B Lab Europe

EU Leads in ESG, But More Needed for Sustainability Disclosure

There is an increasing demand for companies to disclose their impact on people and the planet, but are the European Sustainability Reporting Standards ambitious enough to meet stakeholders’ needs?
reporting

We are witnessing a global trend of citizens, investors, and policy-makers demanding more transparency regarding the impact that companies have on people, communities, and the planet. This has led to the development of sustainability reporting standards both at the international and European levels, which are set to create a common language around sustainability-related disclosure.

 

ISSB’s standard vs. ESRS: what’s the difference?

 

June was a landmark month in the field of sustainability reporting. On 26 June, the International Sustainability Standards Board (ISSB) issued its inaugural Sustainability Disclosure Standards, kicking off the process of creating a common international framework for ESG disclosures. These were published shortly after the European Commission had presented its draft European Sustainability Reporting Standards (ESRS) detailing the information that large and listed companies need to disclose in their non-financial reports according to the Corporate Sustainability Reporting Directive (CSRD).

 

The two sustainability disclosure frameworks adopted different approaches, with ESRS promoting much higher standards of transparency. First and foremost, contrary to ISSB’s standards, the ESRS requires companies to report not only how sustainability risks may affect their performance and positioning (“financial materiality”) but also to disclose how their activities impact people and the environment (“impact materiality”). Secondly, the EU framework has a wider scope regarding metrics to report.

 

While the ISSB’s standard proposes to disclose information about climate-related risks and opportunities (climate-first approach), the EU decided to opt for a more holistic approach asking companies to report on metrics ranging from water to biodiversity and workforce impacts when these topics are significant and relevant according to the materiality assessment (see below).

 

However, the existing differences between the two reporting standards framework should not create too many hurdles for companies. In addition, the ISSB has recently announced plans to consult on additional standards related to biodiversity, ecosystems and ecosystem services, human capital, and human rights following the European Union’s lead.

 

Further improvements are still required 

 

B Lab Europe welcomes the Commission’s draft Delegated Act that mostly upheld the recommendations of the European Financial Reporting Advisory Group (EFRAG). However, the Commission’s draft Delegated Act presents a loophole that – if not addressed – risks endangering the effectiveness and credibility of the European system of sustainable reporting.

Carlota de Paula Coehlo, Policy Lead at B Lab Europe

The European Commission wants to leave it up to companies to decide what is “material” for them to report without requiring any explanation. If the Commission confirms its decision in the final delegated act, there is a risk that critical issues such as climate change and the impacts on human rights and biodiversity are overlooked or downplayed.

– Carlota de Paula Coelho , Policy Lead at B Lab Europe

The concept of materiality relates to the idea that sustainability-related disclosures should be focused on those topics that are most significant and relevant to an entity. For example, biodiversity is likely to be material for a company in the agriculture industry. Still, it may not be material for an IT services company that is likely to prioritize other sustainability matters such as talent acquisition and retention or gender diversity.

 

While it supports the tailoring of management and reporting of sustainability matters to the specificities of each entity, B Lab Europe’s position is that certain topics are always relevant to stakeholders (such as human rights and climate change) and that some disclosures should be mandatory. We have drawn the conclusion that this is not a disproportionate burden on companies – including SMEs – directly from our experience.

 

Based on our decade of assessing sustainability performance through a standardized questionnaire, we see addressing certain always-material topics as a foundation for the effective implementation of corporate sustainability strategies.

 

But how may a company identify what sustainability topics are material? Materiality considers the severity of the impact, which in turn is based on: the scale, the scope, and the irremediable character of the impact. But no thresholds are imposed, leaving the company a wide margin of interpretation. Certain sustainability topics should be considered to be always material because their importance to the people and the planet transcend the specific circumstances of individual companies. Issues such as climate change or any impact of investment decisions or advice that results in a negative effect on human rights and biodiversity have wide-ranging consequences on different stakeholders across industries. These topics hold significance regardless of a company’s size, sector, or geographic location.

 

In particular, principal adverse impacts* are of such irremediable character that they should qualify as severe, irrespective of scale and scope. Examples of these “principal adverse impacts” are: activities negatively affecting bio­diversity-sensitive areas, the number of identified cases of se­vere human rights issues and in­cidents, or incidents of discrimination.

 

Companies that want to certify as B Corps need to answer a series of questions in the B Impact Assessment (BIA). While most of the BIA captures a company’s positive impact, the negative impacts are identified through the Disclosure Questionnaire, background checks, and the public complaints process. A company may be required to transparently disclose practices on their public B Corp profile, implement management practices to mitigate the risk, or in some cases, be ineligible for certification. Find out more about how we mitigate risks here.

 

This is why B Lab Europe supports the idea that by making certain disclosure requirements mandatory, companies are compelled to address these fundamental sustainability concerns, ensuring that critical issues are not overlooked or downplayed due to subjective assessments. 

 

Recognizing these topics’ inherent materiality promotes transparency,  responsible practices, and ultimately contributes to a more sustainable and equitable global business landscape.

 

What can you do? 

CSRD.org take action

B Lab Europe and the Impact Economy Foundation joined forces with Impact Institute and True Price to launch CSRD.org, an initiative to advocate for robust and meaningful sustainability reporting rules within the framework of the CSRD.

You can contribute to this collective effort by replying to the Commission’s public consultation, which is open until the 7th of July.

The coalition provides resources on how to respond to the consultation and ensures that pioneering companies make their voice heard. Find out more here: csrd.org/take-action 

*As defined by the Sustainable Finance Disclosures Regulations (SFDR), a Principal Adverse Impact (PAI) is any impact of investment decisions or advice that results in a negative effect on sustainability factors, such as environmental, social and employee concerns, respect for human rights, anti-corruption, and anti-bribery matters.