Companies Facing Common Challenges On Road to EU Sustainability Compliance
Executive Summary
Key challenges facing companies working to implement the European Sustainability Reporting Standards have been identified by the European Financial Reporting Advisory Group. Onur Durmus, Partner at sustainability consultancy ERM, shares his thoughts on EFRAG’s findings and offers takeaways for firms that will be subject to the EU’s Corporate Sustainability Reporting Directive.
Companies preparing to report on environmental, social, and governance impacts, risks and opportunities under new EU sustainability legislation are facing a number of common challenges related to data collection, processes and management ownership.
These are among the findings of a report from the European Financial Reporting Advisory Group on initial observed practices from selected companies implementing the European Sustainability Reporting Standards.
The ESRS cover a range of ESG issues, including climate change, biodiversity and human rights, and must be followed by all companies subject to the Corporate Sustainability Reporting Directive (CSRD).
An estimated 50,000 companies – including large firms, listed SMEs and certain non-EU-based enterprises – will come under the purview of the CSRD. Large “public-interest entities,” such as EU-listed firms and banks employing over 500 people, which have previously filed a statement on ESG performance under the Non-Financial Reporting Directive (NFRD), will report under CSRD for the first time next year. (Also see "Time Running Out To Comply With New EU Sustainability Legislation" - HBW Insight, 19 Dec, 2023.)
Emerging Practices
To assess the state of play, EFRAG surveyed and reviewed the emerging practices of 28 large EU companies – referred to as “undertakings” in the report – and analyzed these against four focus areas particularly relevant to the implementation of ESRS: materiality assessment, gap analysis on datapoints, value chain, and organizational approaches to ESG reporting.
Companies are moving in the right direction on the double materiality assessment process, according to the report, with EFRAG observing a shift from a judgment to objective evidence-based approach. “Most undertakings consider that double materiality assessment should be based on data and evidence in addition to the views of internal experts and stakeholders,” the report notes.
Using the concept of double materiality, the ESRS require companies to make disclosures on how their activities affect people and planet and how their sustainability performance and targets impact their finances.
EFRAG found, however, that many companies have not yet integrated the outcomes of the double materiality assessment in their gap analysis of datapoints to be reported, “possibly leading to the inclusion…of more datapoints than the standards require, with the risk of taking focus away from the relevant information.”
Furthermore, around 80% of the undertakings surveyed noted the complexity of retrieving data, with similar obstacles found across ESG topics.
Value Chain Challenges
Among the four areas in scope, the value chain area is the least developed for the undertakings that participated in the study, EFRAG reported, with around 90% of companies still working to refine their value chain mapping, looking for the right balance of granularity.
Onur Durmus
A difference in organizational approaches to ESG reporting was also identified by EFRAG.
Around 65% of companies allocate ownership to a single function, such as the chief financial officer, while the remaining 35% adopt a co-leadership approach, with the CFO taking charge of reporting and the chief sustainability officer holding responsibility for the double materiality assessment, for example.
There was consensus among the companies that the CSRD has highlighted the need for standardizing the ESG reporting processes, while requiring several additional capabilities and resources.
For an expert’s view on EFRAG’s findings and what companies can learn from the report, HBW spoke to Onur Durmus, Partner and EMEA service lead for sustainable operations at sustainability consultancy ERM.
I see value in external parties conducting one-on-one interviews to set the scene, ask the right questions and follow-up questions to get the right insights on perceived stakeholder pressure, risks, and opportunities. Surveys can shed light into these only to a limited extent. External parties are also neutral and do not represent a certain interest which enables them to consolidate the insights in an independent and sensible manner. Also, external parties work with various companies and are knowledgeable of good and bad practices in the market which enable companies to get a feeling on how their peers approach this.
We also see some companies (driven by internal preferences or by low-cost service providers) tend to engage with only a limited number of stakeholders. This represents a risk of missing material topics which may lead to non-compliance and liabilities. It is also important to stress, stakeholder engagement is not only for gathering insights but also for creating awareness within an organization. If internal stakeholders do not understand why this is happening they will resist in delivering on the requirements.
Sector guidance would definitely be helpful here but even with that I believe some time will be needed to establish relationships on sustainability matters among value chain players. One idea would be to have sectoral databases for value chain players to deliver data to. We also need to understand some of the data is commercially sensitive requiring a database set-up with strict data protection requirements.