The latest from Brussels: Smaller firms will get more time for ESG reporting, materiality analysis will be key

At the end of July, the European Commission will officially adopt the sustainability reporting standards under which hundreds of Czech companies will be required to report their ESG data (under the CSRD). The Commission has made several last-minute changes to the draft legislation compared to the original proposals from November last year. Here is a summary of the main changes, which we are on the ground in Brussels.

The main objective of the modifications was to enable smaller companies to be better prepared for reporting. The Commission is therefore introducing a phased application of certain reporting requirements, in particular for smaller companies. In addition, the strict obligation to report selected ESG data has been relaxed for all firms, provided that the firm correctly assesses that it does not have material impacts or risks in that area. The changes were officially published after the end of the internal consultation on Friday 9 June.

What's changing?

There is a one-year delay for all companies to report in detail on the financial effects of, for example, climate change, drought or biodiversity loss. For the first year, only the obligation to identify the relevant financial risks and to describe the financial effects in general terms will apply. At the same time, for companies with fewer than 750 employees (regardless of whether or not they have securities traded on an exchange and therefore whether they were already subject to the existing non-financial reporting obligation), the Commission has adopted the following deferrals:

• annual deferral of Scope 3 GHG emissions reporting - i.e. indirect emissions from the supply chain, products and services, such as the carbon footprint of materials, emissions associated with financial investments or end-of-life products
• one-year delay for reporting detailed information on own staff
• two-year delay for reporting data on biodiversity
• two-year delay for reporting on indicators related to social issues in the corporate value chain (e.g. information on supplier workers)

However, the deferral does not concern the obligation to identify material impacts, which is based directly on the CSRD. It merely provides time for companies to set up or modify existing reporting policies and processes to meet the detailed requirements of the standards on the form and content of ESG disclosures - the so-called datapoints. In this regard, it is important to note that compliance with the requirements of the standards is subject to audit.

In particular, experience with Scope 3 emissions calculations shows that it takes companies longer to set up the collection of the underlying data, especially those that use large quantities of materials. In the first reporting cycle they are usually familiar with the methodology and only in the second cycle are they able to provide data for auditable reporting.

Deferral in other areas gives firms the opportunity to focus on getting the materiality assessment right and conducting it. This analysis involves identifying material impacts, risks and opportunities and determining what information the firm should provide about them, including standardized indicators that it is required to report.

Now, reporting on all ESG topics, including for example energy consumption, greenhouse gas emissions, water consumption or employment data, which were mandatory in all circumstances in the original proposals, will depend on this assessment.

In practice, however, reporting on this data will still be necessary for everyone, not least because investors need to collect this data on the companies and projects they invest in. "Greenhouse gas emissions of all scopes or employee data are topics relevant to the vast majority of companies. There will be very few exceptions and they will have to be based on a properly conducted materiality analysis," explains Filip Gregor, head of Frank Bold Advisory, who has been involved in the development of the standards as a member of the Sustanability Reporting Board of EFRAG, the European Commission advisory body mandated by the CSRD to draft the standards. 

Companies need to master materiality analysis, EFRAG prepares guidance

Companies with fewer than 750 employees should take advantage of the ease of reporting in some areas to be able to perform materiality analysis correctly. Until now, companies and consultants have taken a rather haphazard approach to analysis. But the European standards for sustainability reporting define exactly what it must contain and how companies should report on it. "The standards require an analysis that is based on objective criteria relating to ESG impacts and risks, not an exploration of what stakeholders think or how the company perceives things. However, current practice, even among large companies, does not meet the requirements for objective materiality analysis and follows outdated "CSR" principles, as shown by Frank Bold's analysis of more than a thousand companies for the international platform Alliance for Corporate Transparency,” Gregor explains.

As it is essential for the functioning of all mandatory ESG reporting that companies get the materiality analysis right, the European Commission's advisory body EFRAG is now developing guidance to guide companies through the analysis process with the help of our expert Filip Gregor. The guidance will be available during the summer and will explain how to report on the value chain in addition to materiality analysis.

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