Below we explain why now is the time to start taking action on preparing your ESG strategy, why an ESG strategy is so important, and which challenges you might face in your ESG reporting.
When to start preparing your ESG strategy
When is the right time to start preparing for the new EU sustainability legislation? The short answer is: now. Let’s break that down in more detail below, depending on the size of your company:
Large companies that are already complying with NFRD
The CSRD legislation will come into effect in phases, starting in 2024. Companies who were already required to report under the non-financial disclosure regulation (NFRD) will have to start reporting according to the new directive for the 2024 year. They must start now to ensure that their reporting practices are in line with the new standards.
If companies have been reporting according to the Global Reporting Initiative (GRI), both GRI and EFRAG (the body that issued the new ESRS) have assured companies that they should be well-prepared to report according to the new standards. The two sets of standards are closely aligned.
Companies newly falling under the sustainability reporting requirements
All companies with over 250 employees or a certain threshold of net turnover will have to start reporting for the 2025 year. See our article on everything you need to know about the new EU sustainability reporting guidelines for full details on which companies are covered.
Companies who are new to sustainability reporting are advised to start now to familiarize themselves with the new standards and ensure that they have adequate systems in place to measure and report on the required indicators.
A first step that companies should take is to conduct a materiality assessment, to find out what their priority environmental and social topics are. Such an assessment looks at the company’s impacts on stakeholders, as well as the social, environmental and governance risks facing the business. These impacts and risks are then scored and prioritized, to enable the company to develop their ESG strategy and define relevant indicators (KPIs) to measure and report on.
The process of conducting a materiality assessment and developing an ESG strategy can take up to six months, whereas the process of defining targets and implementing measurement systems can take longer, depending on the company’s status quo and chosen methodology. Therefore, if companies want to be sure that they have the required data to report by 2025, they must take action now.
SMEs falling under the criteria of the directive
If you are an SME and know that you fall under the new CSRD (see the requirements in our previous article covering all your need to know about ESRS and CSRD), you will have to start reporting according to the ESRS for the year 2026, but can postpone by one year if needed. However, though SMEs may have more time, they also may have more limited resources to collect the necessary data. Therefore, we recommend that even SMEs start preparing now with a materiality assessment and the definition of their ESG strategy.
Why is an ESG strategy so important?
Understanding your priority ESG risks and impacts will help you prevent and avoid them. This will protect your business, as well as make you a more responsible company.
Understanding your company’s impacts on people, nature and other stakeholders is vital if you want to be a sustainable business. Most responsible business owners and leaders do not want to have a company that makes profit at the expense of the wellbeing of people, animals or nature. Yet sometimes, the negative impacts are not well understood or even known. A key part of developing your ESG strategy is engaging with stakeholders to start understanding which negative impacts your company has or might be having.
What’s more, understanding impacts means being prepared for your biggest risks. Even if your business is doing well in the present, negative impacts on people and planet – otherwise known as externalities – will most definitely come to bite you in the future. This backlash can be in the form of negative publicity, costly fines or losing business partnerships.
What are the challenges of ESG reporting?
Developing an ESG strategy and report are time consuming tasks that require just as much effort as your financial reporting.
ESG reporting can be tricky, because there are so many different guidelines and standards, each of which contains dozens of indicators. The ESRS attempts to help companies by providing one unified reporting framework. However, learning how to report in compliance with those standards will take some effort. You will have to do the following and more:
- Come up with a methodology for your materiality assessment, which can be transparently reported
- Understanding which disclosures you will have to report in order to measure your material impacts and risks
- Report on all mandatory disclosures in the ESRS