There have been great strides in the field of corporate sustainability over the last 12 months, but more companies need to get a better grasp of this topic. Why? Because it’s going to have a tremendous impact on their business in the coming years as new regulations come into force and the demand for transparency increases. Before we dive into what’s on the horizon for Environmental, Social, and Governance (ESG) reporting in 2022, let’s take a look at what’s been happening at SmartHead – one of the advocates of the European Technology Chamber focusing on corporate sustainability data management, communication, and ESG reporting.
What happened at SmartHead in 2021
In short, 2021 was a year of growth for SmartHead. More companies than ever before recognised the value created by tracking their sustainability efforts and communicating them to their stakeholders through this sustainability and ESG reporting platform. Sustainability activity on besmarthead.com grew by 83% compared to 2020 and 198% compared to 2019. This upsurge in activity was fueled by the enormous increase in companies creating profiles on SmartHead: 259% over 2020 and a staggering 1,109% over 2019.
What’s driving this growth?
One of the reasons for this huge uptake and increased activity is that many forward-thinking enterprises are responding to stakeholder demands. But who are these stakeholders? A Gartner survey of 183 international companies asked, “Which are the main stakeholder groups creating pressure on companies to act sustainably?” The results showed that the top 4 stakeholder groups are: customers, investors, regulators, and employees. All of them want information about how companies contribute to sustainable development. It’s therefore clear that communication is becoming a crucial part of corporate sustainability. What these stakeholders really want is information they can understand and most importantly, trust. That’s why so many organisations turn to SmartHead to help manage and deliver their sustainability communication, because SmartHead can deliver what stakeholders are asking for.
The role of the private sector in achieving sustainability
ESG reporting and its communications are more than just responding to stakeholders’ desires; regulations require accurate reporting, and with good reason. As the adage goes, if you can’t measure, you can’t manage. Now more than ever, society needs the private sector to be able to measure and manage its collective impact on people and the environment, in order to take effective action.
Following the Paris Agreement, the European parliament voted to support the European Green Deal, and called for even greater ambition, as the EU aims to transform into a truly sustainable economy. In numbers, this means reducing net greenhouse gas emissions by at least 55% for 2030, with the ultimate goal of achieving net-zero emissions by 2050. To meet these goals, companies will have to adjust to these new conditions. While much is made of the role the individual has to play in securing our planet’s future, ultimately it will be the private sector that determines the final result. But how can companies demonstrate their commitment to sustainability? And what reports are they required to make now, and what changes are coming?
How it started: Non-Financial Reporting Directive (NFRD)
In 2018, the EU introduced the Non-Financial Reporting Directive (NFRD), which required large public-interest entities with over 500 employees to report their sustainability performance. After the launch of the NFRD, there were calls for expansion of the reporting requirements to further address the concerns of companies’ stakeholders. As previously mentioned, the primary users of sustainability information are investors, regulators, customers, and employees, together with NGOs and social partners.
How it’s going: Corporate Sustainability Reporting Directive (CSRD)
Replacing and building on the NFRD, the Corporate Sustainability Reporting Directive (CSRD) will require approximately 50,000 EU companies to report their impact on society and the environment (ESG reporting). This is a stark increase on the NFRD, whose requirements meant only 11,000 EU companies had to file reports. When it comes into force, the CSRD will apply to companies who meet 2 of the 3 following conditions:
- Net turnover of €40M and above
- Assets of €20M and above
- 250 Employees or more
The preliminary set of standards, European Sustainability Reporting Standards (ESRS), should be announced in the second half of 2022. Companies will have to start reporting in accordance with CSRD in 2024, using information from the previous year. While there’s time for companies to get on board with the changes, the fact is the sooner they begin meeting these standards, the easier it will be for them to ensure they’re compliant when CSRD comes into effect.
Sustainability reporting convergence
When it comes to sustainability reporting it’s not always been smooth sailing. According to the European Commission, there are several problems that repeatedly occur when companies try to provide stakeholders with reports. For example, some companies don’t include the information that stakeholders actually want or that’s relevant for them. Other issues include the reliability of information and being able to compare companies. In essence, the supply of information is not meeting demand, which is growing as people become more concerned with the need for sustainability.
Part of the reason why companies are struggling to provide the information stakeholders want is due to a perceived lack of clarity in requirements, combined with the large number of frameworks that companies can use to report on their sustainability performance.
With this in mind, EFRAG’s Project Task Force on European Sustainability Reporting Standards (PTF-ESRS) aims to work towards international sustainability reporting convergence to prevent these problems. EFRAG intends to cooperate on creating European Sustainability Reporting Standards (ESRS) in conjunction with leading international sustainability reporting standards and announced signing the Statement of Cooperation between EFRAG PTF-ESRS and GRI in July 2021.
So, there’s plenty of change ahead, but for the better. While there may be bumps in the road, the journey to a sustainable future is achievable. If you’re interested in finding out more or are looking to start your own journey, do not hesitate to reach out to SmartHead.
SmartHead is a cloud-based software tool for companies of all sizes to manage, track, report, and communicate their sustainability activities and ESG in one place. Publicly accessible company Sustainability Profiles ensure stakeholders have easy access to sustainability information. Alternatively, companies can keep their Sustainability Profile in private mode only for internal purposes. SmartHead is currently in the process of certification by GRI (GRI Software & Tool Partner) and is trusted by companies such as Dell Technologies, EY, Tesco, Kaufland, McDonald’s, IBM, Henkel, BMW and others.
CSRD – Corporate Sustainability Reporting Directive is a new EU regulation that will replace and build on NFRD. Nearly 50,000 companies will have to report on their sustainability and audit reported information. Sustainability reporting will have to follow ESRS (see below).
EFRAG – European Financial Reporting Advisory Group will develop European sustainability reporting standards (ESRS) that will be required by CSRD. In July 2021 EFRAG signed a “Statement of Cooperation” with the GRI (see below).
ESG – Environmental-Social-Governance, a scoring system compiled from data to measure a company’s sustainability performance.
ESRS – European Sustainability Reporting Standards.
GRI – Global Reporting Initiative, is an international independent standards organisation.
GRI Standards – The world’s most widely-used standards for sustainability reporting.
GSSB – Global Sustainability Standards Board, has developed GRI Standards.
NFRD – Non-Financial Reporting Directive, a set of EU rules applied to large public-interest companies with over 500 employees. Launched in 2018, it requires liable companies to report on the social and environmental impact of their activities (approx. 11,700 companies).
SFDR – Sustainable Finance Disclosure Regulation, intended to support the European Green Deal. In effect since March 2021, it is a set of EU rules intended to increase transparency on sustainability reporting among financial institutions and market participants (applicable to banks, insurers, asset managers and investment firms).