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ESG reporting and preparation of a Sustainability Report
Sustainability Report
Boards can lead the way on ESG. We share the why, what, and how of effectively overseeing ESG.
Boards can lead the way on ESG. We share the why, what, and how of effectively overseeing ESG.
A sustainability report is a report published by companies on the environmental, social and governance (ESG) impacts of their activities. It enables addressees and users to understand more clearly the impacts of a company’s business activities on the environment and society and to assess the risks and opportunities companies face, or which are offered to them. It is a communication tool that plays an important role in convincing sceptical observers that the company’s actions are sincere.
The growing importance of sustainability reports is due to the fact that investors and other stakeholders are calling on companies to disclose more information about their sustainability activities and environmental, social, and governance strategies.
Many new legislative documents on ESG requiring companies to disclose sustainability information have already become effective or are currently being prepared:
- REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 18 June 2020 on the establishment of a framework to facilitate sustainable investment (EU Taxonomy Regulation, in force since July 2020)
- Corporate Sustainability Reporting Directive (CSRD, in force since January 2023)
- Directive on Corporate Sustainability Due Diligence (CSDD, draft)
- Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for setting ecodesign requirements for sustainable products
How should companies report on sustainability information?
The CSRD introduced detailed requirements for sustainability information reporting across the EU, creating a common, standardized language for sustainability reporting.
The main CSRD features are:
- Mandatory sustainability information in annual reports
- Mandatory external limited assurance
- Introduction of mandatory European Sustainability Reporting Standards (ESRS) – 12 mandatory sectoral standards
- Subsidiaries are exempt from reporting if covered by a consolidated report meeting CSRD requirements and if other conditions for applying an exemption from individual reporting are met
- Digital tagging of sustainability reports for automated machine reading
A sustainability report allows companies to answer a wide variety of questions raised by stakeholders in a single document. The CSRD obliges companies to include a sustainability report in the annual report.
However, creating a sustainability report can be challenging, as it must meet the conditions stipulated by the relevant legislation and standards and have the right balance of information from the individual agendas. The information must be relevant, comparable, verifiable, easy-to-understand, and give a true and fair view. Furthermore, companies must determine via a double materiality assessment what information, impacts, risks, and opportunities are to be disclosed. Disclosure of information in accordance with the ESRS requires, in addition to the relevant metrics, a description of the company’s existing policies, objectives, and measures. This creates expectations that companies will adopt such policies, objectives, and measures.
In addition to the CSRD, the EU has also issued the EU Taxonomy which classifies economic activities and defines which activities are environmentally sustainable. The EU Taxonomy has set 6 environmental objectives that represent an EU strategic vision:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
It provides companies, investors, and politicians with definitions of what activities can be considered environmentally sustainable.
An environmentally sustainable economic activity contributes substantially to one or more of the environmental objectives, does not significantly harm any of the environmental objectives, and is carried out in compliance with the minimum safeguards related to human rights and workers’ rights.
Before the adoption of the CSRD, the voluntary Global Reporting Initiative (GRI) standards were most frequently used by European companies and, together with the TCFD, became the basis for the preparation of the ESRS standards.
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