In the years to come, comprehensive EU requirements for sustainability will put ESG at the top of the agenda of many boards and executive boards. The requirements will not only affect large companies which are covered directly by the legislation. Sub-suppliers and small companies in the value chain will also have to address the requirements, says ESG adviser and partner at Horten, Line Markert.
If your company has not already addressed the sustainable development goals or ESG (Environmental, Social & Governance), it's about time.
Today, the largest companies and financial players are subject to a number of reporting requirements focusing on ensuring an EU harmonised basis to evaluate whether investments may be considered sustainable.
In a few years, a large number of additional requirements will come into force concerning large companies’ reporting on sustainability. The future rules within ESG will provide a common language for conveying sustainability - and it is decisive to learn this language. This entails a comprehensive task for companies and how they proceed may affect the competitiveness of the company and even its survival, says ESG adviser and partner at Horten, Line Markert.
“The Paris Agreement and especially the EU’s Green Deal have provided a major impetus to the development concerning ESG requirements. The EU’s view is that public measures are not sufficient if we are to meet the goals of the Paris Agreement on limiting global warming. Private investments must drive the transition to a sustainable economy”, she says.
The Green Deal affects many different legal areas to ensure uniform regulation across the EU. For example, companies now have to demonstrate that they actually are environmentally sustainable when they refer to their investments or products as green.
“In 2020, the taxonomy regulation was adopted and it is a kind of dictionary of the green language in a number of areas. This means that when we talk about something being green, we now have a dictionary to consult within a large number of sectors. In the dictionary, you can see whether the activities of a company actually meet the sustainability goals of the taxonomy regulation”, says Line Markert.
You thereby have some set rules as to when an investment may be considered sustainable. To give investors and financial players access to the necessary information, large companies must in the future document their sustainability data in the annual report.
At present, all large companies are already obligated under section 99a of the Financial Statements Act to report any measures taken in relation to social responsibility, including environment, social matters and good corporate governance and how these measures are implemented.
“Today, companies do not have to present data but only make a statement as to how they meet their social responsibility. There is no requirement for setting goals or developing policies - only to account for opt-ins and opt-outs. However, as regards gender diversity, large companies are obliged to set target figures and account for the progress as to meeting these target figures already today”, says Line Markert.
But with the new reporting directive (CSRD), there will be a number of reporting requirements for large companies already in 2024 and for the financial year 2025 at the latest. There will be a number of general requirements, which all companies must address, and a number of sector-specific requirements.
“At present, the general requirements involve 84 disclosure requirements and more than 1,100 data items. So, companies are facing a huge task”, says Line Markert.
This applies to state-owned companies and large listed companies already from the financial year 2024.
Affecting also small companies
And even though the requirements apply only to large companies, small companies cannot just lean back.
“Large companies must give an account of how they will ensure that their value chains meet the requirements. They have to get data from their sub-suppliers and other small companies in the value chain. Otherwise, they cannot submit their reports”, says Line Markert.
It is the intention of the EU to implement the so-called “corporate sustainability due diligence” directive (CSDD) in 2024 or 2025, which does not only contain reporting requirements.
“Under this directive, the largest companies must prepare plans, describe requirements for both themselves, their upstream and downstream value chains and carry out due diligence examinations”, says Line Markert.
Change of culture must be anchored in the management
It almost sounds as an insurmountable task. So, how are companies to go about it?
“First of all, the management must decide whether a sustainable approach to the business is to be strategic, or whether it is to be driven by regulation. The management must address the commercial framework of the company, including investors’ and cooperating partners’ focus on sustainability. And you then have to decide where you want to be in the future as a business enterprise”, says Line Markert.
She has spoken to companies who assess that they have to discontinue parts of their business because others can provide the services more sustainably.
“The management also has to decide whether it is ready to change the culture of the company. Are you ready to give up comfort and avoid traditional thinking in the production or the services?”, says Line Markert.
And it is often in these situations that an ESG adviser such as Horten may help.
“We enter the board room with both a legal and a strategic voice and point out the opportunities of starting now and the risks of waiting too long”, says Line Markert.
Get an overview of the guidelines and data
The organisation must start preparing policies and internal guidelines based on the strategy laid down by the management. And it can be a comprehensive task to implement ESG clauses in supplier agreements and contracts when the company starts making requirements for cooperating partners and suppliers throughout the value chain.
Line Markert also recommends the company to start from one end to see which data is available and which is missing to be able to report sufficiently in the future.
“I think we will see that the key financial metrics in the annual report may be quite fine but if the ESG figures are not, they will “contaminate” the key financial metrics”, she says.
When the company has retrieved its data, the legal ESG adviser may assist with the quality assurance of the communication and reporting.
Line Markert also emphasises that ESG status has become more and more important in connection with business transfers and provision of funding.
“The obligations that the management or the employee is to undertake in this respect may be quite powerful negotiation parameters. Meeting the investors’ ESG goals may be decisive to obtain the funding which is a prerequisite for the company's development. It is therefore also important that goals and efforts are coordinated and described clearly. ESG is not something a company can just talk about - you have to act on it”, says Line Markert.