ESG reporting challenges and solutions

The EU Directive on Corporate Sustainability Reporting (CSRD), approved on November 28, at the European Union level, marks the biggest transformation in corporate reporting in almost 20 years, when the first accounting regulations harmonized with International Accounting Standards (IAS) were launched in Romania.

Companies are no longer evaluated today solely from an economic-financial perspective, with commitments to ESG (Environment, Society, Governance) needing to be integrated into a business strategy and an organization’s mission in order to meet regulatory frameworks and expectations from users of corporate information.

CSRD has introduced extensive changes to reporting requirements and includes a much wider range of reporting companies within its scope. Implementation of these requirements is crucial in supporting the stated objective of the European Commission to direct capital flows towards sustainable activities.

The Directive provides for the presentation of information on aspects such as the business model, strategy and related policies, key non-financial performance indicators and targets, company governance on sustainability aspects, double materiality assessment, ESG risk and opportunity management, as well as information presentations on environmental (including European taxonomy) and social areas, in accordance with European sustainability reporting standards.

The challenges and opportunities in the journey towards preparing for future sustainability reporting are complex and varied:

• Double materiality assessment, which increases complexity by requiring identification not only of the company’s impact on society and the environment (impact materiality), but also how sustainability aspects affect the reporting entity itself (financial materiality);
• In addition to providing information on policies and initiatives, CSRD requires the organization to set objectives related to sustainability aspects and report on progress towards achieving them;
• Companies must report and assess the impact of their own operations and production processes. This also applies to the impact of the activities of their partners in the supply chain;
• The details presented must contain both prospective and retrospective information, expanding the scope to the entire value chain (the company must explain the steps taken to obtain necessary information about its value chain, reasons why all necessary information could not be obtained, and its plans to obtain necessary information in the future);

Reporting must be prepared in accordance with European sustainability reporting standards (ESRS – “EU Sustainability Reporting Standards”), which will increase reporting requirements; the first set of ESRS adopted by the European Commission is expected in June 2023; the second set of ESRS (including sectoral standards) adopted by the European Commission is expected in June 2024; ESRS will require companies to present information aligned with the European taxonomy.

The new sustainability reporting rules will gradually apply between 2024 and 2028, as follows:

• From January 1, 2024 for public interest companies with over 500 employees, reports being issued in the year 2025;
• From January 1, 2025 for large companies (exceeding 2 of the size criteria: over 250 employees and/or 40 million euros in turnover and/or 20 million euros in total assets), reports being issued in the year 2026;
• From January 1, 2026 for SMEs listed on the stock exchange, reports being issued in the year 2027.

The new sustainability reporting constitutes a catalyst for change and plays a vital role in shaping the future. The responsibility for implementing sustainability reporting and how future challenges impacting the future of the planet will be addressed lies with the boards of directors. While preparing for CSRD requires substantial investments and specialized resources, organizations could also gain a competitive advantage by integrating the new reporting framework into the risk assessment and opportunities evaluation process related to ESG. We are witnessing a profound change in the corporate reporting landscape, with ESG reporting evolving from a niche segment to a new dimension, where sustainability aspects are measured and reported with the same rigor as financial information.

The independent assurance report issued by the financial auditor on sustainability reporting plays an essential role in building trust in the robustness of non-financial information, offering benefits such as: Ensuring credibility of ESG information presentations within the annual report;

Creating a positive impact on the company’s brand and reputation; Strengthening the company’s awareness of material ESG risks and facilitating improvement of systems, processes, internal controls, and performance in the ESG area; Affecting the company’s positioning in ESG rating rankings.

Sustainability reporting and adopting governance frameworks that incorporate sustainability principles generate changes in the economy in general, and in financial services in particular.

In particular, potential risks to financial stability due to climate change are a key priority for prudential regulatory authorities and financial institutions. The specific legislative framework for banks and insurers requires them to consider sustainability factors in their risk frameworks and stress tests. Banks and insurers should understand their own and clients’ exposures when determining their strategy and business model.

Reporting in accordance with CSRD will be an essential step in this direction.

The initial ESRS standards have already been approved and published by the European Financial Reporting Advisory Group (EFRAG) and have been submitted to the European Commission for approval. In parallel, work is underway on sectoral standards in several working groups. Companies from various sectors will be affected differently, but certainly all companies will be impacted by the new requirements.

The scope and complexity of ESRS are unprecedented, and considering that the deadline for the first reporting is approaching rapidly, companies must be prepared.

 Sustainability Services Sustainability in Romania

The right company for business will boasts a team endowed with extensive expertise, adept at managing a diverse array of project types. Their focus is sharp, particularly on several critical areas such as public sector strategies, green ESG sustainability, circular economy, decarbonization, and sustainable financing, where they stand out with their strategic acumen and detailed reporting. With a stronghold in the sustainability sector across Central Europe, the company continues to weave its narrative of success into the fabric of Romania’s market.

Their offerings are comprehensive. From ESG reporting and the development or revision of sustainability policies to organizing workshops and educational programs, the company you choose should be dedicated to enhancing corporate sustainability practices. A significant part of their service portfolio includes implementing decarbonization strategies aimed at reducing greenhouse gas emissions. This not only helps in mitigating environmental impact but also assists companies in aligning their operations with global sustainability goals. The company should also provides carbon footprint calculation services, ensuring a meticulous approach to decarbonization which includes cost analysis, factory-level implementation, preparation of engagement materials, and an interactive model for ongoing tracking and reporting.

They delve deep into the economic implications of decarbonization, staying abreast of trends, and conducting comparative analyses to advocate for best practices. Their methodical approach in identifying and evaluating potential solutions should  take into consideration geographic specificity and the integration of renewable energy sources, thereby designing roadmaps that align with the Science Based Targets initiative.

In terms of sustainable financing, the company should support businesses through offerings such as green financial products, assessments of financial exposure to ESG risks, assistance with EU grants, development of regulatory frameworks, and more. Their expertise would extends to evaluating and supporting adjustments in credit and investment portfolios to better align with ESG and climate financing requirements.

The circular economy is another pivotal area where it should make a significant impact. Recognizing the growing national importance of this approach, they would aid companies in transitioning towards more sustainable practices. This includes strategies for circular procurement, packaging cost reduction, and the development of circular policies.

The public sector’s role in sustainability is another area where the right company lends its expertise. They assist local and central public authorities, and public companies, in defining and implementing strategies for mitigating and adapting to climate change, fostering a more sustainable world.

In addition to these services, it should place a strong emphasis on continuous training and capability expansion of its team to address a wide range of projects in the sustainability and environmental sectors. Their service offerings are enriched with ESG due diligence, value chain transformation, preparation for ESG ratings, and various analyses and models related to economic and climate impacts.

Through its expansive services and dedication to sustainability, the right company will not only aid in transforming corporate approaches to environmental responsibility but also ensures these changes are rooted in strategic, economic, and practical realities.