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A paradigm shift in reporting, a new challenge for mid-sized companies, the hurdle of double materiality, the growing interest of CFOs in managing ESG data, data availability and reliability… the CSRD directive has been generating a lot of buzz in recent months. As the weeks go by, the dimension of sustainability governance appears to be a major issue for the future implementation of the directive.
Reading the draft standards published last November (the European Sustainability Reporting Standards drafts: ESRS 1 “General requirements”, ESRS 2 “General disclosure”, and ESRS G1 “Business conduct”), one notes the omnipresence of governance and the importance of the requirements in this area. And this is ultimately quite logical, insofar as the CSRD is intended to be the operational arm of the ecological transition sought by the European Union, sustainability reports under the CSRD will have to prove the involvement of governance in their company's contribution to this transition, and therefore in the transformation of their business toward a sustainable model.
The CSRD highlights the necessary involvement of governance
The CSRD will require three areas of reporting, which in a way call for the involvement of governance in the implementation of energy, ecological, and social transitions.
- Strategy: strategy and business model, governance, and the analysis of key impacts, risks, and opportunities,
- Implementation (policies, objectives, actions, and allocated resources),
- Performance (indicators, particularly for monitoring the achievement of objectives).
The goal for companies will be to explain the governance processes, controls, and procedures put in place to monitor and manage sustainability issues. Once again, we will no longer be in the usual rearview-mirror reporting, built on regulatory, annual, static data, without commitment, without a trajectory, and without objectives.
The CSRD will result in the publication of a sustainability report, certainly, but it will primarily be about making public a report on the transformation of the company's model and its management. This implies proving the real involvement of governance bodies.
The first information requirement
Requires that the information to be provided regarding governance concerns the role of administrative, management, and supervisory bodies in sustainability, as well as their competence or expertise in this area, or access to expertise and skills in sustainability.
Regarding CSR skills, according to Ethics & Boards, 24% of SBF120 boards mentioned climate/CSR training in their 2021 registration documents. Unfortunately, without specifying the number of hours dedicated to this training. But was the data regarding the number of hours available in the non-financial performance statements (DPEF) published for the 2021 fiscal year, and will it be in the DPEFs currently being published?
Last February, Novethic ran the headline "220 government directors already trained in environmental issues, the first signs of a shift". We learned that these senior civil servants were to take a 28-hour module on ecological transition: The Climate Fresk, 2tonnes, lectures, and field visits... Information that might give private companies some ideas for proving the upskilling of their governance bodies?
The second information requirement
Concerns the information provided to administrative, management, and supervisory bodies regarding sustainability issues and how these matters were addressed during the reporting period. The purpose of this disclosure requirement is to enable stakeholders to understand how administrative, management, and supervisory bodies are informed about sustainability issues, as well as the information and topics they have addressed. The idea is to demonstrate that the members of these bodies have been properly informed and have been able to fulfill their roles.
According to the IFA - Ethics&Board SBF 120 Barometer - Post-AGM 2022 , 71.7% of companies had a CSR committee in 2022 (compared to 47.5% in 2019). A strong increase that tends to confirm that environmental and societal issues are being taken into account by the boards of companies already well-versed in non-financial reporting, with most having 20 years of practice.
However, what about non-listed companies already subject to the DPEF, and more specifically, what about mid-sized companies (ETIs) that previously had no reporting obligations? According to a 2021 survey published by the Mouvement des Entreprises de Taille Intermédiaire (Meti), 95% of ETIs pursue ESG commitments, while two-thirds of ETIs with fewer than 500 employees have already conducted a carbon footprint assessment covering scopes 1, 2, and 3. These figures are ultimately very encouraging. But was the sample representative of the approximately 5,530 French ETIs (Source: INSEE)? Regardless, the Meti estimated that the resources to be allocated to the process were colossal.
The third information requirement
Concerns incentive mechanisms linked to sustainability issues for members of the board of directors, supervisory board, and management. The new Afep-Medef Governance Code places social and environmental responsibility issues at the heart of the board of directors' duties, particularly regarding climate matters.
Regarding remuneration linked to sustainability issues, the previous version of the Governance Code already recommended that the remuneration of executive corporate officers (Chairman and CEO, CEO, Deputy CEOs, Chairman and members of the Management Board, manager of a partnership limited by shares) include several CSR-related criteria (former Art. 25.1.1). The new version completes the framework: "these criteria must be defined precisely and reflect the most important social and economic issues for the company; quantifiable criteria should be prioritized, and at least one criterion must be linked to climate objectives of the company (new art. 26.1.1).”
However, care must be taken to ensure that bonuses are aligned with ambitious objectives, particularly regarding climate change; they must be defined in compliance with the Paris Agreement to limit global warming to 1.5°C.
The fourth disclosure requirement
Concerns the statement on sustainability due diligence. The purpose of this disclosure requirement is to facilitate an understanding of the company's due diligence process(es) regarding sustainability matters.
This disclosure requirement does not impose specific behavioral requirements regarding sustainability due diligence actions, nor does it extend or modify the role of administrative, management, and supervisory bodies as provided for by other legislative or regulatory texts.
The fifth disclosure requirement
Concerns risk management and internal controls regarding sustainability reporting.
The purpose of this disclosure requirement is to provide an understanding of the company's risk management and internal control processes regarding sustainability reporting.
The CSRD expands the role and responsibilities of the audit committee to include sustainability reporting, particularly regarding integrity, monitoring, and auditing. It thus revises Directive 2014/56/EU (the Audit Directive). The audit committee will be required to oversee the sustainability reporting process, the effectiveness of internal control and risk management systems regarding sustainability reporting, and, where applicable, internal audit functions in this area.
In the most advanced companies—often those already subject to the DPEF and the taxonomy—we are seeing a new level of attention paid to these reporting topics by CFOs and internal audit teams. If "non-financial" is no longer the term, and we are moving toward "sustainability"—placing what was previously called non-financial and financial on the same level—then reporting processes, governance, and the necessary reliability of data become a crucial issue for leadership. Hence the shift toward functions accustomed to reporting and reliability processes: CFOs and internal audit.
In conclusion, the CSRD marks a turning point in the implementation of CSR within companies. Better integrated, more cross-functional, shared, and driven, CSR is set to become a governance issue, whereas it was previously confined to a regulatory requirement and a communication opportunity. Moving from Corporate Social Responsibility (CSR) to sustainability is not as simple as it seems. Companies are being called upon to transform, to evolve their business models, to consider the path of triple-bottom-line accounting, to reorganize, and to recruit the talent essential for this transformation without leaving behind the roles that will be affected by it. Sustainability is truly a matter for governance!
Photo credit: 241596237 @Feodora