There Is A Real Dynamic

  • ESRS is out – the significance of Double Materiality Assessment

    Now that the Delegating Act for ESRS is out, we have observed the analyses presented by all consulting firms (refer to sources) to outline what is and is not in the current set of non-financial reporting requirements.

    Primarily listed, we can summarize that the ESRS requires 84 disclosure requirements and over 1000 qualitative and quantitative data points. This significantly increases the level of detail, notably in the value chain. However, there has been commendable work done to ensure interoperability between the GRI/ISSB. There are still some gaps and differences in the definitions, but it is closer than in the ESRS draft.

    As anticipated, the negotiations have resulted in a reduction of the time pressure on the provision of some data points for firms with fewer than 750 employees, and the double materiality assessment is here to confirm the absence of materiality for some data points.

    What is double materiality?

    Principles of materiality: the topic on which the activities of a business have an influence.

    1/ Financial materiality: companies report on the financial materiality of their businesses, estimating potential risks and assessing opportunities for their investors.

    2/ Impact materiality: companies report on their impact on the environment and communities, positive or negative, in the short or long term. This assesses the influence of their activities on the communities as well as on the planet.

    ESRS connects ESG with financial reporting by requesting information on the anticipated financial effects of sustainability, as the material has an impact on the business AND an impact outside. It aims to compel companies to gather a holistic view of their sustainability footprint and broaden their risk assessment to new factors that enhance their business resilience.

    Why is double materiality key?

    Only the general requirements are mandatory; the double materiality assessment will be key to defining the number of topics on which the company has to report. It has to be seriously approached to justify what is not reported.

    The double materiality assessment is the keystone of a new strategic approach influencing not only finance but also operations, supply chain, and planning, etc.

    1 / It helps companies identify the risks and opportunities linked to sustainability that could affect their financial performance and the impact of their business operations on the environment and the communities or society around.

    2/ It influences future strategic decision-making by enlarging the volume of areas that the company can be accountable for. More stakeholders than before are empowered to take part in the decisions, putting pressure on companies to act responsibly, and it brings the markets to adhere to new standards, under the scrutiny of more eyes.

    It opens the way for ambitious companies to achieve a leading position on the future market as more and more sustainability, transparency, and accountability are in the investors’ and clients’ spotlight.

    Why not wait for 2025?

    From the 1st of January 2025, there is an extremely large number of data points from 2024 to report on. 

    This information has to be reliably gathered and checked, organised, and analysed.

    Double materiality helps to select what can be left out, but it also has to be justified and proved. The team requires understanding this data and acquiring experience in assessing the quality of the information provided, as well as being capable of acting according to the conclusions of their analysis.

    Bringing managers and employees up to speed on the evolution is key to succeeding in this transition. It is not only the role of the Finance and Sustainability department to align but the entire firm to envision where the company wishes to go. The double materiality assessment offers the possibility to focus the internal training energy on a series of initial topics that can open the way to better anticipating.

    How to kick-start the process? Connect with the company’s stakeholders.

    Choosing the right ESG topics is a collaborative exercise; it is an opportunity to start positive relationships with stakeholders. It can be a challenge to launch this process but brings a supportive environment when setting the right ESG material themes on the table. Stakeholders are the users of the reporting and those influenced by the company’s activities. They are crucial in shaping the map of themes through their needs and shared interests that will become material in the reporting.

    To address stakeholder engagement, the company may wish to invest in cross-functional teams, adding corporate communication and risk management to their current financial/sustainability reporting effort. The discussions will bring to light not only the themes but their importance on the timescale (short-term, mid-term, long-term) and risks for the company. It would prioritise the data to be gathered and analysed and the quality of what can be provided. It will highlight where the gaps are and how to address them.

    Leverage robust data gathering and management architecture to guarantee the quality and reliability of your data. Establish relevant tools and teams to analyse the data. Create communication paths that are trustworthy, supporting stakeholder information and relationship nurturing.

    Stakeholder mapping and engagement are part of the ISO 26000 system management in which I am certified. With your cross-functional team, I can help you launch the initiative to build your community engagement. Be in touch!

    Sources

  • The new rules for CSR reporting in Europe: ESRS is coming

    I wrote about CSR for ‘small businesses’ in February 2019, touting it as an opportunity to win new customers, attract employees and improve your local community when it was still voluntary. 

    The legislation only affected large businesses that were trading and niche businesses that were pioneering this. Of course, I wasn’t the only one to present this as an opportunity and the idea of thinking about it has become commonplace, but not always for the right reasons. 

    The ultimate aim remains to reduce the impact, ideally to be regenerative to compensate for years of abuse of our planet’s resources. This would enable our children to enjoy the same quality of life as we do, right? 

    Many companies are not yet ready and will not act until the regulator pushes them to move forward in reducing their environmental and social impact. The CSRD regulation is one such regulation. 

    From 2025, for 2024 data, more companies will have to report on their CSR impact or their supplementary financial reporting. For example, almost five times as many companies will have to report on their non-financial impact in Germany, from 11,000 to 50,000 entities. And the report is no longer a separate report; it must be integrated into the financial report and checked by the auditors like any other element.

    Why does it matter? 

    “You can’t improve what you don’t measure.“

    Simply asking companies to include non-financial elements reinforces the need to expose their current practices. This is an enormous opportunity to visualise the real impact of their activities in terms of environmental and social impact, both internally and externally. It is only when they can imagine their current position in the market that they have the opportunity to position themselves in their own sector, and surprises can emerge. 

    From this panorama, a new style of competition can emerge to take the lead in the field of sustainability; and this will not be long in coming. and governments have a card to play to encourage virtuous companies and motivate regenerative behaviour. Ambition will, I hope, be the keystone of progress.

    What will the reports cover?

    The three pillars of CSR (environment, social and governance) are included, but at the time of writing, the definitive standards have not been published. Nevertheless, it is clear that the following topics should be covered: 

    • Environment : Pollution, use of water and marine resources, circularity (including waste management) and resources used, biodiversity (such as land use and impact on land) and impact on ecosystems.
    • Social: Workforce, value chain workforce, affected communities, consumers and end-users.
    • Governance: Corporate governance.

    How do you get started? 

    For those who have already started, it would be a matter of understanding what is expected to enter the official report (it will be digital), and perhaps filling in the gaps.

    For those who haven’t started yet, this is an excellent opportunity to develop the company’s future-proof vision, involving stakeholders to work together to develop the best approach to get there. Drawing up a clear picture of current practices, opportunities, pain points, risks and bottlenecks, and selecting the SDGs that the company wants to address in line with its core values, sets the stage for successful progress.

    What’s next?

    As mentioned earlier, this is only the beginning of the journey, the company must use this new regulation not as a limitation but as an opportunity to move the company into the future. This needs to be understood by stakeholders, which means promoting the approach and gaining support internally (employees and management) as well as externally (community). 

    (employees and management) as well as externally (community, customers and suppliers, trade unions, authorities and professional and civil associations).

    For the sake of future generations, it is quite positive to approach these changes with goodwill and vision.

    Sources : 

    • Regenerative economy – https://www.weforum.org/agenda/2022/01/regenerative-capitalism-industry-explainer/
    • SDG – https://sdgs.un.org/goals
    • Lieferkettegesetz – https://de.wikipedia.org/wiki/Lieferkettengesetz