Are you prepared for ESG reporting, compulsory from the financial year 2023?
ESG reporting entails that a company can disclose information about its environmental, social and governance impacts and strategy, according to a well defined regulatory framework. ESG reporting complements the traditional financial reporting and allows the reader to depict an overall picture of the company’s track record and potential.
As the interpretation of the extensive ESG agenda is still under development, regulatory bodies, companies and various stakeholders are struggling to establish their ESG approach and how to measure and report on it.
Today different frameworks coexist, often without real enforcement or obligation to comply. With financial markets paving the way for E(SG) topics for a while now, official regulation is imminent. This will affect all large companies, and all companies listed on EU regulated markets, except for listed micro-companies. Under the Corporate Sustainability Reporting Directive (CSRD), large companies will have to disclose their ESG footprint in line with the EU taxonomy.
Large companies are defined as companies exceeding at least two of the following criteria:
- Balance sheet total: EUR 20 million
- Net turnover: EUR 40 million
- The average number of employees during the financial year: 250
(Subsidiaries of parent companies complying with the ESG obligation are exempted)
The new EU taxonomy for ESG will take effect from the financial year starting on January 1st 2023, and reporting to be published in 2024.
Companies are to provide qualitative and quantitive information based upon the mandatory reporting standard issued by EFRAG, the European Financial Reporting Advisory Group. EFRAG’s responsibility under the new Corporate Sustainability Reporting Directive (CSRD) is to advise the European Commission with fully prepared (draft) EU Sustainability Reporting Standards.
Currently, only a draft framework is available, requesting companies to provide info as follows:
- ensuring comprehensive coverage of environment (including climate), social and governance topics;
- fostering proper quality of information (relevant, faithfully represented, comparable, understandable, reliable);
- addressing the needs of all stakeholders under the concept of double materiality (impact and financial materiality);
- inclusion in the management report;
- audited by an external third party (limited assurance initially);
- capable of being translated to digital format at the outset
In June 2022, the first ESG standards proposition will be issued by EFRAG to the European Commission and is planned to be adopted in October 2022. The second set of Standards is expected to be released in October 2023.
Good to know:
Within their ESG reporting companies need to provide insight on both how they are impacted by sustainability matters as well as information on how the company impacts its environment. In other words, not just climate-related impacts on the company are material but also impacts of the company on the climate and broader ESG agenda are in the scope of the ESG reporting.
ESG reporting must be digitally tagged to allow machine reading for increased transparency and information accessibility.
While publication in early 2024 may still seem far away, we advise you not to underestimate the impact of ESG reporting on your organisation. Technology can facilitate the process, but the ESG puzzle remains challenging even with appropriate software support. Adoption from 2023 necessitates organisations to start acting today. Sustainability, permits no lagging, time to gather your troops.