How European Companies Are Preparing for New Sustainability Standards in 2024: Initial Steps and Challenges
Oryx Group
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The year 2024 presents a significant challenge for many businesses in the European Union with the implementation of the European Sustainability Reporting Standards (ESRS). These new regulations, now in effect, require companies to rethink their strategies and adapt to the demands of assessing the impact of their environmental, social and governance (ESG) activities. In this context, a study conducted by the European Financial Reporting Advisory Group (EFRAG) offers valuable insights that can help Polish companies better prepare for these changes.
Key Practices and Challenges in Implementing ESRS
1. Double Materiality Assessment
The double materiality assessment under ESRS is a groundbreaking approach that requires companies to analyze both financial materiality and the impact of their activities on ESG aspects. This process involves several key stages aimed at identifying, understanding, and managing significant sustainability issues.
Business reality: Companies first establish context and map stakeholders and internal experts to define their overall approach to the double materiality assessment. During this process, they create a long list of ESG topics, identifying key sustainability issues based on ESRS guidelines, industry standards (e.g., SASB), and external stakeholder opinions. Once the long list is compiled, companies narrow it down to a short list of critical ESG topics. Internal experts and stakeholders are engaged in this process to ensure a precise connection between topics and disclosure requirements, as well as data points. Subsequently, companies conduct a materiality assessment based on data analysis and stakeholder consultations, prioritizing the most relevant data for their business operations.
Challenge: The most significant difficulties in the double materiality assessment stem from the need for access to appropriate data and expert involvement in the evaluation process. About 70% of surveyed companies base their approach on objective evidence. While a subjective approach may consider a broader range of issues deemed material, it carries the risk of subjective judgments not grounded in hard data.
2. Managing Data Points
Effective data management is a crucial element in the implementation of ESRS. These standards require companies to precisely determine which data is most important for ESG reporting.
Business reality: 95% of companies implementing ESRS have utilized EFRAG IG 3 implementation guidelines to identify gaps in their reporting. Additionally, 75% of companies opt for a gradual implementation of the standards to better manage priorities, while 20% plan to use IG 3 in future digital taxonomy for data tagging.
Challenge: Many companies still struggle to understand which data is most relevant to their ESG reports. Understanding data materiality means companies must focus on information that has the greatest impact on the quality and reliability of ESG reports. If companies fail to identify these key data points, they may produce overly complex and difficult-to-manage reports, potentially distracting from and diminishing the quality of the reports.
3. Value Chain Mapping
Accurate value chain mapping is essential for understanding impacts, risks, and opportunities in the context of ESRS. Companies must identify where their operations have the most significant impact on sustainability.
Business reality: Businesses strive for precise value chain mapping, aiming to balance detail with data aggregation. Most companies highlight the need for further sectoral guidelines to ensure more comparable and precise reporting.
Challenge: Differences in approaches to value chain mapping across sectors and between financial and non-financial institutions indicate the need to tailor strategies to industry specifics. Identifying "hotspots" in the value chain, which point to areas of high risk or development potential, is also crucial.
4. Organizational Approaches to ESG Reporting
Implementing ESRS requires companies to rethink their organizational structures and how they manage ESG reporting. Many companies opt to implement cross-functional collaboration models, allowing for better data and reporting process management.
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Business reality: 65% of companies have chosen a model where a single function, such as the CSO or CFO, is responsible for overall ESG reporting management. Key departments involved in this process include Sustainability, Finance, Risk Management, Human Resources, and Audit, emphasizing the interdisciplinary nature of this process. Companies are also introducing quality control mechanisms, similar to those used in financial reporting, to ensure data accuracy.
Challenge: One of the biggest challenges remains IT transformation and the integration of ESG reporting with other business processes. This requires not only the adaptation of tools but also a shift in how data management and internal communication are approached.
Conclusions and Recommendations
The EFRAG study provides valuable insights into the initial practices of large enterprises in the European Union regarding ESRS implementation. Key challenges, such as double materiality assessment, value chain analysis, and data point management, are critical areas where companies need to focus their efforts. Implementing ESRS requires not only operational adjustments but also a strategic approach to risk management and seizing opportunities in sustainability.
Recommendations
- Increased Stakeholder Engagement: Actively engaging internal and external stakeholders is crucial for accurately identifying key ESG issues. Consultations and regular communication can significantly improve reporting quality.
- Education and Training: Investing in training programs to increase employee knowledge of the new ESRS standards is essential. Teams responsible for ESG reporting must be well-versed in the new requirements.
- Systematic Approach to Data: Prioritizing key data will help companies create concise and valuable reports, avoiding an excess of less important information.
- Using Objective Evidence in Double Materiality Assessment: Relying on hard data, such as industry and geographic indicators, can significantly enhance the credibility of the assessment results.
- Strategic Approach to Value Chain: Striving to balance detail with data aggregation in value chain mapping will help companies better manage risk and capitalize on potential opportunities.
Implementing ESRS is a process that will undoubtedly challenge many companies. However, well-prepared businesses will not only meet the new requirements but also use this opportunity to build a stronger, more sustainable brand.
Feel free to review the full EFRAG study. I also encourage you to share your insights on implementing ESRS – what has your experience been?
If you want to discuss #ESG matters with our experts from Oryx Group and the author of this article Grzegorz Floriański - feel free to contact us via Linkedin, we will be happy to exchange ideas and support you in your business!
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Link to the EFRAG report: