Since my 2023 Company of Entrepreneurs’ Raleigh lecture on Sustainability, the European Union’s reporting standards that underpin environmental, social & governance (ESG) have solidified and taken shape. At the time of my talk, the European Sustainability Reporting Standards (ESRS) promulgated by the EU’s Corporate Sustainability Reporting Directive (CSRD) were still in draft form. Final passage was highly anticipated, but a late challenge was expected and did not disappoint.
In October 2023, the EU defeated an attempt by some of its MEPs to water down the ESRS requirements by a vote of 359 to 261. The first reports will be due in January 2025, for the year 2024, using the concept of double materiality. Companies will be required to submit non-financial information both on the risks and opportunities that affect their business, as well as on the impacts of their business on people and the environment.
There are ten separate topics to which this materiality assessment applies, in three different categories: five under Environment – climate change, pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy; four under Social – own workforce, workers in the value chain, affected communities, and consumers and end users; and finally, one under Governance – business conduct.
Some of you might be saying, “But that’s the EU; this is the UK”. Two observations to consider here:
1.) ESRS will apply to all non–EU companies that were previously in the scope of the Non-Financial Reporting Directive (NFRD), which was the predecessor to the CSRD. As the London Stock Exchange has noted, this includes Companies with securities, such as stocks or bonds, listed on a regulated market in the EU; Companies with annual EU revenues exceeding €150 million and an EU branch with net revenue of more than €40 million; and Companies with annual EU revenues exceeding €150 million and an EU subsidiary that is a large company, defined as meeting at least two of the following three criteria: more than 250 EU-based employees, a balance sheet above €20 million or local revenue of more than €40 million. And
2.) In its Guide to Climate Reporting, the London Stock Exchange has stated that: “Investors want to understand how a company is positioning itself strategically in light of its climate-related risks and opportunities. They frequently indicate that climate-related risks and opportunities have a significant impact on their investment decisions. While the TCFD recommendations emphasise single materiality (information which has an immediate financial impact and therefore should appear in financial filings), companies should also pay attention to double materiality, the impact a company’s actions have on society or the environment. This can be of significant benefit for the future, as materiality may vary over time. Information which is identified as financially immaterial in the near-term – which is unlikely to impact mainstream financial filings – but that is found to have an outward impact on society or the environment, will likely become financially material at some point in time.” The LSE is signaling that Double Materiality is coming to our shores and will eventually apply to organisations outside of the 1,183 UK companies that fall within the scope mentioned above, albeit no doubt in a different form.
In the meantime, there is a lot to learn, which can best be achieved in a concentrated, structured format. With their centuries-old tradition of educating their members, both formally and in social gatherings, the Livery Companies are well placed to conduct seminars and roundtable discussions, and to hold informal dinners on the complexities of assessing double materiality as an integral part of formulating ESG strategy in relation to impacts, risks, and opportunities. Such an educational exercise will bring its own insights for many companies.
Tim Bovy
CEO & Cofounder, Six Sentinels