EU companies will soon required to report ESG

EU companies will soon required to report ESG

Helsinki at dusk, symbolizing the broad perspective and clarity ESG reporting brings to corporate transparency

Creating and reporting balance sheets and income statements in accordance with clear, common rules is the DNA of any Finance Team. If you work with Finance, chances are these responsibilities will soon be extended to include mandatory ESG reporting.

The EU’s Corporate Sustainability Reporting Directive (CSRD) came into force on 5 January 2023. This new directive modernizes and strengthens the rules on the social and environmental information that companies are obliged to report. A growing number of large companies and listed SMEs – around 50 000 in total – will have to report on their sustainability performance. More information on the CSRD Directive can be found here.

The Corporate Sustainability Reporting Directive might be the well-needed gamechanger for companies on EU markets – and for the survival of our planet. Here’s what you need to know.

ESG reporting on the Board agenda

ESG reporting (ESG stands for Environmental, Social and Governance) is quite a jungle. Who should do what, what should be reported on and how should it all be done? The fact is that most companies do no ESG reporting, and those who do report mostly to the authorities with no public transparency. The nature of the information reported can vary, to say the least. As a result, for example, it is difficult for stakeholders to get hold of ESG information on companies they intend to do business with, including CO2 emissions, waste and fossil fuel dependency.

This will all change when the new CSRD Directive replaces the current Non-Financial Reporting Directive (NFRD).

The EU aims to harmonise all ESG reporting and provide a common framework for the information to be included. ESG information will be considered lead data, as data in the financial process, and as such signed off by the company board. So far, audits have not been mandatory and there are no regulatory requirements. Under the new CSRD Directive, the same auditor who approves the financial statements will also review and approve the ESG content as it is part of the Board of Directors report.

Sustainability is placed on the Board’s agenda and at the heart of corporate strategies.

New standards to be applied in 2023

If the EU Parliament and the EU Council reach an agreement by mid 2022, companies are expected to have to apply the new standards to reports published in 2024, covering the financial year 2023.

So, for the 2024 financial year… should we just wait and see what happens?

No, because first of all, the data must be comparable with the data for the previous year, 2023. Secondly, the workload is enormous. Huge. At Intito, we have started to map data sources and we can confirm that it will take time to gather all the data. Consider how most of the working hours of Finance are tied up by the obligations of the fiscal year.

ESG data collection should start now.

ESG reporting mandatory for all companies with more than 250 employees

The existing NFRD has so far only covered large companies (over 500 employees). With the new ESG directive, all companies above 250 employees, 40 MEUR net sales or 20 MSEK net value, will be required to comply. The current NFRD reporters will be first out, they are required to report starting 1.1.2024 but the new smaller companies are required starting 1.1.2025.

Financial institutions are more or less prepared. Standards for green loans are currently being developed. Since the big corporations own a clear majority of all funds in the market, and EU wants to stimulate them to grant more green loans. As more money is funded by green loans, green investments get better terms while other loans are expected to become more expensive. Of course, provided that the banks know if a loan is green or not – thus the CSRD.

Even if you work in a small company that does not need to report ESG data, there may still be good reasons to do so. More and more companies have ambitious goals and simply won’t work with companies that don’t fit their green strategy. Compliance with climate requirements should not only be measured in terms of direct CO2 emissions, but also in terms of emissions throughout the supply chain and product life cycle. This means that suppliers dependent on fossil fuels pose a serious risk to climate targets.

What to do now?

Most importantly, sustainability information is brought together in a single database where it can be compared by all those who need a partner, investor or supplier. The new transparency of ESG data will have consequences for all organisations. Those who will benefit most are those who start a systematic shift towards greener business and report clearly on their actions.

Here’s what you need to know:

  • What does your organization needs to do to comply with the CSRD Directive?
  • What needs to be reported?
  • Where can you find the data?
  • How is the data collected?
  • Who is responsible for the ESG report?
  • What tools are needed?

Data challenges

Like your financial data, ESG data will have to be consolidated, reported and included in your planning tools (ESG planning will be required by EU).

At least the next three challenges are expected:

Defining ESG metrics. How to calculate CO2 emission is far from straightforward and still debated.

Structuring data. It is possible that the data to be reported is unstructured and scattered in different places.

Collecting data. Energy costs is usually easy to collect, but how do you get hold of the number of kilowatt hours and split them into green ones? Different formats is another challenge: the numbers on the energy bill PDF must somehow appear in your financial system. And where on earth did the final results from that employee satisfaction survey go?

A software platform such as IBM Planning Analytics and a well-defined process will probably resolve a lot of these issues and help you collect, verify, and report compliant ESG data effectively. We have built a comprehensive key to EU sustainability reporting – Intito ESG Solution.

This is a lot but start by getting acquainted with the different standards for sustainability reporting: GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board) are good starting points. Read ESG-reports from companies in your industry. Talk to your board members and colleagues about what´s coming. Ask the questions we´ve just covered.

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