Indicator ESG Whitepaper

SOCIAL ENVIRONMENT

SUSTAINABLE BUSINESS: HOW TO ACHIEVE YOUR GOALS?

GOVERNANCE

ESG & CSRD

ENVIRONMENT | SOCIAL | GOVERNANCE

WHY ARE ESG POLICIES RELEVANT?

In the news, we see reports on climate change and its consequences every single day. Poor crops, floodings, severe thunderstorms, forest fires, ice caps melting and rising sea levels: these phenomena are both recurrent and unpredictable, and they can have a major impact on our companies and communities. It’s therefore crucial that we change our ways.

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ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) BACKGROUND

Scientific research conducted by the Intergovernmental Panel on Climate Change (IPCC) shows that greenhouse gas emissions play a major role in climate change.

Current government policies which aim at reducing carbon emissions could lead to a global warming of about 3.2°C, more than double the 1.5°C target set by the 2015 Paris Agreement and exceeding the 2°C limit the Agreement imposed. The UK has agreed to become climate neutral by 2050 and to reduce its greenhouse gas emissions by 68% by 2030.

Additional commitments from the corporate world and civil society will be crucial to reduce greenhouse gas emissions, thereby mitigating global warming.

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By shifting responsibility from the government to companies, these will have to assume their role.

Consumers are increasingly demanding and opting for more sustainable products and services. Young talent is more likely to apply for a job in a company which stands out for its sustainable development policy. When deciding whether to give a loan or invest, financiers see sustainable development policies as a positive factor. As for suppliers, they are increasingly questioned about the impact of their products and services.

The world is looking for corporations which are committed to bringing benefits to all stakeholders, not just shareholders. But how can we know which companies are delivering on their promises to people and the planet? ESG reporting provides some insight.

ENVIRONMENT | SOCIAL | GOVERNANCE

Long-term value creation In order to remain relevant in the long run, it is essential that companies integrate sustainability into their strategy, business model and commercial transactions. This applies not only to their carbon emissions, but also to the working and living conditions they provide for their employees.

Companies are being challenged to think in terms of long-term value creation. This means that they take an interest in creating shared value for the various stakeholders involved in the organisation, but also that this value focuses on financial as well as environmental and social performance.

Long-term value creation is aligned with the company’s mission, vision and core values, but also with the formulation of concrete and achievable goals.

The Integrated Reporting Framework is a standard which is often used to create long-term value.

Sustainability is no longer about doing less environmental damage; it is about having a positive impact and building a business which will stand the test of time.

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SUSTAINABLE DEVELOPMENT GOALS (SDGs)

NO POVERTY

ZERO HUNGER

GOOD HEALTH AND WELL-BEING

QUALITY EDUCATION

GENDER EQUALITY

CLEAN WATER AND SANITATION

AFFORDABLE AND CLEAN ENERGY

DECENT WORK AND ECONOMIC GROWTH

INDUSTRY, INNOVATION AND INFRASTRUCTURE

REDUCED INEQUALITIES

SUSTAINABLE CITIES AND COMMUNITIES

RESPONSIBLE CONSUMPTION AND PRODUCTION

CLIMATE ACTION

LIFE BELOW WATER

LIFE ON LAND

PEACE, JUSTICE AND STRONG INSTITUTIONS

PARTNERSHIPS FOR THE GOALS

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ENVIRONMENT | SOCIAL | GOVERNANCE

The United Nations’ Sustainable Development Goals In addition to mitigating climate change, sustainability focuses on social factors, such as the fight against poverty, inequalities and injustice. The United Nations have established a list of 17 Sustainable Development Goals (SDGs), with the aim of creating a better, more sustainable world by 2030.

Various organisations have committed to this and report annually on their goals and results.

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STREAMLINED ENERGY AND CARBON REPORTING (SECR) AND OTHER STANDARDS

Sustainability reporting in the UK was, until relatively recently, voluntary in nature and driven by non-governmental organisations such as the Global Reporting Initiative (GRI). Increasing awareness of the environmental impact of economic activities, and a public desire for accountability by businesses, has seen a rise in reporting obligations – a trajectory which is set to continue.

Under the Streamlined Energy and Carbon Reporting (SECR) framework, large companies in the UK have been required to disclose information about their direct and indirect emissions since 1 April 2019. For all financial years from that date, qualifying companies must include details of their greenhouse gas emissions and UK energy use as part of their directors’ reports. More recently, reporting requirements emerging from the Task Force on Climate-Related Financial Disclosures (TFCD) dictate that certain large, listed and/or regulated companies must make disclosures in line with TFCD recommendations or state their reason for non-compliance.

Looking to the future, the UK government is seeking to develop UK Sustainability Disclosure Standards based upon related International Financial Reporting Standards drafted by the International Sustainability Standards Board (ISSB). The scope of such standards will be determined by the UK government and Financial Conduct Authority (FCA) in 2024. However, the 2023 Green Finance Strategy acknowledges the role of small and medium-sized enterprises (SMEs) in decarbonising British business. A pilot programme by Bankers for Net Zero and its partners to automate SME sustainability reporting suggests that emissions reporting may not remain the domain of larger firms alone…

The ISSB was created in 2021 for the purpose of creating a global baseline for sustainability reporting. It published two International Financial Reporting Standards in June 2023: ❶

IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information

❷

IFRS S2: Climate-related Disclosures

The ISSB has worked closely with the European Commission and the European Financial Reporting Advisory Group (EFRAG) to ensure a high degree of alignment between these standards and the CSRD.

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ENVIRONMENT | SOCIAL | GOVERNANCE

Environmental resources and concerns are, much like a lot of companies, trans-boundary and require international solutions. It’s therefore vital to know what’s happening in all jurisdictions in which your business operates. The US Securities and Exchange Commission, for example, is currently drafting laws and regulations on sustainability reporting practices.

Closer to home, significant change is coming in the form of the Corporate Sustainability Reporting Directive (CSRD), which EU member states will be implementing as of 2024. Around 50,000 companies in the EU will be affected by the requirements of the CSRD by the end of its phased implementation in 2029. With new standards coming along in the future, these numbers are likely to increase. UK companies within scope of the CSRD will be obligated to comply with the Directive and its European Sustainability Reporting Standards (ESRS).

Even where UK companies are not directly within scope, they may be required to provide relevant information to business partners with a European presence. While current UK SECR requirements focus on direct (scope 1) SECR requirements on direct (scope 1) and indirect (scope 2)focus emissions, ambitious CSRD and indirect (scope 2) emissions, ambitious reporting requirements include emissions information CSRD companies’ reporting requirements across value chainsinclude (scope emissions 3). UK information across companies’ value chains companies may therefore need to record and share (scope 3). UKthe companies mayand therefore need to data to meet expectations obligations of record and share to they meetdo the expectations organisations withdata which business.

Which companies are in scope of the CSRD? -

Companies already subject to the NonFinancial Reporting Directive (such as public-interest entities, banks and insurance companies) - EU parent companies of consolidated groups and large EU companies (including EU subsidiaries of third-country parent companies) fulfilling at least two of the qualifying criteria: – net turnover > €40m – balance sheet > €20m – an average of 250 employees or more in the financial year - Large companies and SMEs (excluding micro-entities) listed on the EU regulated market – Non-EU listed companies or groups with: – turnover in the EU > €150m for the last 2 consecutive years and 09 of – at least one subsidiary within scope the CSRD or one branch that generated a net turnover of more than €40m in the previous year.

WHAT TO INCLUDE IN YOUR CSRD REPORT?

AN OVERVIEW OF THE EUROPEAN SUSTAINABILITY REPORTING STANDARDS (ESRS) IS PROVIDED BELOW:

ALREADY PUBLISHED

COMING LATER

Cross-Cutting Standards ESRS 2 General disclosures

ESRS 1 General principles

Topical Sector-agnostic Standards

SOCIAL

GOVERNANCE

ESRS E1 Climate Change

ESRS S1 Own workforce

ESRS G1 Business conduct

ESRS E3 Water and marine resources

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Small and Medium Sized Entities Proportionate Standards (coming later)

ENVIRONMENT

ESRS E2 Pollution

ESRS S2 Workers in the value chain

ESRS E4 Biodiversity and ecosystems

ESRS S3 Affected communities

ESRS E5 Resource use and circular economy

ESRS S4 Consumers and end users

Sector-specific Standards (coming later)

ENVIRONMENT | SOCIAL | GOVERNANCE

CSRD standards reinforce the transition to a sustainable way of living and working.

The European Commission adopted the ESRS on 31 July 2023.

There are 12 ESRS: - Two general standards, which address crosscutting issues: general principles and reporting obligation; - Five environmental standards, which address climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy; - Four social standards, which address internal workforce, workers in the value chain, affected communities, consumers and end users; - One governance standard, which addresses sustainability.

Sector-specific standards and SME standards are yet to come.

The company must disclose its sustainability policy, the processes implemented and the measures and procedures which allow it to supervise the implementation of the sustainability policy.

For instance, the company must provide information on the impact of the sustainability policy on executive pay.

The idea is to provide a clear explanation of the company’s sustainability strategy. This includes: - accounting for the potential impacts, risks and opportunities of ESG aspects for the company (outside-in), and considering what financial impact these may have on the company’s business model and value chain; - identifying the impact which the company may have on the environment and on other people (inside-out).

This method is also called a “double materiality assessment”. It enables you to determine the impacts, risks and opportunities (in terms of ESG) which are of importance for your company.

It is essential for the company to discuss this with the main stakeholders. The company has to explain the process by which it determined those ESG aspects, and what information from the stakeholders (amongst others) was used to that end. The company must also identify its goals and targets and explain how it plans to achieve those.

These ESRS provide information on: • • • •

Governance Strategy Risk and opportunity management Figures and clear goals

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WHAT MIGHT CHANGE FOR YOU?

Sustainable development is no longer about doing better, it’s about getting it right. Thousands of companies will now be required to write detailed reports on sustainability and it’s important to ensure you are capturing and communicating the right information in the right way. For example, consideration should be given to tools and processes, to ensure reports can be compiled in the digital, machine-readable method required by the legislation. This may require training and financial investment.

The CSRD may serve as a model for ESG reporting worldwide. Voluntarily collecting and sharing data in line with CSRD standards now can ensure your business remains competitive against European competitors. Standardised information provides opportunities for benchmarking and allows potential customers, investors, employees and others to compare your ESG credentials with that of other companies. This can boost your brand value and reputation, building trust through transparency and fulfilling an ethical duty to report on the impacts of your business.

UK companies within scope of the CSRD should be mindful of the applicable timeline and the requirements of the transposing law in the member state(s) in which you do business.

With scope 3 emissions accounting for an estimated 80-95% of an organisation’s total footprint*, the UK government is also turning its attention to this area.

Understanding this complex field now will not only prepare UK companies to assist European partners but will also shed light on the potential future of green financial reporting in the UK.

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* HM Government (2023) Mobilising Green Investment: 2023 Green Finance Strategy, p. 44

ESG reporting was created in order to enable organisations to identify risks, to determine what sustainable development topics are important to them, to set goals and to report on their performance.

This offers many opportunities: indeed, anyone who is committed to environmental, and governance issues can create a sustainable environment, build customer loyalty, attract new investors and stand out from their competitors.

But where do we start?

ENVIRONMENT | SOCIAL | GOVERNANCE

The CSRD was adopted by the Council of the European Union at the end of November 2022. Before that, on 22nd November, EFRAG published the first set of ESRS and submitted it to the European Commission. The timeline below shows the different steps in the implementation of the CSRD, as well as their applicability to companies.

November 2022 • European legislators finalise the legislative review of the CSRD • First set of ESRS published by the EFRAG

2022

2023

July 2023 • The European Commission adopted the first set of ESRS (standard information for all sectors)

End of 2023 – Start of 2024 • Start of the transposition of the CSRD in member states

2024

June 2024 • Expected adoption of the second set of ESRS (sector-specific information)

CSRD reporting on fiscal year 2024 (report on 2024 data; published in 2025) • Limited assurance • For companies subject to the NFRD

2025

CSRD reporting on fiscal year 2025 (report on 2025 data; published in 2026) • Limited assurance • For all large companies (meeting certain criteria)

2026

2030 • Reasonable assurance • Six years after the CSRD is introduced

2030+

2027 • The CSRD applies to SME (≤ 250 employees) (possibility to opt out until 2028)

What’s going to change in the annual report under the CSRD? • In addition to the management report, the company will have to file a sustainability report.

• The sustainability report must comply with the ESRS and focus on the three ESG aspects (Environment, Social and Governance).

• The sustainability report must discuss both the (financial) impact on the company and the company’s impact on the environment (double materiality).

• An auditor will assess this sustainability report.

• This information must be available digitally.

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YOUR JOURNEY TO SUSTAINABLE TRANSACTIONS: EIGHT STEPS TO BUILD AN EFFICIENT ESG STRATEGY.

03.

DISCLOSE OR GATHER YOUR DATA

01.

IDENTIFY YOUR GOALS

Gather the right data from

Discuss with the internal parties

the right sources.

involved. Decide what to focus on,

Manage data consolidation

conduct a materiality assessment

and storage across

based on taxonomy. At this stage,

departments and countries.

you will need guidance from an external consultant or auditor.

02.

DEFINE YOUR GOVERNANCE MODEL Define processes and responsibilities. Choose a

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04.

GET AN OVERVIEW OF THE CURRENT LEVEL OF SUSTAINABILITY

consistent methodology

Analyse the data and translate

and KPIs, and take into

it into concrete action. Identify

account the sector’s best

discrepancies and avoid

practices.

duplicates.

biggest impact? Identify

07.

MEASURE IMPACTS

processes which can

File monthly, quarterly or

be improved upon.

annual reports to measure

Collaborate with the sector.

the impact of those changes.

Where can you have the

ENVIRONMENT | SOCIAL | GOVERNANCE

05.

IDENTIFY AREAS OF IMPROVEMENT

Compare the effect of various parameters.

06.

IMPLEMENT THE CHANGES Carry out targeted

08.

ASSESS AND SHARE THE RESULTS

interventions. Discuss

Discuss the results with the

with the parties

management team and share best

involved and with the

practices within the company.

management team to

Share improvements with your

determine how you can

clients through sustainability

successfully implement

ratings or labels.

the changes.

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START PREPARING NOW!

Complying with the CSRD will take some effort.

The information required usually comes from a large variety of sources, which are not (yet) structured. Without dedicated information systems, data is often gathered manually.

Moreover, the question is whether the company achieves its sustainability goals, and how it determines the impacts, opportunities and risks.

It takes a lot of time and effort to gather and document qualitative data from various sources.

Large companies in more regulated industries are already further along in that respect. In order to improve data processing and to get the right information at the right time, we recommend that you carefully consider the reporting frequency, process design and information systems which you will need. In the future, business management will be based not only on financial considerations, but also on sustainability. You will therefore need to adopt a more holistic approach.

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Not only internal data sources, but also sources in the value chain.

When gathering and documenting data, you need to include not only internal information, but also information which comes from the value chain. What risks are associated with the value chain? How could the company potentially have a negative impact on this value chain? Conversely, what impact does the value chain have on the company?

Reporting standards associated with the CSRD notably ask for information regarding workers in the value chain (ESRS S2), consumers and end users (ESRS S4) and climate change (ESRS E1).

The reporting standard ESRS E1 deals with information on indirect carbon emissions (scope 3) caused by the suppliers’ activities or by other providers. The Greenhouse Gas (GHG) Protocol is the standard to follow in that respect.

ENVIRONMENT | SOCIAL | GOVERNANCE

It makes it possible to carry out a life cycle analysis on a given product and to determine its carbon footprint. Consequently, large companies falling under the CSRD reporting obligation will have to disclose information on the carbon emissions of products and services supplied by other companies in the value chain. These will have to disclose information on their own carbon footprint even if they are not subject to the CSRD. Who will be responsible for sustainability?

It is also important to assign clear responsibilities within the company.

Who is responsible for what? There is not just one answer, but you must definitely adopt a multidisciplinary approach: expertise in sustainability policy, social expertise, risk management, internal supervision, compliance, etc.

What are the next steps?

• Attend training sessions/workshops; • Create a multidisciplinary team with the necessary expertise; • Create a roadmap and identify priority actions.

Many companies start by creating a multidisciplinary team.

Its members might differ depending on the specific situation and on the expertise and know-how available in each company. Generally speaking, this team includes the following: -

CEO; Director of administration and finance; CSR coordinator; Health and safety officer; HR manager; Compliance coordinator; Auditor.

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BUILDING YOUR ESG STRATEGY? START WITH THESE FOUR STEPS:

1

2

Identify your sustainability strategy and policies.

You probably already have several initiatives underway. What has already been implemented, what are the plans for the future and what do they involve?

Discuss with the main stakeholders and conduct a materiality assessment.

This analysis will give you an overview of the most relevant topics and will therefore guide you as you gather data.

3

4

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Conduct a CSRD gap analysis.

This analysis will give you an overview of areas for improvement, both for your company and for the value chain. This includes setting goals to improve performance.

Set up an action plan to gather and document any missing data and to assess the quality of the data already gathered.

How do you know whether the data which you have gathered is reliable? What measures have been taken in terms of supervision? Who is responsible for these processes? How do you ensure that data is systematically gathered? This is a crucial step before performing an audit.

ENVIRONMENT | SOCIAL | GOVERNANCE

There’s still a long way to go before you can comply with ESG reporting obligations. At Indicator, our teams will continue to support you in understanding and integrating these new standards, with a series of webinars, lectures, practical information and articles to come.

Stay informed http://esg.indicator-flm.co.uk/