With changes to the EU regulations on corporate disclosure on the horizon, many companies are reviewing their ESG reporting strategy. Whilst the regulatory requirements are diminishing, stakeholder expectations remain and companies need to make sure they achieve the right balance. In this article we take a step back and look at the motivations for companies to produce annual sustainability reports, and some of the decisions they need to consider to adapt their reporting strategy to the evolving market conditions.
The regulatory shift
Many companies operating in Europe are currently in scope to adopt mandatory disclosure obligations under the EU CSRD. At the time of writing, the EU Parliament is reviewing a proposal to merge CSRD with two related instruments—CSDDD and the EU Taxonomy—into a single omnibus regulation. This proposal aims to narrow the scope of companies required to report, prompting many businesses to pause their activities and reconsider their reporting strategies if the proposal passes.
The proposed reduction in scope will remove thousands of mid-sized listed and private companies from mandatory disclosure obligations. Many companies have already made significant progress toward CSRD compliance and must now decide how to move forward.
Reassessing Your Disclosure Strategy
Re-evaluating your reporting approach has to begin with being clear on your reasons for reporting. With the regulatory obligations removed, what remains are stakeholder needs and expectations, along with business objectives. Focusing on stakeholder needs will help to ensure any commitment of resources to ESG reporting will serve a purpose. Many companies seeking financing already recognise that aligning their reporting with comprehensive standards will benefit them in the long run.
Stakeholders in the value chain are also a big consideration. Companies mid-way through value chains who are in a B2B relationship with larger enterprises, will need to look up and down their value chain to understand expectations. Increasingly large businesses are looking for suppliers to provide some level of transparency under supplier code of conduct terms.
For companies who are adopting a position of transparency, aligned to clear business objectives around sustainability, a well defined approach to reporting helps them to focus their resources. For some companies, the process of producing an annual report will be more related to the culmination of significant effort internally to manage matters related to ESG more effectively.
EU regulations mandate climate risk assessments and transition plans. Investors and many other stakeholders increasingly view these as essential components of responsible business management, making them a crucial part of any ESG strategy.
Choosing the Right ESG Reporting Standard
Once the intent behind the reporting strategy is clearly determined, choosing the most relevant standards to use for reporting will become easier. There are a growing number of reporting standards in the market currently. Choosing one can be perplexing without either a regulatory incentive or clear indication from stakeholders. We’ve outlined the general landscape of standards below with some commentary on each:
ESRS
The European Sustainability Reporting Standards (ESRS) remain the backbone of CSRD. In terms of global reporting standards, they are the most detailed in the market today. For large enterprises, and for companies who want to provide exceptional transparency, ESRS are the right choice. ESRS focus on financial and impact materiality of a business, providing stakeholders with a greater degree of insight into the impacts, risks and opportunities related to the company.
ISSB
The International Sustainability Standards Board (ISSB) have developed comparable set of standards to ESRS. They are comprehensive and in comparison to ESRS, are more focused on financial materiality. These are designed to provide stakeholders with a more risk centric perspective on the company reporting.
GRI
The Global Reporting Initiative is a more impact focused set of reporting standards. They serve a broad range of stakeholders and prior to the development of ESRS, were perhaps the most widely adopted standards for corporates.
VSME
EFRAG, the organisation behind ESRS, has developed Voluntary Small and Medium Enterprise (VSME) standards to support SMEs in the value chains of larger enterprises. These standards reduce the reporting burden on SMEs while providing larger companies with insights into their contributions to value chain impacts, risks, and opportunities.
LSME
EFRAG are also in the process of finalising standards for Listed Small and Medium Enterprises (LSME). These will align with ESRS and provide a reporting standards middle ground for listed companies operating in the value chain of the EU. They have been designed to be proportionate to the size and complexities of listed companies. The alignment with ESRS includes the focus on double materiality.
Steps for Implementing an Effective ESG Reporting Strategy
We help companies of all sizes, across sectors to develop pragmatic reporting strategies. As a general rule, we follow the steps below:
1. Understand your audience – as we’ve described in this article, being clear about your motivations for developing an annual disclosure are essential. Your audience will help you choose the most appropriate reporting standards, which in turn will influence your approach to disclosures.
2. Materiality assessment – Financial, impact or double materiality, whichever is most suitable for your purposes, performing a materiality assessment will help you to focus on the relevant aspects of your business to report on.
3. Gap analysis – with material topics now understood, you can assess your readiness for reporting against your chosen standards. Looking across your business, you can be clear about where you have information and where more work is required to satisfy the reporting requirements.
4. Process design and integration- producing an annual statement is a significant undertaking. Ideally the process should be integrated into the everyday flow of your business, reducing the burden on your teams. We help clients to design and implement structured processes to automate as much of the effort as possible, enabling your teams to focus on more valuable activities.
5. Governance – reporting must be integrated into the wider governance of the organisation. In the same way that annual financial statements have a high degree of rigour applied to them, your sustainability statements should have too.
How Jordisk can help
Jordisk specialises in supporting clients to navigate ESG complexities effectively. Our expert team offers support to companies looking to adapt their approach to ESG disclosures. Including materiality assessments, strategic framework selection, gap analyses, and practical integration of ESG practices. We help your business to meet stakeholder expectations pragmatically and leverage sustainability for strategic advantage and business growth.
