• stratESGy

Are you ESG ready for the EU?

The number of companies required to provide sustainability disclosures in Europe will jump to over 50,000 from around 12,000 currently. The introduction picture summarizes 3 metrics. If a company, operating (Headquarter or subsidiary) in the EU, exceeds at least two of the metrics on two consecutive annual balance sheet dates (Balance Sheet > 20 million EUR, Net Turnover > 40 million EUR and number of employees > 250 people), it would become mandatory for this company to report on ESG according to the European Sustainability Reporting Standards.

This will apply to local SMEs, but one should not forget that EU subsidiaries of foreign companies may as well be required to provide substantial incremental ESG disclosures. Many large public companies are already aware of these accelerating changes in ESG standards, and are beginning to make changes to their sustainability reports and disclosure statements. These large corporations are also beginning to play a larger role in driving the adoption of ESG metrics and sustainability tracking. They have been focused on their internal sustainability metrics for several years, but many have realized that the greatest opportunities can now be found by looking outward at their supply chains. And there are many SMEs among their suppliers.

As a matter of fact, SMEs are faced to increased pressure from their biggest customers and/or a rapidly evolving mandatory landscape. However, for them, it can be hard to develop the necessary processes and controls. As such, we would recommend to begin developing an implementation plan now based on the initial proposals and the actual state of the art standards.

To tackle the challenges ahead and be ready in time when the European Sustainability Reporting Standards will be implemented, we recommend the following process:

Review the basics: Starting any sustainability initiative would not be credible as long as your environmental permit or basic safety procedures are missing. Assess your current status. We can support your company with our streamlined but comprehensive ESG assessment.

Identify the sustainability issues: Once the basics are assessed, it is time to conduct a Materiality Assessment. Some standards or frameworks still relate to financial materiality only but we would recommend to use a double materiality approach from the beginning. Consider not only the risks and opportunities on the future cash flow of the company, but as well its impact on people and/or the environment. We can show you how to proceed.

Identify the relevant ESG Frameworks / Standard: The trend is on consolidation. TCFD framework is interesting as a base, but limited to Financial Materiality and Climate mainly (not so much on Social and Governance). From the standards side, we basically recommend to use GRI. Why? Because its concept of dual materiality is at the core of the European Sustainability Reporting Standard (ESRS). GRI is also collaborating on both the ESRS and the ISSB (International Sustainability Standards Board). It can be expected that the transition from GRI to ESRS will be smooth.

Gather the data you need: It make sense to focus on data that are related to your specific material topics. Whenever possible use digital data collection and preparation for the reporting phase

Report: Transparency is a fundamental tenet of ESG. Customers, investors and the public are wary of companies that produce over inflated, complex, “greenwashing” marketing pamphlets. Remember that: a) Rome was not built in a day (be realistic) b) The narrative is yours (Make sure all ESG dots have coherent connections)

During this approach toward reporting for SMEs we can support you by applying the basic design principles of our framework. This will help get consistency from the assessment to the reporting phase and prepare for a compliant approach in the future.