Private companies have been found wanting in the past in their environmental, social, and governance (ESG) reporting efforts. But as the EU finalizes a new, mandatory set of standards as part of its Corporate Sustainability Reporting Directive (CSRD), they have no option but to play catch up. Fortunately, there are simple steps they can take to get going – as explained by Kōan Strategic Director Neil Smith.
It’s ESG reporting crunch time in Europe. The EU’s Corporate Sustainability Reporting Directive (CSRD) entered into force at the start of the year, and while debates about its many requirements rage on, we’re edging closer to the first businesses coming into CSRD scope on January 1, 2024 – with a total of around 50,000 set to be affected in the next five years.
The scramble to be ready is on. Companies were already battling it out for the best in ESG talent to meet growing reporting needs and hiring Chief Sustainability Officers at an unsustainable rate. Now, they have just a few short months to figure out what the European Sustainability Reporting Standards (ESRS) – the long list of information required by CSRD – mean to them.
And that’s just the businesses with advanced reporting maturity. The hardest hit will be private companies. Not because they don’t have the resources – but because, according to Koan’s analysis, their reporting capabilities are underdeveloped to the point where resources feel immaterial.
Throwing money at the problem will not help private companies meet the tidal wave of incoming regulations. Not unless they know what they’re doing. They need a plan. Like ESG reporting itself, they need a simple, systematic approach if they’re to have hope of catching up.
They need answers to the who, how, where, when, what, and how of ESRS preparation – as outlined in the steps below.
1. Work out when your company is in scope
ESRS will be rolled out gradually – with larger public interest companies in scope first, followed by the rest. Private companies need a clear idea from the beginning on when they’re in scope, so they can work out how much time they have left to act.
For large private companies, January 2025 is the key date – that’s when non-listed companies meeting two out of three of the following criteria have to start reporting: a net turnover of more than €40 million, balance sheet assets greater than €20 million, and/or more than 250 employees.
2. Decide what to focus on and where your reporting gaps are
ESRS presents a unique test for private companies because of its size and depth. It’ll be a monumental task for many because of the sheer number of data points to be measured – 1,444 and counting – not to mention the complexity of the standards, the new expectation to report on entire value chains, and the fast-approaching deadline.
Even more challenging is the level of detail. The task will change from company to company, with each needing to consider its own specific impact. This isn’t a generic box-ticking compliance exercise – it’s going to take time and real consideration, and any business viewing in any other way will be sorely mistaken.
The key to success for private companies new to ESG concepts is efficiency – maximizing their efforts by knowing what’s relevant and where to find it. Assessing for material issues – i.e., working out the ESG issues most relevant to your business – is central here so much so that completing a double materiality assessment is an ESRS requirement, and where private companies must start.
Assessments like these will help generate a plan of attack – weeding out what standards are relevant and which they might already be measuring. Be warned, though. It seems EFRAG did not write ESRS with novices in mind, so read around for breakdowns and guides where you can.
3. Round up those who can help and how
With an ESRS plan in place, the next challenge is finding a team to execute it. It’s a tall order, managing the stakeholders and inputs that have a say in a quality ESG report – which is why companies with reporting experience are already expanding their IT systems and automating their data flows and processes to make ESG data preparation as seamless as possible.
That’s the bar. But before then, private companies in their early reporting eras should make the most of what, and who, they have – leveraging the individuals who are already measuring relevant ESG data for their own targets and those with a keen interest and understanding of ESG concepts.
Beyond data, a good report comprises multiple elements that require various skills and skillful people to pull together. For example, writing a clear and – crucially – balanced report that focuses on the story the data holds requires a different set of skills to writing a press release or whitepaper. Private companies need to assess their capabilities in-house and bring in external support to plug the gaps.
4. Understand why ESG reporting is vital
The real difference between mature and immature companies is in philosophy. A company experienced in reporting will have convinced their teams of the value of the steps outlined in this article, which ensures that the work moves that bit quicker. If staff understand why ESG reporting is valuable, they’ll put in the necessary time and effort.
Private companies that have ignored opportunities to report against voluntary standards face their biggest test here – implementing a mindset change. ESRS is designed to accelerate a “green transformation” – private companies need to find a way of communicating those values internally. Otherwise, they will find themselves swimming upstream.
This means more than telling everyone “we’re green now”. Company leaders need to substantiate that change. Only then can they genuinely lead the education of their company on the significance of ESRS, establish a governance structure responsible for meeting ESRS, and adjust roles and responsibilities.
It all starts with some serious introspection on how they do business today. Are they willing to see work on ESRS issues as important internally as financial performance? Are they ready to commit to paper where their weaknesses are and what they’re failing at? Are they enlightened enough to know this kind of transparency is beneficial in the long run?
If they can answer yes, then it’s time to get going.
References
- https://www.ft.com/content/fe5853a4-ba3e-434a-abe0-1b43c094ae85
- https://businesschief.com/sustainability/charting-rise-chief-sustainability-office
- https://www.linkedin.com/posts/wearekoan_different-forms-of-materiality-in-sustainability-activity-7033728478185193472-IGj3/?utm_source=share&utm_medium=member_desktop
- https://www.europeanbusinessreview.com/private-businesses-are-falling-behind-in-the-race-to-meet-eu-esg-reporting-standards-heres-why/
- https://www.linkedin.com/posts/wearekoan_esrs-in-plain-english-e1-1-activity-7054063315664138241-GxNg?utm_source=share&utm_medium=member_desktop
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