Understanding the intricacies of sustainability reporting has never been more crucial. Recently, a webinar titled “How the European Sustainability Reporting Standards Adopted by the EU Will Impact Global Public Companies” provided valuable insights on how new and existing legislation, the ESRS, from the European Union (EU) will impact how companies report their earnings results.
Moderated by John Nunziati, IR Advisor to Q4, and featuring the expertise of MJ Privyk, Chief ESG Innovation Officer for Novisto, the session clarified how the recently released European Sustainability Reporting Standards (ESRS), and its foundational framework, the Corporate Sustainability Reporting Directive (CSRD), will have enormous implications for public companies.
CSRD and ESRS: The history of ESG in the EU
MJ initiated the conversation by pointing out that the largest European companies already had sustainability reporting obligations. However, theses standards were often not specific enough in their terms and were not consistently followed. The EU needed to develop new directives due to the fragmentary nature of sustainability reporting and recognized that a more specific directive was needed to guide its members, leading to the development of new regulations.
The Corporate Sustainability Reporting Directive (CSRD) evolved from the EU’s Green Deal and Sustainable Finance Action Plan to establish a comprehensive framework for sustainability reporting. The flexibility of CSRD allowed individual EU member states to tailor and adapt according to their specific needs. This adaptability paved the way for the ESRS, a structured guide designed to streamline sustainability disclosure for corporations. According to MJ, “It’s not just about sustainability reporting. It’s about sustainable business and governance and how that impacts your strategy, operations, and financial performance. It’s really about integrating sustainability into the core of the business.”
Data quality and double materiality
Quality data is the foundation for an investor relations professional in order to build accurate and impactful sustainability reports. MJ explained that the ESRS, with its emphasis on data integrity, pushes for a collaborative effort between different departments, meaningdepartments ranging from finance to compliance must combine their efforts, ensuring the data reported is of the highest possible quality.
MJ then brought up the concept of double materiality. This principle suggests that sustainability issues should be evaluated based on how they can influence a company’s operational efficiency and its broader impact on social and environmental ecosystems. In ESG terms, the two main ways of thinking are broken down into financial materiality and impact materiality.
Financial materiality is about economic value-creation – it’s focused on the issues that internally impact a company’s financial performance and its ability to create economic value for investors and shareholders. Conversely, impact materiality focuses on the external impacts an organization’s activities have, including impacts on communities and the environment. These would include the organization’s contributions to air and water pollution, for example, or its emissions of greenhouse gases (GHGs) that add to global climate risks.
MJ noted that companies do have the option to not disclose its impact; however, “A company can also choose not to disclose; but if it doesn’t disclose, that means that they consider it to be not material, and then they have to explain why. So, if you’re not going to disclose climate, you will have to explain why climate is not material to you.”
The global impact of the ESRS
The implications of the ESRS aren’t confined to European borders. John and MJ delved into how these standards could shape global sustainability reporting. Given the influence and economic heft of the EU, its initiatives often act as a precursor to global trends.
Companies operating internationally, even if not headquartered in a European country, now find adapting to these European standards essential, ensuring alignment and consistency in their global reporting strategy.
The discussion concluded with an acknowledgment of the inherent challenges that come with transitioning to the ESRS model. These include adapting to tight regulatory timelines, fostering inter-departmental collaboration, and navigating the nuances of the ESRS guidelines. However, with challenges come opportunities for companies to innovate, realign, and strengthen their commitment to sustainable practices.
As businesses and organizations gear up for this transition, this session underscored the importance of preparedness, collaboration, and unwavering commitment to a sustainable future. For more information on the European Sustainability Reporting Standards, you can watch the full webinar or read Q4’s post, “ESRS Adoption: Explained.”