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For supervisory authorities and many NGOs alike, the lack of transparency in ESG reporting by companies and investors is a recurring theme. European regulatory developments, including the Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive, aim to improve the transparency of reporting by both real economy players and financial actors.
Stakeholder demand for transparency regarding the environmental, social, and governance impacts of companies and investors has significantly increased in recent years. What stakeholders want is access to concise, reliable, consistent, comparable, and verifiable information and data, expressed in clear language understandable to the widest possible audience.
Banks, for their part, are increasingly expected to prioritize companies' ESG reporting. For instance, LCL, a partner of Tennaxia, testified at the last Produrable event about the evolving role of banks alongside companies in financing the transition, through green financing tools and the necessity for companies to manage their ESG performance and share data with them. The need for transparency is also paramount here.
Transparency thus emerges as the cornerstone for legitimizing the environmental and social policies implemented by companies. It serves as proof of the reality of commitments made by companies and, by extension, is also a prerequisite for financial actors to contribute to ecological, energy, and social transitions.
Transparency in ESG reporting by companies, as well as by financial actors, is ultimately the best anti-greenwashing safeguard that can be employed. Easier said than done?
Transparency and Materiality
The Non-Financial Performance Statement (DPEF) aimed to encourage companies to focus on material information, while simultaneously encouraging greater transparency. Ultimately, the idea was to lead reporters to publish more concise reports. However, the 2019 Medef – EY – Deloitte study showed that the page count of DPEFs had, on the contrary, increased. Transparency should not be a source of information overload!
Transparency in corporate ESG reporting should enable the identification of all sustainability-related elements capable of creating or eroding value. In other words, it should allow for the assessment of environmental and social risks and opportunities that could affect the company's value. This refers to single materiality, also known as financial materiality, which is currently advocated by the International Sustainability Standards Board (ISSB), now chaired by Emmanuel Faber.
Transparency in corporate ESG reporting must also enable the identification of their contributions to sustainable development, i.e., their actions having a substantial, positive or negative impact on Society and the Environment. The integration of this second perspective aligns with the double materiality concept championed by Europe. Sustainable finance actors must be able to assess both the impact of environmental and social issues on the company's activities and the impact of the company's activities on the environment and its sphere of influence.
The materiality analysis itself must be transparent in reporting. This means specifying the methodology used to identify the issues submitted for evaluation by internal and external stakeholders. In doing so, it should clarify who these stakeholders are and how they were identified. Finally, transparency regarding the assessment framework for risks and opportunities. What credibility can be given to the publication of a materiality matrix without this essential transparency?
Transparency and the Corporate Sustainability Reporting Directive
Mairead McGuinness (European Commissioner for Financial Services) recalled last April that "Sustainable investment is about making the right choices. To make the right choices, you need good information." Having good, consistent, relevant, comparable, and reliable information is the objective assigned to the CSRD , which is set to offer the 49,000 affected companies a single set of ESG reporting standards, thereby obliging these companies to greater transparency and accountability in their reporting.
With the CSRD, companies will, for example, have to transparently report on the involvement of governance in decisions and actions taken to contribute to climate change mitigation and adaptation. They will, for example, need to show how this affects and impacts the remuneration of executives, managers, and all employees...
In this regard, according to Ethics and Boards, there are currently only 5% of climate criteria in the variable remuneration policies of CAC 40 CEOs in 2021. This figure suggests that significant room for improvement exists to enhance the credibility of corporate governance involvement in the fight against climate change. And this is what should be required for financial years starting from 1st January 2023.
Still on the topic of climate change, the increased level of requirement and precision demanded by the CSRD should lead companies to more clearly define the scopes considered regarding the company's organization. This will also concern the scope adopted for Scope 3 carbon emissions (as a reminder, according to a recent BCG Gamma study of 1290 companies in twelve countries, 9% of companies accurately measure their CO2 emissions. 81% of them omit some of their internal emissions, and 66% do not report any of their external emissions). The definition of indicators and details on coverage rates can also be added.
With the CSRD, companies will have to report on the results achieved against objectives set over specific periods (a five-year period seems to be emerging). This is a change of paramount importance. This transparency will enable stakeholders to more easily make sectoral comparisons and thus verify the actual level of performance of the commitments made.
In conclusion,
the demand for transparency has continuously increased since the NRE law came into force in 2003. The standardization work on ESG reporting for companies and investors, undertaken by the European Financial Reporting Advisory Group (EFRAG), will significantly raise the level of transparency required for ESG reporting. It is clear that this will be much more than just another compliance exercise.
For companies most experienced in reporting, this will require making some adjustments, providing some clarifications, and nevertheless responding to the new standardized metrics. For others, it will involve making a significant qualitative leap. In this regard, it would seem advisable to conduct a gap analysis as soon as possible between the current situation and the emerging future requirements, despite existing uncertainties.
For SAS companies and SMEs with more than 250 employees that were not previously subject to the DPEF, the sooner they start considering the implementation of the CSRD, the better prepared they will be to face the challenge they will have to address.
Photo credit: 177923174@Drobot Dean