ESG – The Next Step in Sustainability Reporting

With the announcement of the Corporate Sustainability Reporting Directive (CSRD) back in April sustainability reporting is beginning to take center stage, but what does ESG mean and what does it have to do with iXBRL?

On April 21, 2021, the European Commission announced the adoption of the proposal for a new Corporate Sustainability Reporting Directive (CSRD) which will mean that all large and listed European companies will be required to report on environmental, social and governance matters.

In this article we’ll give you an introduction to ESG reporting as well as the new CSRD, what it will mean for European companies, and how it all relates to iXBRL.

What Is ESG Reporting?

ESG is short for “Environmental, Social and Governance”, and it is the disclosure of factors related to the three areas outlined in the acronym. It is intended to give investors and financial stakeholders the ability to analyze how companies operate and manage social, environmental and governance challenges.

ESG reporting is by no means new. In fact, the Non-Financial Reporting Directive (NFSRD), which was instituted in 2018 requires that European public interest companies report on ESG.

Why You Should Care about ESG Reporting

As with any other reporting standard it’s easy to just think that compliance is the reason why you need to care about it, but that is also ignoring a larger truth. Environmental and social awareness are key factors in society, and a big carbon footprint or poor treatment of employees can be as destructive to a company’s stock value as poor financial results.

Over the past years we’ve seen investors become increasingly interested in the non-financial factors surrounding environmental challenges and social matters as part of their analysis process. It’s become a part of the process in identifying material risks and growth opportunities.

In past years specific larger companies have been required to report on ESG, but with the adoption of CSRD the number of companies who will need to report on ESG will explode.

What Information Should Be Disclosed in ESG Reporting?

ESG reporting focuses on disclosing factors within the environmental, social and governance areas. In Europe, Directive 2014/95/EU requires certain large companies to publish information on how they manage

  • environmental challenges
  • social matters and treatment of employees
  • human rights
  • anti-corruption and bribery
  • diversity on company boards

While the factors reported on in ESG can often be measured (employee turnover, for instance, can be measured), it is often more difficult to assign a monetary value to these factors (for instance, what the annual cost of employee turnover is).

Is ESG Reporting Mandatory in Europe?

To help investors, civil society organizations, consumers, policy makers, and other stakeholders evaluate the non-financial performance of certain large companies EU law requires them to disclose information on how they manage social, environmental and governance challenges.

Who Needs to Report on ESG?

The NFRD currently requires large public-interest companies with over 500 employees to report on ESG. The definition of “large public-interest companies” includes:

  • listed companies
  • banks
  • insurance companies
  • companies designated as public interest companies

This definition means that approximately 11,700 companies are affected, but with the adoption of the CSRD, the requirement to report on ESG matters will extend to a much larger audience.  By the time the CSRD has been fully implemented nearly 50.000 filers will be reporting on ESG instead of the 11,700 companies currently affected.

When Will the CSRD Take Effect?

Just like the NFRD, the CSRD will need to be adopted by the member states before December 1, 2022. This means that the CSRD will most likely come into effect for reporting years starting on or after January 1, 2023, for large and listed companies in Europe.

ESG reporting timeline

How Will the CSRD Change ESG Reporting?

The Corporate Sustainability Reporting Directive (CSRD) will amend and replace the current Non-Financial Reporting Directive (NFRD) in the following ways:

  • It will extend the scope to all large companies and all companies listed on European regulated markets (not including micro-enterprises)
  • It will require the assurance of the reported information in the form of an audit
  • It will introduce more detailed reporting requirements
  • It will add a requirement to report according to mandatory sustainability standards
  • It will require companies to digitally tag the reported information, making it machine readable and it will feed into the ESAP (European Single Access Point)

ESG and iXBRL

The number of companies needing to report on ESG matters isn’t the only thing which will change with the Corporate Sustainability Reporting Directive (CSRD). The CSRD will require the use of iXBRL when reporting on ESG matters, to ensure detailed, consistent, and structured data.

In essence it will extend the European Single Electronic Format (ESEF) to also cover non-financial reporting such as ESG.

Kim Eriksen

Kim Eriksen

Kim Eriksen is the co-founder and CEO of ParsePort

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