The universe of ESG reporting is ever expanding, and it feels like we have seen dramatic shifts in the world of sustainability over the last 12 months. The elements of ESG are increasingly overlapping and complimentary to each other, regardless of whether they are mandatory or not.
Previously for most businesses, the primary focus was on voluntary reporting for those who wanted to tell the world about all the good things they were doing, with mandatory sustainability reporting being applicable to a select few.
Now however, mandatory reporting is catching up and creating more of a level playing field for businesses, setting the minimum standards for the sharing of performance data on ESG and sustainability matters. The general trends show mandatory reporting requirements are going to keep on increasing and eventually will impact many of those currently left untouched. This could be through requirements trickling down from parent companies and investors and as a requirement to access grants, new customers or new markets. In any case reporting should be on your agenda and we believe this new focus is a good thing for the following reasons:
- Standardised requirements create a level playing field. This means greater transparency, comparability and accountability – a win for investors, stakeholders and the planet.
- A requirement for double materiality, under the CSRD for example, means that businesses are required to disclose material impacts on people and the environment. Having a broad ranging process for ensuring that action is focused on the highest impact areas is essential to achieving transformative change.
- An increased focus on external verification – third party scrutiny will ensure that businesses are no longer marking their own homework and rigour is applied to evaluating what we say about how the businesses is performing.
If you don’t prepare now you could fall behind your competitors and face increased scrutiny for not disclosing. You may also be missing out on the benefits of having accurate data at your fingertips. So we have created this guide to explain how to use these new reporting requirements to your advantage, benefit your business and create meaningful impact. This doesn’t have to be just another tick box exercise.
How ESG reporting might affect your business
UK
Depending on your sector, size and location, you may be required to report on non-financial data as a listed company or to feed into parent company reporting requirements. In the UK, mandatory reporting for some already includes;
- Streamlined Energy and Carbon Reporting (SECR),
- Energy Saving Opportunity Scheme (ESOS),
- Climate-related Financial Disclosures (CFD); and
- Diversity and Inclusion reporting.
Europe
Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) are the big pieces of new broad ranging ESG related legislation in the EU, with other regulations such as the EU Taxonomy Regulation and the European Union Deforestation Regulation (EUDR) also requiring increased data gathering.
Interestingly, most of these regulations now apply to some businesses not headquartered in the EU, but with significant operations inside the EU.
For example, the CSRD is an EU regulation which requires companies to report on their environmental, social, and governance (ESG) impacts.
Even though the UK is no longer part of the EU, the CSRD affects UK companies in a few ways:
- Companies with securities listed on EU regulated markets: If a UK company is listed on an EU stock exchange, it will need to comply with the CSRD, regardless of where it is headquartered.
- Companies with significant business in the EU: UK companies that generate a certain amount of revenue in the EU also fall under the scope of the CSRD. This includes companies with:
- An annual EU revenue exceeding €150 million in each of the last two consecutive financial years.
- An EU branch that generates a net turnover exceeding €40 million.
- An EU subsidiary that meets certain criteria (net turnover, assets, and number of employees).
- Supply chain implications: Even if a UK company isn’t directly subject to the CSRD, it may still be affected if it’s part of the supply chain of a company that needs to comply. Larger companies may require their UK suppliers to provide them with sustainability information to meet their own reporting obligations.
USA
In spring last year, the US Security and Exchange Commission (SEC) adopted the final rule for Climate-related Disclosures, requiring some businesses to report against a variety of ESG related matters.
The rule is being challenged and will undergo judicial review and the future on this is unknown with the new Trump administration now being in power. Regardless of the results of this, it is expected that many large businesses in the US will be captured by the EU CSRD for reasons above, or face questions from investors to maintain global standards and demonstrate how they are addressing increasing climate risks.
There have also been many other developments more globally, including the Transparency in Supply Chains Act in California and the Modern Slavery Act in Canada …but far too many list in full.
Making it work for you
In Greenheart fashion, we’ve been observing these trends for some time and here are our three key thoughts on how you can make them work for you.
Key point 1: if done properly, the benefits of reporting outweigh the costs
Critics are suggesting that undue focus on reporting is an ineffective use of time, which could be spent on action. This overlooks the many benefits to businesses of gathering and analysing accurate environmental and social performance data.
For one of our clients, the reporting process flagged an unnecessary £2,000/month energy cost that they’ve since been able to cut.
Data is absolutely key to identifying hot spots, areas for improvement, efficiencies and potential synergies. Good data can inspire your workforce and completely transform your strategy to really address impact where action is most crucial. It provides a basis for storytelling to engage and empower your whole value chain and to bring others on your journey with you. But this only applies if data gathering and reporting is done properly, making sure that data trends are analysed and fed back to decision makers and internal groups such as buying teams or site engineering managers.
Another client gathered data from suppliers and used it to produce a purchasing guide for buying teams. These teams now have the knowledge to make sure their decisions are in line with company goals and that improvements resulting from their informed decisions can be tracked and fed back into the reporting and overall strategic process.
Reporting for reporting’s sake IS costly because the benefits are only seen on a superficial level. Those businesses instilling real change will reap the benefits in the long term as they make the most of the evolving landscape of increasing compliance and disclosure requirements. Preparing now will also help by spreading any set up or resourcing costs over a longer time period.
Key point 2: Selling the business case internally is key
Once you have identified the benefits above, gaining internal buy-in is key. Developing a clear rationale that includes drivers other than compliance will ensure that you can confidently communicate why this is an important proactive step for your business.
Therefore it is important to take your time in crafting a business case that has examples, case studies and evidence to demonstrate the benefit in resourcing a good reporting process.
- Look at what is being required of you now from regulators and stakeholders (e.g. customers, local community, the Government) and how confident you are in responding
- Review how effective your systems are and how much time is being spent internally on data collection and reporting. If reporting is a huge time and energy drain the signs are that it needs to be improved.
- Consider what is coming in the future for your business and how you need to evolve and outline what needs to be put in place now to effectively prepare for and benefit from.
This process is largely about creating a cultural shift and a more proactive than reactive stance to sustainability matters. You will be selling the case for taking time to fully understand impact throughout the value chain using both qualitative and quantitative data. This will need involvement from all levels of the organisation and various stakeholders.
The important thing is that it is seen as a priority focus area that will only grow in prominence, requiring proper set up, resourcing and roll out makes complete sense even if you are not required to comply imminently.
Once you have achieved this cultural shift in understanding the value of data gathering and accurate reporting it can be a smoother journey to setting up the systems you need to deliver all the identified benefits. In summary, progress on sustainability and ESG requires cultural change just as much as actual action.
Key point 3: whether it’s voluntary or mandatory reporting it’s essential that you make it work for your business.
These are challenging times for businesses, and sustainability teams can be under-resourced with what feels like more demands on their time and pressure on budgets. So great governance, simplified systems, empowered teams and automated data collection are essential. There isn’t time for the back and forth and hours of data collation that has gone along with reporting in the past. Sustainability managers need data at their fingertips so they can focus on catalysing action and change. Moving forward it’s necessary to utilise technology to ensure workload is shared with individuals throughout the business and integrated into existing processes like accounting systems for example.
We are currently undertaking a review of systems available to our clients and are preparing for a webinar on this important topic : How to manage ESG data in the new era of compliance? coming up in March. (Make sure you sign up for our updates to receive details soon.)
Key point 4: these reporting requirements can facilitate your strategic planning
The evolving reporting standards are also increasingly forward looking rather than just focusing on what has been achieved; they facilitate the planning of future action including how a business should set out plans to manage resources, respond to climate change and uphold governance structures for example. These are critical areas for resilience in any business heading into a volatile and competitive future and for this the standards can be an extremely helpful guide.
Conclusion
There is a clear trend towards mandatory reporting and an overall shift towards data transparency that will affect most, if not every, business eventually.
Whether you are reporting voluntarily, wanting to improve the quality of your reporting or prepare for mandatory reporting, being able to communicate the benefits of reporting and the importance of good governance and systems are key. Putting a robust strategy in place now will pay dividends for your business, people and the planet.
Clearly the first step is to understand the reporting landscape (current and coming) for your business so we are offering a compliance horizon scan, as well as more developed services such as CSRD preparation, double materiality assessment and environmental management systems.
What next?
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