How ESG Reporting in the EU Is Building a Sustainable Economy

While the headlines about European Union (EU) sustainability regulations are awash with topics like high-level negotiations about the omnibus, industry pushback, and political intrigue, ESG advisors in the EU are helping businesses to understand their reporting responsibilities and to get on with their everyday work.

Malte Øster is a senior ESG advisor at SustainX in Copenhagen, Denmark, specializing in CSRD/ESRS (Corporate Sustainability Reporting Directive/European Sustainability Reporting Standards) reporting in the EU. He has extensive experience working on ESRS-aligned double materiality assessments and data gap analyses, including writing one of the first ESRS-aligned sustainability statements. Øster spoke with 3E in January about the turbulent developments in the world of EU sustainability regulations and how they might impact the way businesses conduct their reporting.

Øster's role is to help businesses turn abstract regulatory concepts into real reporting on the CSRD.

“The first step is the double materiality assessments,” said Øster, “which is determining which sustainability matters to report on. Then data gap assessments, which is evaluating whether the company's data maturity is sufficient to meet the requirements of CSRD.”

Unsurprisingly, data maturity is frequently a challenge for many companies, so a big part of Øster's job is to help them develop new policies, actions, and targets, as well as helping them create their sustainability statements.

Since CSRD reporting is still a new field of practice, Øster frequently uses his expertise to help both businesses and auditors find their way around reporting.

“I help customers navigate this whole jungle of engaging with an auditor because the auditors are also very new to the field,” said Øster. “Quite often, I have to correct the auditors in their opinions and help the customer because they are so bewildered with all these data points, they just accept everything from the auditor.”

The What and Why of CSRD

Understanding CSRD reporting requires knowing the origin and development of the regulation, which begins with the 2015 Paris Agreement on limiting global warming. As a legally binding treaty, signatories are obligated to translate the targets of the Paris Agreement into national legislation. For the EU, translating it into a national approach for each of the member states requires a coordinated approach.

“Instead of having every member state go about doing its own thing, we decided to coordinate our efforts under this great strategy called the Green Deal,” said Øster. “In its essence, the Green Deal is the plan for how the EU becomes sustainable and net zero by 2050. There are other environmental objectives underneath this related to pollution, biodiversity, and so on, but the grand vision is this net zero target.”

Like any large initiative, achieving these goals requires balancing and protecting diverse interests.

“We have two major pillars: transitioning to a sustainable society and making this transition socially just,” said Øster. “We need to make the transition, but we need to do it in a way where we don't have a lot of people who all of a sudden don't have a job.” According to Øster, this means rethinking many of the systems on which the EU relies, including transportation, food, infrastructure, and manufacturing, a recalibration that requires a labyrinth of regulations.

All of this, of course, depends on financing to ensure that capital flows towards sustainable activities. Redirecting this capital means companies need data that will help them make good decisions about sustainable activities. This is where the CSRD and other related regulations and approaches like the CSDDD (Corporate Sustainability Due Diligence Directive) and the EU Taxonomy Regulation help by providing classification systems and methods for producing the necessary data.

The CSRD uses the ESRS to provide a standardized approach for reporting. However, while the depth of reporting requirements is necessary for obtaining the right data, the complexity of compliance has fueled the backlash against regulations like the CSRD.

“This is very frustrating for companies trying to comply, because they have to spend a lot of resources just to translate the legislation into something that they understand,” said Øster. “This is the reason why the EU Commission has opened up this omnibus maneuver to simplify things, because it is not constructive for companies to spend more of their energy on compliance than on actual action.”

The Omnibus and the Push for Simplification

For Øster, a pragmatic approach with clear, simple guidelines will help make reporting easier and reduce the potential for overcompliance by auditors.

“The lack of clarity has prompted a lot of auditors to demand overcompliance because of the amount of hours they're able to bill,” said Øster. “So they have a financial incentive to apply as much scrutiny as possible towards these reports, and that's not how this was intended.”

According to Øster, the pragmatic approach will also make the reports themselves more useful.

“If you want to answer every single data point within the standards, you're going to end up with a sustainability statement that is over 100 pages,” he said. “That is simply not proportional when this is supposed to be part of the annual report, which for most companies would be from 50 to 150 pages, so 50% of the report would end up being just sustainability.”

Øster believes that regardless of what the final outcome of the proposed EU Omnibus Package might be, a pragmatic approach to reporting will allow for a more lenient approach for some companies reporting for the first time.

“I think we'll see reports with modified opinions,” said Øster, “where it is stated that they acknowledge this is the first year of reporting and that they can't guarantee its completeness because they don't yet have the competencies to ensure that.”

While the reporting requirements are certainly complex, Øster explains that this complexity is not always what businesses think it is.

“The general myth out there is that this demands a huge amount of new quantitative data,” he said. “However, most of the data points within the ESRS are actually qualitative data that require companies to make narrative descriptions. Companies think everything is a spreadsheet with different categories about CO2, waste amounts, and diversity. This is part of it, but it's a small part. Most of it is descriptions of processes, policies, how they implement actions, and so on.”

Narrative descriptions, however, are still challenging for companies that don't yet have the maturity to develop sustainability processes, action plans, and transition plans, all of which demand considerable effort and resources. Øster also explained that ambiguity in reporting requirements can contribute to the confusion.

“There's a lot of ambiguity about how to conduct materiality assessments and how to determine which impacts, risks, and opportunities are material for a company,” said Øster. “I think the reason a lot of companies are struggling with this is that they don't know what the double materiality assessment will trigger. If they find something to be material, they don't know what that means for what they need to disclose.” Some companies with simple business models, for example, might find they have to report on everything from GHG emissions to biodiversity indicators and Indigenous rights, which might not be applicable and can cause considerable confusion.

Øster explains that many companies are probably more prepared than they think they are because of the data they already have as a result of their everyday business operations.

“Many of the data points - such as how many people work there, how many corruption cases have there been, how many kilos of product have they imported - is stuff companies already track,” said Øster. “The main data challenge for companies reporting in the first year is going to be CO2 emissions, because the calculations are new to them. However, most of the actual data going into those calculations will be data they already have, which might include electricity bills from their energy provider, milage from company cars, and data on purchased goods.”

Øster hopes that the end result of the omnibus discussions is an approach that removes the complexity from reporting and allows businesses to spend the majority of their energy on the everyday actions of building a sustainable business and contributing to the goals of the Green Deal.

“I truly hope that simplifications are made,” said Øster. “An example I like to use is that the CSRD requirements will make it so that the annual report will contain three different sections on governance in three different parts of the report. Given all the experience people like me have actually operationalizing the standards, I hope we see a simplification that makes it easier for companies to disclose relevant and faithful information about sustainability so they spend their energy on actual actions instead of reporting.”