Three Things you should know about the new ESRS General Disclosures

Every professional in the Sustainability and ESG world is getting familiar with the new European Sustainability Reporting Standards (ESRS) officially adopted a few days ago in Brussels. This article is for those who are already knee-deep in their annual sustainability reporting preparation process and need one last reality check before getting swamped with IRO assessment spreadsheets.

Here are three insights about its General Disclosures part you ought to know, before things get too serious.

Own your materiality assessment: yes it‘s still a messy read but it actually confirms what pragmatic practitioners already figured out when applying the original ESRS three years ago.

You can‘t expect to forcefully involve your whole organization to perform a successful granular bottom-up assessment of all IROs that might be material.

Whether it is on a huge cranky spreadsheet or some sleek user interface of a new ESG software platform, the result always depends on the personal view of participants when choosing if the severity of a risk or an impact is „high“, „very high“ or „moderate“. You - or your external consultants - can come up with detailed methodologies to make sense of the results, but eventually you will end up using quite some long time to get biased, watered-down input from colleagues who often are just deputies or simply do not care too much about this additional homework. Traffic lights, smileys, whatever, the underlying quality of the assessment is often poor. I have been there: three-month long projects with on-boarding meetings and workshops, just to get a costly slide deck at the end where everything is - in one way or another - material. Definitely one of the reasons why companies got scared about the original ESRS and pushed back so much about it.

So, it‘s quite good now that the new EU rules allow the so-called top-down approach.

You as Sustainability Officer or Head of ESG Reporting can - and should - take ownership of the assessment. Not just the process, the results too.  

Sure you still can get some help from the outside, but this is your deliverable. If your Board members are concerned about budget and always questioning what you actually do, this becomes a huge opportunity. You can sit down with two or three other peers, e.g. your Head of Strategy, your Head of HR or your Chief Risk Officer, and draft a perfectly valid IRO assessment, based on externally available data and an analysis of the strategy and business model of your organization. Solid results at a fraction of the cost. The only caveat: what you choose, including the decision to exclude something that others outside might see relevant, needs to be explained. This top-down approach allows you to shape the topics that will have to be reported and, indirectly, the processes needed to get the info you need. As you might do such assessment every year (or even six months if you are into active ESG risk management) it allows you to define the pace and scope of ESG integration into the organization, much better than an overwhelming 60-page slide deck once prepared by an external consultancy with no stake in your journey.

No more fake positive impacts: finally the new ESRS will put an end to an old marketing trick used by too many. ESRS 3.2.1, 44) states: „(...)The results of actions to prevent, mitigate, bring to an end, minimise or remediate negative impacts the undertaking is connected to, or compliance with law and regulation, are not positive impacts“. Yep, that‘s right. You can‘t paint as positive impact something that is done just because you would be otherwise linked to the negative one.

Take the biodiversity topic: in the past there was always a self-congratulatory paragraph in the sustainability report where implementing environmental management systems at site level or allowing some birds to nest near an operational area were praised as great positive impacts on nature. It didn‘t matter if this was something anyway required by local environmental permits. From now on, save yourself the effort and simply explain that these are mitigation or prevention actions already in place. This example is a reminder that ESRS are pushing companies towards a balanced and neutral reporting, leaving behind misleading practices. So don‘t be afraid to bring this up in the next IRO workshop.

Sustainability governance is key: the general requirements from GOV-1 to GOV-4 are often overlooked but are actually a hidden little gem. If you are in the lucky position to build from scratch a new sustainability department, you better read them well. If you instead manage a whole team with legacy processes and struggle running what you already have, reading this list of requirements might feel like a slap in the face. Why? The aim of the ESRS here is to enhance accountability and oversight on material impacts, risks and opportunities at top level. This means more transparency on risk assessments, due diligence and internal control processes - including checking if the Board members have sufficient knowledge and skills on sustainability matters.

It‘s easy to realize that many companies in scope won‘t be able to meet them right away. Maybe on the first year they will try to lean on some catch-all policy or existing code of conduct, to show some sort of overarching framework of reference. The reality is that some organisations have still just one or two people handling whatever ESG-related issue comes in at operational level, with no dedicated governance set up or incentive scheme at Board level. Auditors love testing these requirements as they show how much an organization is really integrating sustainability and ESG priorities into the actual company administration and top management activities. So here is the suggestion: take these reporting requirements as guidance for building or evaluating the effectiveness of your internal management system. It‘s no rocket science, there are many models that would fit right in as well. Still, it is a useful tool to standardize a system and meet the expectations of your internal and external stakeholders.

In the end, the new ESRS aim for simplification without loosing on accountability. Sure there are ways to keep your disclosures at the bare minimum, but don‘t get fooled by just looking at the reduction in the data point count. There is still quite some serious work to do. The next two years will tell us if the new ESRS hit the target or not. What you can do in the meanwhile is to understand these detailed standards, not just as homework but rather as a textbook to study and smartly apply to your profession.