Environmental, Social and Governance (ESG) matters have never been higher up the Board agenda. Pressure is increasing on businesses from an array of stakeholders to demonstrate their social licence to operate and act on ESG matters, particularly around climate change and the progress to net zero. Stakeholders expect real action and accountability; not green or social washing.
COP26 has boosted collaboration on these ESG matters with commitments and declarations from many world leaders to help progress toward net-zero carbon emissions by 2050. Further, the IFRS Foundation’s announcement at COP26 to align global sustainability reporting standards will build upon momentum from the EU’s proposed Corporate Sustainability Reporting Directive (“CSRD”).
The CSRD expands non-financial reporting obligations for impacted entities beyond those set out in the Non-Financial Reporting Directive (NFRD) and is expected to impact on more than 49,000 companies. As a direct result of the introduction of the CSRD, many EU registered businesses will be caught directly and have to comply with its non-financial reporting requirements and UK businesses with European parent companies might be asked to report more non-financial data upwards within their group structure.
It is hoped that the CSRD will improve sustainability reporting and drive the European single market toward a more sustainable and inclusive economic and financial system. The key new features of the CSRD are:
The legislation will need to be considered on an entity by entity and consolidated basis; therefore subsidiary boards (and local management of branches) of U.K. and non EU headquartered businesses will need to consider the new standards on an entity and enterprise wide basis. Local directors will have the responsibility and liability to report and ensure the correct infrastructure is in place. Failure could lead to criminal sanctions and financial penalties, not to mention reputational damage.
Whilst the CSRD legislation is being finalised, where the final text is expected by December 2022, there are some key steps EU companies as well as UK companies with an EU presence can be taking.
Undertake a risk assessment to identify gaps in policy, corporate governance culture and business operations to relevant ESG standards that will impact the business.
Understand what governance, policies and controls you have in place over ESG matters. This should include at subsidiary level where many impacts from EU directives may be felt for Non-EU companies. Ensuring you have the right governance will protect the integrity of your data and reporting.
Undertake an exercise to map out ESG matters material to your business and identifying what assurance you have or should have in place. CSRD will require reported information to be audited.
Consider what ongoing review and maintenance will be done to ensure high standards of quality.Consider what ongoing review and maintenance will be done to ensure high standards of quality.
If you would like to understand more about ESG matters and how your business is impacted please reach out for discussion.