.svg)
A paradigm shift in reporting, a new challenge for mid-sized companies, the challenge of double materiality, growing interest among CFOs in ESG data management, data availability and reliability... the CSRD directive has been the subject of much discussion in recent months. As the weeks go by, the issue of sustainability governance appears to be becoming a major challenge for the future implementation of the directive.
Reading through the draft standards published last November (drafts of the European Sustainability Reporting Standards: ESRS 1 "General requirements," ESRS 2 "General disclosure," and ESRS G1 "Business conduct"), we see the omnipresence of governance and the importance of requirements in this area. And this is ultimately quite logical, given that the CSRD is intended to be the driving force behind the ecological transition sought by the European Union, CSRD sustainability reports will have to demonstrate the involvement of governance in their company's contribution to this transition, and therefore in the transformation of their company towards a sustainable model.
The CSRD emphasizes the necessary involvement of governance
The CSRD will require reporting in three areas, which in a sense call for governance involvement in the implementation of energy, ecological, and social transitions.
- Strategy: strategy and business model, governance, and analysis of key impacts, risks, and opportunities.
- Implementation (policies, objectives, actions, and allocated resources),
- Performance (indicators, particularly those used to monitor 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 dealing with the usual backward-looking reporting, based on regulatory, annual, static data, with no commitment, no trajectory, and no objectives.
The CSRD will result in the publication of a sustainability report, of course, but above all it will involve publishing a report on the transformation of the company's model and its management. This means proving the genuine involvement of the governance bodies.
The primary information requirement
Requires that the information to be provided under governance relates to the role of the administrative, management, and supervisory bodies in relation to sustainability, as well as their competence or expertise in this area, or access to expertise and skills in relation to sustainability.
Regarding CSR skills, according to Ethics & Boards, 24% of SBF120 boards mentioned climate/CSR training in their DEU in 2021. Unfortunately, they did not mention the number of hours dedicated to this training. But was the data on the number of hours available in the DPEFs published for the 2021 fiscal year, and will it be available in the DPEFs currently being published?
Last February, Novethic ran the headline "Already 220 administrative directors trained in environmental issues, the beginnings of a shift."The article reported that these senior government officials would be taking a 28-hour course on ecological transition: La Fresque du Climat, 2tonnes, conferences, and field visits. This information could give private companies ideas on how to demonstrate the growing competence of their governing bodies.
The second information requirement
Concerns the information provided to administrative, management, and supervisory bodies on issues relating to sustainable development and how these issues were addressed during the reporting period. The purpose of this reporting requirement is to enable stakeholders to understand how administrative, management, and supervisory bodies are informed about sustainable development issues, as well as the information and issues 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 role.
According to the IFA - Ethics&Board Barometer of the SBF 120 - Post AG 2022, 71.7% of companies will have a CSR committee in 2022 (compared to 47.5% in 2019). This sharp increase tends to confirm that environmental and societal issues are being taken into account by boards of companies that are already well-versed in non-financial reporting, with most of them having 20 years of experience in this area.
On the other hand, what about unlisted companies that are already subject to the DPEF, and more specifically, what about mid-sized companies that were not previously subject to any reporting requirements? According to a 2021 survey published by the Mouvement des Entreprises de Taille Intermédiaire (Meti), 95% of mid-sized companies are pursuing ESG commitments, while two-thirds of mid-sized companies with fewer than 500 employees have already carried out a carbon assessment covering scopes 1, 2, and 3. These figures are ultimately very encouraging. But was the sample representative of the approximately 5,530 French mid-sized companies (Source: INSEE)? In any case, Meti estimated that the resources required for this initiative would be enormous.
The third information requirement
Concerns incentive mechanisms related 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' missions, particularly with regard to climate change.
With regard to remuneration linked to sustainability issues, the previous version of the Governance Code already recommended that the remuneration of executive corporate officers (chairman and chief executive officer, chief executive officer, deputy chief executive officers, chairman and members of the executive board, manager of a limited partnership with share capital) should incorporate several CSR-related criteria (former Art. 25.1.1). The new version completes the provisions: "these criteria must be precisely defined and reflect the social and economic issues that are most important to the company; quantifiable criteria must be given priority and at least one criterion must be related to the company's climate objectives (new Art. 26.1.1)."
However, care must be taken to ensure that bonuses are aligned with ambitious targets, particularly in terms of climate change. They must be defined in accordance with the Paris Agreement to limit global warming to 1.5°C.
The fourth information requirement
Concerns the statement on due diligence in relation to sustainable development. The purpose of this reporting requirement is to facilitate understanding of the company's due diligence process(es) with regard to sustainable development issues.
This disclosure requirement does not impose any specific behavioral requirements with regard to due diligence in the area of sustainable development and does not extend or modify the role of administrative, management, and supervisory bodies as provided for in other laws or regulations.
The fifth information requirement
Concerns risk management and internal controls relating to sustainability reporting.
The purpose of this disclosure requirement is to enable an understanding of the company's risk management and internal control processes with regard to sustainability reporting.
The CSRD extends the role and responsibilities of the audit committee to sustainability reporting, particularly with regard to 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 in relation to sustainability reporting, where applicable, and internal auditing in this area.
In the most advanced companies, often those already subject to the DPEF and taxonomy, we are seeing CFOs and internal audit departments taking a new interest in these reporting issues. If non-financial information is no longer separate but becomes sustainability, encompassing both what used to be called non-financial and financial information, then reporting processes, governance, and the necessary reliability of data become crucial issues for governance. This is why the functions accustomed to the reporting and reliability process—CFOs and internal audit—are taking charge.
In conclusion, the CSRD marks a turning point in the implementation of CSR within companies. Better integrated, more cross-functional and shared, and more closely monitored, CSR is set to become a governance issue, whereas previously it was 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 themselves, evolve their business models, consider triple bottom line accounting, reorganize, and recruit the talent needed for this transformation without leaving behind the professions that will be affected by it. Sustainability is indeed a matter of governance!
Photo credit: 241596237 @Feodora