance will ultimately reduce reporting costs while also increasing openness regarding the company's effects on the global environment and its population. 

What about SMEs? 

The majority of large organisations with a net turnover of €40 million and €20 million in assets, as well as businesses employing more than 250 people, 

including private firms and foreign subsidiaries, will be subject to the CSRD mandatory ESG reporting. The reporting requirements will be implemented in phases between 2024 and 2026, depending on the size of the company. Additionally, non-EU businesses with a turnover of more than €150 million in the EU will also need to comply. Although CSRD will not be required for SMEs that are not listed, the Commission has also suggested creating unique requirements for these businesses. This would enable SMEs to fulfil their obligations during the shift to a sustainable economy.  

(How to Add Further Clarity to Your ESG Reporting)

What will be the impact of CRSD Mandatory ESG Reporting? 

Via its stringent rules that sustainability data be submitted in a digital format, transparency should be assured, meaning that mandated reporting should also help to prevent the instance of greenwashing we are seeing. Assertions can be made based on supported data, rather than claims on unspecified information. Businesses will be required by the mandatory CRSD regulation to declare their greenhouse gas emissions, which will allow consumers to assess their adherence to the global net-zero goals. 

A significant advantage for enterprises will be that it will offer a required assurance for reporting by an independent assurance service provider against sustainability reporting standards, while conforming to CSRD laws. Providing accurate information and monitoring a company's sustainability claims and ratings will both be aided by this. A solid, transparent ESG report will support the development of the company's reputation in the market and increase the trust of consumers, employees, and potential investors. 

Reporting = Reputation

As a result, many potential investors will be eager to invest in a reputable organisation or company that has undergone ESG verification. By actively participating in realistic climate action plans that are founded on scientific criteria and actively participating in the implementation process, CSRD regulation will assist corporations in providing tangible evidence of their climate aims. 

In this way, enterprises and companies are advancing climate goals while also establishing a reliable standard for climate reporting that will be impartial and scientifically support any statements about the company's climate action that can be monitored.   

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