This article was written in collaboration with Sim Hoekstra.
The European Corporate Sustainability Reporting Directive (CSRD) will come into effect for large public organisations in 2024 (reporting on 2023 metrics) and will progressively apply to more and more companies over the upcoming 6 years.
With the introduction of mandatory reporting, the European Commission recently published its new reporting standards, the European Sustainability Reporting Standards (ESRS). This standard elaborates on the specific reporting requirements of the directive, and the mandatory disclosure points.
Among mandatory disclosures, the “general disclosures” (ESRS 2) give guidance on the general aspects that all organisations must report upon, regardless of their specific context and material impacts.
The general disclosure requirements can be summarised as follows:
This blog focuses on ESRS 2.4 “Impact, risk and opportunity management”. As the legislative requirements can quickly become complex to understand, we aim to simplify the disclosures and translate them into concrete actions.
Under the new CSRD, conducting materiality assessments will become mandatory.
A materiality assessment is a process through which a company identifies the environmental, social, governance and broader emerging issues that are most important given the operating context of a business. Material issues have significant implications for organisational risks and opportunities, making them critical elements for decision-making and strategy setting.
Typically, a topic is considered “material” if:
The first ESRS requirement is about transparently disclosing the methodology behind the identification of material topics:
In this process, some methodological requirements are:
Read more on our “What is Double Materiality & How Does it Fit In With CSRD Requirements” blog here.
(pages 13-14)
This requirement is in place to ensure that there is transparency in the disclosure requirements which are reported against. Similar to other reporting frameworks (e.g., GRI, SASB) the ESRS will request a depiction of:
The most common and recommended way to do so is by providing a content index table at the end of the sustainability report.
On each material topic reported throughout the report, the ESRS requires descriptive information on the current and future opportunities related to this topic. This can be an organisation-specific opportunity or an industry opportunity.
For instance, this can consist of industry developments, new promising innovations, or company-specific circumstances (e.g., new capabilities acquired through a merger, workforce diversification, consumer behaviour change).
For example:
In addition, clarity on whether this specific opportunity is currently being pursued must be brought forwards, along with content on whether it makes financial sense to pursue it.
For organisations to prepare themselves for CSRD compliance, we encourage a systematic integration of opportunity thinking in all aspects of sustainability.
This will not only be important to report on industry-disruptive innovations and R&D developments. The adoption of an opportunity mindset for every single material topic will be necessary. For example, what are the current opportunities for:
(page 52)
This disclosure requirement mandates the reporting of policies and actions regarding relevant material topics identified by an organisation.
These are important, as material topics outline the areas with the highest potential for risk and impact for an organisation and its value chain. Therefore, it is pivotal to have policies and actions in place, as they can help address these risks and impacts.
A policy transforms the mission and values of a company into a longer-term action plan with qualitative and quantitative objectives.
It outlines measures and steps to achieve these objectives over time, and thus provides internal guidelines for employees and management toward these goals. This also brings insight into the organisation’s strategy.
Disclosing policies demonstrates an organisation’s commitment and long-term objectives to create impact or mitigate the material topics' risks. Thus, overall, it aims to provide a holistic understanding of the formal policy in place, and how it will dictate further actions the organisation plans to take.
To report, it is necessary to describe:
Finally, if relevant, consideration given to the interests of key stakeholders in implementing and communicating the policy, such as employees, or suppliers, should be described. If the policy is aligned with any third-party standards or initiatives (such as the UN Global Compact, UN Sustainable Development Goals etc.) this is important to reference.
(pages 80-83)
Actions are the translation of an organisation’s sustainability strategy, policy and efforts into the organisation's daily operations.
Actions are broad and can cover most efforts to enhance sustainability within an organisation. This can include anything from implementing waste separation bins in offices, providing training for employees regarding diversity and inclusion, to implementing a supplier code of conduct, to name a few examples.
The disclosing of actions aims to demonstrate how the actions impact or mitigate the material topics' risks and pursue opportunities. Thus, overall, its aim is to provide a holistic understanding of the action being undertaken, and how it contributes to the organisation's policy objectives.
Formalising and keeping track of actions as they are implemented will make disclosing actions, and their key impacts, much easier. overall.
Similarly to reporting on policies, it is essential to provide a key description of the actions implemented in the reporting year, along with expected achievements in relation to policy objectives.
This makes time horizons also important, to understand how the action is expected to unfold over time, and any key milestones and progress expected to be made. Furthermore, it is important to describe the scope of actions, and their coverage across operations or value chains.
Finally, key actions taken, along with results, to support or remedy those harmed by material impacts of the organisation should be distinctly mentioned. Reporting on actions is both a past and forward-looking exercise. Thus, quantitative and qualitative information regarding the progress of actions or action plans disclosed in prior periods can also be reported on.
If there are no policies or actions, it is required to provide reasons for not adopting them. If there are no relevant reasons, organisations may disclose a timeframe within which they will be adopted.
Want to make sure you're fully prepared to comply with the upcoming CSRD? Get in touch.