ESG is a framework that assesses a company’s performance and impact in three areas: Environmental, Social, and Governance. Environmental criteria consider a company’s efforts in climate change, pollution, water use, biodiversity and commitment to developing a circular economy. Social criteria focus on how a company manages relationships with its employees, workers in their supply chain, customers, communities, and other stakeholders. Governance criteria evaluate the company’s leadership, transparency, and ethical practices.
ESG is important for several reasons. First, it helps identify and manage risks and opportunities associated with environmental and social issues, such as climate change, biodiversity, water, pollution, product end of life management, labour practices, and human rights. By addressing these risks and opportunities, companies can enhance their long-term sustainability and avoid potential legal, reputational, and financial consequences.
Second, ESG factors are increasingly considered by investors, lenders, potential new staff and other stakeholders when making decisions. Demonstrating a commitment to ESG can attract capital and talent, improve access to funding, and enhance a company’s valuation and reputation.
Third, ESG aligns with growing societal expectations. Consumers, employees, and communities are increasingly concerned about environmental and social issues, and they favour companies that prioritise sustainability, diversity, and responsible practices. By embracing ESG, companies can foster trust, loyalty, and positive relationships with their stakeholders.
In summary, ESG is a comprehensive framework that helps companies manage risks, identify new opportunities, attract capital, and align with societal expectations. By integrating ESG principles into their strategies and operations, companies can enhance their long-term success and contribute to a more sustainable and equitable future.
These are just a few key terms in the vast field of Environmental, Social and Governance (ESG) landscape, which is continuously evolving and new terms and concepts may emerge over time.
- Carbon footprint: The amount of greenhouse gas emissions, particularly carbon dioxide, produced by an individual, organization, or activity.
- Carbon credit: A carbon credit is a tradeable certificate that constitutes an offset of 1 ton of carbon dioxide or carbon dioxide equivalent from the atmosphere.
- Carbon emission: The release of carbon dioxide or equivalent greenhouse gas into the atmosphere.
- Carbon tax: A government issued environmental tax or penalty that organisations have to pay for production of greenhouse gases.
- Carbon dioxide equivalent (CO2e): A global warming potential (GWP) metric used to quality the combined emissions of all greenhouse gases from an activity.
- Renewable energy: Energy derived from sources that are naturally replenished, such as solar, wind, or hydro power.
- Biodiversity: The variety of plant and animal species within a given ecosystem.
- See “Explained – Carbon management, offsetting, carbon reduction and carbon footprint” for more details.
- See also “What to say and what not to say about carbon?”
- Diversity Equity and Inclusion (DEI): The practice of embracing and valuing individuals from different backgrounds, cultures, and identities, and ensuring equal opportunities for all.
- Human rights: Fundamental rights and freedoms that every individual is entitled to, such as the right to life, liberty, and security.
- Labour standards: Guidelines and regulations that protect workers’ rights, including fair wages, safe working conditions, and freedom of association.
- Board diversity: The representation of individuals from diverse backgrounds, experiences, and perspectives on a company’s board of directors.
- Executive compensation: The financial rewards and benefits given to top executives within a company, typically including salary, bonuses, and stock options.
- Transparency: The degree to which a company provides open, accurate, and accessible information about its operations, financial performance, and decision-making processes.
4. ESG Integration:
- ESG integration: The process of incorporating ESG factors into investment analysis and decision-making to better understand the risks and opportunities associated with an investment.
- Materiality: The significance or importance of an ESG issue to a particular company or industry, based on its potential impact on financial performance and stakeholder interests.
- Double Materiality: The significance or importance of an ESG issue to a particular company or industry, based on its potential impact on financial performance and stakeholder interests as well as operational performance and impacts on the world at large.
- Stakeholder engagement: The practice of actively involving and communicating with stakeholders, such as employees, customers, communities, and investors, to understand their concerns and interests.
5. ESG Standards:
- CSRD, the Corporate Sustainability Reporting Directive, came into force from 5 January 2023, updating the NFRD and applicable to a broader set of companies, as well as listed SMEs.
- ESRS, the European Sustainability Reporting System is a key provision of the CSRD and came into effect in July 2023. Covering 5 environmental, 4 social and broad governance reporting areas the ESRS is a comprehensive statutory ESG reporting system.
- TCFD, the Taskforce of Climate-based Financial Disclosures, (including TNFD, the Taskforce of Nature-based Financial Disclosures) established 2015 by the Financial Stability Board at the request of the G20 Finance Ministers and Central Bank Governors.
- NFRD, the Non-Financial Reporting Directive required companies to publish a non-financial report on their ESG performance together with their annual management report. It is now replaced by the CSRD.
- IFRS, the International Financial Reporting Standards and replaced the International Accounting Standards (IAS) in 2001. The IFRS 1 and IFRS 2 are both consistent with the ESRS from a financial materiality perspective.
- ISSB, the International Sustainability Standards Board, established 2021 by the IFRS Foundation, formerly consolidating CDSB (Climate Disclosure Standards Board) and VRF (Value Reporting Foundation).
- GRI, the Global Reporting Initiative, established 1997 in Boston (MA) with roots in the non-profit CERES and Tellus Institute. The GRI is consistent with the ESRS from a general reporting perspective.
In January 2023, the EU passed the Corporate Sustainability Reporting Directive (CSRD) which compliments the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy. As part of the CSRD, the EU created the European Sustainability Reporting System (ESRS) which outlines all the criteria and relevant indicators that organisations must use to fulfil their Environmental, Social and Governance (ESG) reporting commitments, as per the CSRD.
The rules initially only apply to large organisations, but the threshold for organisational size reduces each year. In 2025, entities with more than 500 staff must report for the year 2024, and in 2026, the company size reduces to 250+ staff for the reporting year 2025. In 2026, listed companies with 10 or more staff will need to report for 2025 and we may well see SMEs needing to make their first limited reports either then or the year after.
CSRD and ESRS are essentially the same thing – the Corporate Sustainability Reporting Directive is part of the EU Green Deal and was passed in Jan this year. The European Sustainability Reporting Standards define the criteria and indicators that apply within the CSRD… so by meeting them you are compliant with the CSRD.
Let’s first define which companies have to submit ESG reports for 2024 – they need to have >500 employees and/or >40mEuro turnover and/or >20mEuro assets. So, at the moment the new ESG laws are not directly relevant to SMEs. However, an SME might be part of a supply chain for a company that does need to report, in which case you should expect to have to provide details about your Environmental, Social and Governance (ESG) performance.
However, the thresholds for companies that must report is reduced each year… at the moment listed SMEs with 10 employees or more will need to start reporting from 2027 and there are suggestions that all companies, listed or otherwise, with 40 employees or more having to report from 2028.
Firstly, organisations have a maximum of 12 months after the balance sheet date, to submit the duly approved annual sustainability statements in the required electronic reporting format.
We are still waiting for final clarification of the process for evaluation and punitive measures. At the moment, if an organisation is guilty of being non-compliant with the CSRD it can expect administrative sanctions and three possible penalties: a public denunciation; an order to change conduct; and financial punishment of periodic penalty payments of up to EUR 50k amounting up to EUR 10 million or 5% of their annual revenue
Companies will be expected to provide all ESRS related information in either their annual or management reports to the European Securities and Markets Authority (ESMA) in European Single Electronic Format (ESEF) digital format. This is to ensure that financial and ESG information is published at the same time and considered as a whole, rather than two separate entities. It is not yet clear which additional documents, for example for verification or as evidence, may be required to be reported.
In line with regulations, all sustainability information will need to be provided in XHTML format for standardisation and easier verification.
Only public organisations will need to include an assurance report for sustainability disclosures subject to:
- On or before 1 October 2026, the European Commission will provide limited assurance standards for auditors to use when assessing the assurance of sustainability reports.
- On or before 1 October 2028, reasonable assurance standards will be provided—but only if it’s determined that reasonable assurance is feasible for auditors.
Complying with the ESRS will require a substantial effort from multiple staff members and eventually involve most of your organisation. Even if you do not have to complete a full ESG report for 2024, it makes sense to begin preparing your record keeping now and spread the workload over time. And of course, you may have partners or suppliers who do need to complete a comprehensive ESRS report and they will need information from you to do so.
The first step is to establish a Green Team (or similar title) that will be responsible for planning, executing, monitoring and submitting the organisation’s ESRS report. The Green Team must have at least one person with executive authority (normally at board level), management representatives from all major functional areas and who all possess strong critical-thinking skills.
Simultaneously, two important processes must begin; Human Resources must update all workforce records and ensure an effective Diversity, Equity and Inclusion (DEI) system is in place, and, senior management develops a clear ESG policy and ensures that it is reflected in all organisational policy and governance documents. Both of these tasks typically take multiple months to complete so it is essential that they begin as soon as possible after the formation of the Green Team.
The first major decision or recommendation the Green Team must make is the choice of ESG reporting software. It is worth considering a number of alternatives, but of course, we recommend ESG Report Pro! The software needs to contain an easy to use and intuitive system for categorising relevant information for each of the reporting criteria and specific indicators. You may well need a system that is compliant with other standards and reporting criteria, especially if you have international subsidiaries or partnerships. It is also critical that you have access to skilled guidance on how to implement the reporting system and embed it wherever possible to ensure efficiencies. There are many features that you may need to consider, so please get in touch for a free consultation call.
The next step for the Green Team is to build your Greenhouse Gas (GHG) inventory. This involves identifying, categorising and quantifying each source and importance scale of each GHG emission associated with your organisation. So, this includes all internal (Scope 1 and 2) and external (Scope 3) emissions as well as defining all risks and opportunities associated with each emission. While building the GHG inventory, you will need to identify a GHG Baseline Year for which you have comprehensive records and is since 2015. The goal is to comprehensively monitor and report your organisations interface with climate change through a scenario and resilience analysis that allows you to set target emission levels and establish a transparent transition plan to reach net zero emissions before 2050.
OK, big question, I’ll try to go slowly. Emissions transition planning is another way of saying you have a plan to reduce your carbon and GHG emissions. In very simple terms, it involves 4 steps – first to complete a full GHG inventory – that means detailing all activities that your organisation does internally and externally that potentially contributes to global warming, you also need to identify the dependencies and impacts of these activities on your operations and assess if there are any risks or opportunities associated with each one.
Then you need to set a baseline year for your carbon and other GHG emissions that you will use to compare your progress in reducing emissions in the future. Many companies choose 2019 or 2020, but it can be any year since 2015 that you have complete records for all of the activities identified in making your inventory.
Thirdly, you then need to set some targets – by how much do you plan to reduce your emissions? And then comes the big question – how will you do it? This is actually what the Transition Plan is all about and it can get complicated very quickly, especially as you also need to budget for each activity and set up reporting systems. An added complication can be choosing an appropriate mitigation pathway approach, but for nearly all companies the most straightforward and internationally recognised is the Absolute Contraction Approach (ACA).
Finally, you need to develop a monitoring and tracking process to report all of this and ensure that all stakeholders are being included in the process… that can be quite a daunting process as it often involves your customers, your own workforce and your whole supply chain.
See What carbon targets do I need to set to be GHG Protocol Compliant? For more information.
The first thing that I’d say after many years of working with companies to improve their sustainability performance, is that the process often works out to be cost neutral, and can even be a benefit to your bottom line. I know that this might sound counterintuitive but it’s true.
ESG reporting makes you look into things that you have probably been ignoring or have put in the too hard basket. It uncovers your organisational ‘blind spots’ and these are often areas of excessive or unnecessary costs. ESG reporting also helps you align your entire organisation more efficiently and encourages your work force and suppliers to more actively engage with what you do… in both cases, this often saves money and improves quality.
So, the potential fear of a big cost is the ESG reporting system itself, how to set it up? How to manage it? And how to report it? That’s what I’m working on at the moment, designing and building a system that will guide a company through the ESG reporting process and if you need someone to give your team advice, then there will be affordable consultants as well.
Having been in this field for many years, the thing I’m most afraid of is that ESG reporting becomes the territory of the big, expensive accounting firms… so although this new system can be used by large companies, it will be just as useful to SMEs. Actually, it needs to be, as I mentioned at the start, the emphasis on the whole up and down stream supply chain in the ESRS means that someone will probably come knocking on your door even if you are a micro-enterprise.
The language around carbon and the impact that it may have on your organisation can appear to be complicated and contradictory. Let’s start with some simple definitions before digging deeper:
1. Carbon Management: Carbon management refers to the strategic approach taken by organisations to identify, measure, monitor, and reduce their greenhouse gas (GHG) emissions. This involves analysing and managing the carbon footprint of a company’s operations, including energy consumption, transportation, waste management, and production processes. The goal of carbon management is to minimise emissions and improve overall environmental sustainability.
2. Offsetting: Offsetting, also known as carbon offsetting, involves taking actions to compensate for or neutralise the GHG emissions produced by an organisation or an individual. This is achieved by investing in projects that help reduce emissions or remove an equivalent amount of carbon dioxide from the atmosphere. These projects can include renewable energy initiatives, reforestation efforts, or energy efficiency programs. Offsetting allows organisations to balance their emissions by supporting projects that contribute to a net reduction in global carbon emissions. However, carbon offsetting is considered to be a separate activity to carbon reduction, so an organisation cannot include offsetting in their carbon footprint.
3. Carbon Reduction: Carbon reduction focuses on actively reducing the amount of GHG emissions generated by an organisation. It involves implementing measures to decrease energy consumption, improve operational efficiency, transition to cleaner energy sources, and adopt sustainable practices. Carbon reduction strategies can include optimizing supply chains, implementing energy-saving technologies, promoting recycling and waste reduction, or adopting renewable energy sources. The aim is to decrease carbon emissions at the source and minimise the environmental impact of business activities. Carbon reduction is a higher priority for organisations than carbon offsetting.
4. Carbon Footprint: Refers to the total amount of greenhouse gas (GHG) emissions, primarily carbon dioxide (CO2), that are directly or indirectly produced by an individual, organisation, event, or product throughout its life cycle. It quantifies the impact of human activities on the environment in terms of carbon emissions. By calculating and understanding their carbon footprint, individuals or organisations can identify the main sources of GHG emissions and take steps to reduce their environmental impact. This can involve implementing energy-efficient practices, adopting renewable energy sources, optimising transportation, promoting sustainable production methods, and engaging in carbon offsetting initiatives to compensate for unavoidable emissions.
Your carbon footprint takes into account various activities, including energy consumption, transportation, waste generation, and production processes. It is measured in units of carbon dioxide equivalent (CO2e), which represents the amount of CO2 that would have the same warming effect as the combined emissions of different GHGs.
When calculating a carbon footprint, the emissions from different sources are considered. These include:
1. Direct emissions (Scope 1): These are emissions produced from sources directly owned or controlled by an entity, such as burning fossil fuels in vehicles or on-site power generation.
2. Indirect emissions from purchased electricity, heat, or steam (Scope 2): These emissions result from the consumption of energy provided by external sources, such as electricity from the grid.
3. Other indirect emissions (Scope 3): These encompass all other indirect emissions that occur upstream or downstream in the value chain, including emissions associated with the production of purchased goods and services, business travel, employee commuting, and waste disposal.
See What are Carbon Scopes? Are they part of the Greenhouse Gas (GHG) Protocol?
In summary, carbon management involves overall GHG emissions (carbon footprint) management and sustainability efforts, carbon offsetting compensates for emissions by supporting environmental projects, and carbon reduction focuses on actively reducing emissions through various strategies and practices. Reducing carbon footprints is crucial for mitigating climate change and transitioning to a more sustainable future. It contributes to efforts to minimise overall GHG emissions and limit the impact of human activities on the environment. These concepts are interconnected and often work together to achieve environmental goals.
Carbon scopes, often referred to as the “three scopes of carbon emissions,” are a framework established by the Greenhouse Gas Protocol to categorise and measure greenhouse gas (GHG) emissions. They provide a structured approach for organisations to assess and manage their carbon footprint. Here’s an overview of each carbon scope:
1. Scope 1 emissions represent direct GHG emissions that occur from sources owned or controlled by an organisation. These emissions typically include on-site combustion of fossil fuels, for example fuel (for vehicles owned by the organisation), on-site energy generation (for example diesel generators and boilers), and industrial processes (including refrigeration). Scope 1 emissions are considered the most direct and tangible emissions for an organisation to measure and manage.
2. Scope 2 emissions refer to indirect GHG emissions resulting from purchased energy for own use for example, electricity or natural gas that’s purchased from a local power utility to power a building or facility, energy consumption and usage for offices and sites that’s purchased from a utility, energy generation from any leased non-renewable sources, and other purchased emissions from rented or leased equipment not already accounted for in sites and facilities as well as refrigeration coolants. These emissions occur outside of an organisation’s direct control but are associated with the organisation’s activities. Scope 2 emissions are often measured by calculating the emissions factors associated with the purchased energy sources and the amount of energy consumed.
3. Scope 3 emissions encompass all other indirect GHG emissions that occur as a result of an organisation’s activities but are not classified as Scope 1 or Scope 2. These emissions occur upstream or downstream in the organisation’s value chain and can include emissions from sources such as purchased goods and services, business travel (including accommodation and events), employee commuting, waste creation/management, capital goods, transportation and distribution from suppliers and to customers, use of services like email and hosting/data centres, leased assets, franchises, investments, use and end use management of products and services, and end of life processing of sold products. Scope 3 emissions are typically the most significant in terms of overall carbon footprint but can be challenging to measure and manage.
By considering all three scopes, organisations can gain a comprehensive understanding of their carbon emissions and identify areas where emissions reductions can be made. This framework helps businesses develop effective carbon management strategies, set emission reduction targets, and report their environmental performance accurately.
To improve the governance of ESG data collection and reporting, and to prepare for a transition to reasonable assurance, you’re almost certainly going to need the support of third-party software and service providers. Additionally, real-time monitoring will grow as firms look toward-off claims of greenwashing and become more proactive in ESG risk management.
By using ESG Report Pro, organisations can enhance their ESG performance, improve transparency, and meet the growing demands for sustainable and responsible business practices by:
1. Data Collection and Management: ESG Report Pro enables efficient data collection, aggregation, and management of environmental, social, and governance-related information. It can help you gather data from various sources, track key performance indicators (KPIs), and streamline the process of reporting and disclosure.
2. Performance Monitoring and Reporting: ESG Report Pro allows you to monitor your organisation’s sustainability performance and track progress toward specific goals and targets. It helps generate comprehensive reports and visualisations that showcase your ESG performance to stakeholders, investors, and regulatory bodies.
3. Compliance and Risk Management: ESG Report Pro can help you stay compliant with relevant regulations and standards related to sustainability and ESG reporting. It provides tools for assessing and managing sustainability risks, identifying areas for improvement, and implementing appropriate mitigation strategies.
4. Stakeholder Engagement and Transparency: ESG Report Pro facilitates stakeholder engagement by providing a centralised platform to communicate your organisation’s ESG initiatives and progress. It enhances transparency by sharing relevant sustainability information with investors, customers, employees, and other stakeholders who are increasingly interested in a company’s ESG practices.
5. Benchmarking and Comparison: ESG Report Pro often includes benchmarking capabilities that allow you to compare your organisation’s ESG performance against industry peers or established sustainability indices. This helps identify areas of strength and areas where improvements can be made, fostering a culture of continuous improvement.
6. Decision-Making Support: ESG Report Pro can provide insights and analytics to support strategic decision-making. It helps identify opportunities for sustainable innovation, assess the impact of potential initiatives, and align ESG considerations with broader business strategies.
ESG (Environmental, Social, and Governance) consultants can provide valuable expertise and guidance to organisations seeking to enhance their ESG practices, so yes, it’s probably a very good idea.
Implementing organisational commitments to ESG and sustainability targets requires specialist internal skills and broader competencies to bring them to fruition. Critically, training provides essential upskilling to develop dynamically in line with operational needs. Consultants offer support to assess assurance preparedness and perform gap analysis, while software providers enable data centralisation, help build reporting workflows to improve traceability, and facilitate the assurance process. Sustainability will become the remit of all business units, not just that of the sustainability team, so consultants are often relied upon to assist with:
1. ESG Strategy Development: ESG consultants can assist in the development of a comprehensive ESG strategy tailored to your organisation’s specific goals, industry, and stakeholder expectations. They can help define key ESG priorities, set measurable targets, and establish action plans to drive sustainable performance.
2. ESG Reporting and Disclosure: ESG consultants are knowledgeable about various reporting frameworks, such as the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), and can guide you in aligning your reporting with industry best practices. They can help you identify relevant ESG metrics, collect and analyse data, and prepare high-quality ESG reports and disclosures.
3. ESG Risk Assessment and Mitigation: ESG consultants can conduct assessments to identify and evaluate potential ESG risks and opportunities within your organisation and across your value chain. They can assist in implementing risk management strategies, developing sustainability policies and procedures, and integrating ESG considerations into decision-making processes.
4. Stakeholder Engagement and Materiality Assessment: ESG consultants can help you engage with stakeholders, including investors, customers, employees, and communities, to understand their expectations and concerns regarding ESG issues. They can facilitate materiality assessments to identify the most relevant ESG topics for your organisation and establish effective communication and engagement strategies.
5. ESG Performance Benchmarking: ESG consultants can conduct benchmarking exercises to compare your organisation’s ESG performance against industry peers, sector-specific standards, or sustainability indices. This helps identify areas of strength and weakness, uncover improvement opportunities, and provide insights to support decision-making.
6. ESG Training and Capacity Building: ESG consultants can provide training and workshops to educate your employees and leadership on ESG principles, best practices, and the business case for sustainability. This helps build internal capacity and fosters a culture of sustainability within your organization.
Overall, ESG consultants bring specialised knowledge, experience, and resources to help organisations navigate the complex landscape of ESG, align their practices with emerging standards and regulations, and drive sustainable value creation. They can offer tailored solutions to address your unique challenges and support your journey towards improved ESG performance and long-term sustainability.
Yes! ESG legislation is already in place or in the process of adoption in USA, Australia, UK, Switzerland, Japan, India, Singapore, Canada, China, Malaysia, Hong Kong and New Zealand. Additionally, associated regulations such as the German Supply Chain Duty of Care Act and the EU Corporate Sustainability Due Diligence (CSDD) Directive will increase the spotlight on firms’ value chains, requiring them to disclose ESG issues such as labour rights, conflict minerals and modern slavery, and articulate how they will mitigate these issues.
Producers of goods, retailers and suppliers in a range of sectors will need to provide digitally transferrable copies of product data in the form of digital product passports (DPPs).
Expect to see new legislation that targets greenwashing and social-washing, for example the Competition and Markets Authority (CMA) Green Claims Code, which is already being used to prosecute companies for making excessive claims about their carbon footprints, which highlights the need to avoid making claims like “Net-Zero” or “Carbon-Neutral”. Social impacts are likely to see specific legislation related to the Diversity, Equity and Inclusion (DEI) performance and claims of organisations.
The first step is to ensure that all employee records and related ESG policies are complete, and that you have the right information on file to complete relevant indicators.
Despite the Social pillar of ESG reporting, organisations are struggling to interpret and use Diversity, Equity and Inclusion (DEI) data to drive performance improvements — for example, through hiring strategies, mentoring programmes, professional development, or DEI education and training. Additionally, persistent tight labour markets across the US and Europe, coupled with changing employee preferences, mean that it will be increasingly important for firms to demonstrate their commitment to DEI and wellbeing.
Against this backdrop, organisations will need to develop a strategic approach to DEI that links data, measurable goals, and outcomes. This will increase demand for both internal and external expertise in interpreting DEI metrics to convert social performance data into impact.
A person’s or household’s carbon footprint is the total amount of carbon emissions they cause, directly or indirectly, through all of their actions. But each separate action has a different carbon cost, so it can be helpful to consider the amount of carbon emissions per action: that’s the carbon intensity. Carbon intensity is often a good indication of where to begin looking for ways to reduce your carbon footprint by improving efficiencies.
Targets should include a base year and the target year, where the base year is the year against which GHG reductions are tracked. The year in which the target will be met should be 5 to 10 years from the base year, as well as setting a long-term target for 2050.
Best Practice: Set a GHG reduction target below your 2005 emissions level by 28% to be met in 2025 and 45% in 2030. Also set a long-term target of zero or near-zero GHG emissions by 2050 with a minimum 4.2% reduction per annum for each year.
Some additional targets to consider:
1. Reduce carbon emissions: Set a target to reduce your carbon footprint by a certain percentage over a specific time period. This can be achieved through energy efficiency measures, transitioning to renewable energy sources, and promoting sustainable practices.
2. Increase energy efficiency: Aim to improve your energy efficiency by implementing measures such as upgrading appliances inefficient or poorly maintained, optimising heating and cooling systems, and reducing energy waste. Set specific targets for energy consumption reduction for each activity that creates an emission.
3. Transition to renewable energy: Set a goal to increase the share of renewable energy sources in your energy consumption. This can involve installing solar panels, purchasing renewable energy credits, or supporting community renewable projects.
4. Water conservation: Establish targets to reduce water consumption by implementing water-saving technologies, promoting responsible water use practices, and minimising water waste.
5. Waste reduction: Set goals to minimise waste generation and increase recycling rates. Implement strategies like composting, waste segregation, re-purposing, and promoting sustainable packaging solutions. Aim for zero-waste.
6. Sustainable transportation: Aim to reduce the carbon footprint of transportation by promoting alternatives to fossil fuel-powered vehicles. Set targets for increasing the use of public transportation, cycling, walking, or electric vehicles.
7. Reforestation and conservation: Consider setting targets to support reforestation efforts, biodiversity regeneration or protect and conserve natural habitats. This can involve planting trees, supporting biodiversity initiatives, or participating in conservation projects.
Remember to make your targets specific, measurable, achievable, relevant, and time-bound (SMART). Adapt them to your specific circumstances and regularly track progress to ensure you stay on track to achieve your climate-related goals.
The GHG Protocol and the Science Based Targets Initiative are widely recognised accounting tool guidelines for organisations to measure and manage their Greenhouse Gas emissions (GHGe). They provide a standardised framework for identifying, measuring, assessing, tracking and reporting emissions. The goal is to develop a statement that clearly and simply states your organisation’s GHG target and conversion to a low or zero carbon emission generating organisation.
Best Practice: Set a GHG reduction target below your 2005 emissions level by 28% to be met in 2025 and 45% in 2030. Also set a long-term target of zero or near-zero GHG emissions by 2050 with a minimum 4.2% reduction per annum for each year.
See Let’s talk about transition planning – what are some practical first steps that SME’s should take? For more information.
Here are the key steps ESG Report Pro will guide you through:
- Assessing the Organisation’s Impact on the Climate and Identifying Key Sources
Assessing the organisation’s impact on the climate involves mapping its greenhouse gas (GHG) emissions and identifying the sources that contribute to its carbon footprint, this involves building a Greenhouse Gas emission inventory. This assessment identifies Scope 1, 2 and 3 emissions, which can then be used to choose a Baseline Year for measuring progress and identifying areas for improvement.
See What are Carbon Scopes? Are they part of the Greenhouse Gas (GHG) Protocol? For more information.
- Scenario and Resilience Analysis
Using the Locate, Evaluate, Assess, Prepare (LEAP) framework, begin by describing how your organisation’s activities (including up and downstream activities) may be dependent or influenced by climate-related factors. For each identified activity, evaluate the dependencies and potential impacts (availability, quality, cost, and reliability) associated with climate change. Then conduct a risk assessment to identify climate-related risks and opportunities that may affect each activity and present your findings in a Climate Resilience Strategy Report.
See Do we need an ESG Consultant to help? For more information.
- Target Setting and Transition Plan
Target setting involves establishing an emissions target for each organisational activity and then totalling the target emissions per year, such that you establish targets for reducing GHG emissions by 2030 and then by 2050. An example of an organisational target is ‘to reduce GHG emissions by 50% by 2030, compared to a baseline year of 2016, across all operations and supply chain, and by 95% by 2050’.
Establishing a long-term target and transition plan involves defining your emissions mitigation pathway, for which we recommend the Absolute Contraction Approach (ACA) – see Let’s talk about transition planning – what are some practical first steps that SME’s should take? For more information. Other elements include setting renewable energy usage targets. Identifying energy efficiency actions, reducing waste, transportation and supply chain emissions.
- Monitoring and Tracking Progress
The organisation must describe how it will establish mechanisms for monitoring and tracking its progress in implementing climate-related actions and achieving its mitigation targets, we recommend integrating ESG Report Pro into regular organisational reporting schedules. By effectively monitoring and tracking progress, the organisation can assess the effectiveness of its strategies, identify areas for continuous improvement, and ensure transparency in reporting.
Throughout 2023, firms will recognise that supply chain sustainability represents a significant resilience factor as well as a considerable effort to report. As such, they will incorporate it as a core element of their business strategy and take steps to enhance supply chain transparency beyond their Tier 1 suppliers. They will do this by running supplier onboarding and engagement programmes, as well as by leveraging third-party services and software offerings to capture much-needed data.
The CSRD and ESRS influence goes well beyond the EU because they require Scope 3 emissions disclosures “if they are material”. Most firms will need to go through the exercise to determine what is material from both a financial and material impact. Firms will look to software to facilitate the necessary analysis and automation. Effective double materiality assessments will require cross-functional collaboration between sustainability, finance, risk and operations functions.
First, let’s reassure you, companies are not expected to go supplier by supplier, component by component, up- and down-streams in an exhaustive effort to find all possible impacts, risks and opportunities, and then organise every one into a double materiality matrix! The ESRS does recognise that there is a limit to resources, contractual arrangements, levels of control and buying power. Plus, they have added some Phase-Ins and possible exclusions in some circumstances – see It’s really hard to find Value Chain Information – is there any flexibility or phasing-in in the ESRS? For more information. However, there is work to do, so let’s try to simplify it as much as possible.
It’s best to begin by looking at the Value Chain in entirety, take a backstep from it, and determine where risks and opportunities can be most material, both in terms of impacts and financials – see What is Double Materiality? For more information.
The primary considerations should address geographical areas, facilities or types of assets, inputs, outputs and distribution channels by documenting an overview that identifies, assesses and prioritises your organisation’s potential and actual impacts on people and the environment. Most commonly this information is gathered through your due diligence process, including whether and how your organisation:
- Identifies in your business model, strategy and decision-making (including own operations and up- and downstream value chain) where material impacts, risks and opportunities are concentrated.
- Has responded or plans to respond to these effects, including timelines and any changes it has made or plans to make to its strategy or business model as part of its actionsto address particular material impacts or risks, or to pursue particular material opportunities.
- Focuses on specific issues due to heightened risk of adverse impacts and then considers the impacts with which the undertaking is involved through its own operations or as a result of its business relationships (both up and down the Value Chain).
- Prioritises negative impacts based on their relative severity and likelihood.
The ESRS expects the assessment process to include information from industry group publications, investor publications and engagement activities, civil society and media reports, Business and Human Rights Resource Centre, data on where incidences most frequently arise for certain sectors; and both government-issued and independent publications on country-level human rights and environmental risks.
It is also important to keep in mind that this a dynamic process, requiring reassessment each year to better define material impacts, risks and opportunities along the value chain, as well as scanning for other high-risk areas.
Yes, this is expected to be a problem for organisations for some time. There is some flexibility for the first 3 years in the event that not all necessary information regarding your upstream and downstream value chainis available. For missing or incomplete reporting, the organisation must explain the efforts made to obtain the necessary information and the reasons why it could not be obtained, as well as plans to obtain the necessary information in the future.
It is wise to anticipate that you may face difficulties with value chain reporting and do the following:
- When disclosing information on policies, actions and targetsyou may limit upstream and downstream value chain information to information available in-house, such as data already available to the undertaking and publicly available information; and
- When disclosing metrics, it is not required to include upstream and downstream value chain information, except for datapoints concerning specific governance and organisational reporting requirements.
Additionally, there are some Phase-In criteria that may mean your organisation may omit elements of the ESRS reporting, for example:
- Undertakings with less than 750 employees may omit scope 3 GHG emissions data and the disclosure requirements specified in ‘own workforce’ in the first year that they apply the standards;
- Undertakings with less than 750 employees may omit the disclosure requirements specified in biodiversity and on value-chain workers, affected communities, and consumers and end-users in the first two years that they apply the standards.
- All undertakings may omit the following information in the first year that they apply the standards: anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use); and certain datapoints related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance).
- Voluntary disclosures: biodiversity transition plans; certain indicators about “non-employees” (self-employed persons or persons provided by workplace agencies or similar); and an explanation of why the undertaking may consider a particular sustainability topic not to be material.
- Flexibilities in specific disclosures: for example, there are additional flexibilities in the disclosure requirements on the financial effects arising from sustainability risks and on engagement with stakeholders, and in the methodology to use for the materiality assessment process. Furthermore, the datapoints regarding corruption and bribery and regarding the protection of whistle-blowers have limited flexibility regarding what might be considered to have infringed on the right not to self-incriminate.
And if you still cannot find accurate information from your value chain? Firstly, describe how you have made every attempt to do so and then you may make estimations using all reasonable and supportable information that is available at the reporting date without undue cost or effort. This includes, but is not limited to, internal and external information, such as data from indirect sources, sector- average data, sample analyses, market and peer groups data, other proxies or spend-based data.
Finally, it is worth noting that the European Commission is putting in place an interpretation mechanism to provide formal interpretation of the standards. The Commission has also asked the European Financial Reporting Advisory Group (EFRAG) to publish additional guidance and educational material, addressing the materiality assessment process and other issues.
Double materialityhas two dimensions that are inter-related, namely: impact materiality and financial materiality.
In general, an organisation should begin with an assessment of environmental and social impacts, whether or not they are financially material, to help stakeholders understand the overall sustainability performance. Although there may also be material risks and opportunities that are not related to the undertaking’s impacts, for example, the impact of changing weather patterns due to climate change.
From a financial perspective, companies need to disclose information about environmental and social risks and opportunities that could affect their financial performance. A sustainability impact may be financially material from inception or become financially material, when it could reasonably be expected to affect the undertaking’s financial position, financial performance, cash flows, its access to finance or cost of capital over the short-, medium- or long-term.
Double materiality is therefore a concept that considers both the financial impacts of environmental and social issues on a company, as well as the impact of the company’s activities on the environment and society. Impacts should be categorised as Principle or Significant to identify greater materiality to the organisation and therefore reported.
Double Materiality also applies to the Value Chain, whereby the organisation needs to identify and assess impacts, risks and opportunities to determine their materiality based on the nature of the activities, business relationships, geographies or other factors concerned.
Additionally, the organisation must consider how it is affected by its dependencieson the availability of natural, human and social resources at appropriate prices and quality, irrespective of its potential impactson those resources.
Yes, ESG Report Pro will guide you through the full process, but here’s an outline.
In assessing impact materialityand determining the material matters to be reported, the organisation must follow three steps:
- Understand the context in relation to its impacts including its activities, business relationships, and stakeholders;
- Identify actual and potential impacts (both negative and positive), including through engaging with stakeholders and experts. In this step, the undertaking may rely on scientific and analytical research on impacts on sustainability matters;
- Assess the materiality of its actual and potential impacts and determine the material matters. In this step, the undertaking shall adopt thresholds to determine which of the impacts will be covered in its sustainability statement.
The severity of impacts is determined by the following factors:
- Scale: how grave the negative impact is or how beneficial the positive impact is for people or the environment;
- Scope: how widespread the negative or positive impacts are. In the case of environmental impacts, the scope may be understood as the extent of environmental damage or a geographical perimeter. In the case of impacts on people, the scope may be understood as the number of people adversely affected; and
- Irremediable character: whether and to what extent the negative impacts could be remediated, i.e., restoring the environment or affected people to their prior state.
Any of the three characteristics (scale, scope, and irremediable character) can make a negative impact severe. In the case of a potential negative human rights impact, the severity of the impact takes precedence over its likelihood. As a quick guide, the ESRS dictates that a group of products and/or services offered, a group of markets and/or customer groups served, or an ESRS sector, is significant for the undertaking if it meets one or both of the following criteria:
(a) it accounts for more than 10 per cent of the undertaking’s revenue;
(b) it is connected with material actual impacts or material potential negative impacts of the undertaking.
ESG Report Pro guides you through your financial materiality assessment by first asking you to identify risks and opportunities that affect, or could reasonably be expected to affect, the organisation’s financial position, financial performance, cash flows, access to finance or cost of capital over the short-, medium- or long-term. The financial materialityof a sustainability matter is not limited to matters that are within the control of the organisation but includes information on material risks and opportunities attributable to business relationshipsbeyond the scope of consolidation used in the preparation of financial statements. In this context, the undertaking shall consider:
- the existence of dependencieson natural and social resources as sources of financial effects as they may influence the undertaking’s ability to continue to use or obtain the resources needed in its business processes, as well as the quality and pricing of those resources; and
- if any dependencies may affect the organisation’s ability to rely on relationships needed in its business processes on acceptable terms.
Financially material matters need to be classified as:
(a) risks that may contribute to negative deviations in future expected cash flows and/or negative deviation from an expected change in capitals not recognised in the financial statements; or
(b) opportunities that may contribute to positive deviation in future expected cash flows and/or positive deviation from expected change in capitals not recognised in financial statements.
Once you have identified your risks and opportunities, you need to determine which of them are material for reporting over the short-, medium- and long-term based on a combination of (i) the likelihood of occurrence and (ii) the potential magnitude of financial effectsdetermined on the basis of appropriate thresholds. We recommend that you build scenarios/forecasts that are deemed likely to materialise; and consider sustainability mattersderiving either from situations with a below a “more likely than not” threshold or assets/liabilities not, or not yet, reflected in financial statements. This includes:
- potential situations that following the occurrence of future events may affect cash flow generation potential;
- capitals that are not recognised as assets from an accounting and financial reporting perspective but have a significant influence on financial performance, such as natural, intellectual (organisational), human, social and relationship capitals; and
- possible future events that may have an influence on the evolution of such capitals.
Sound complicated? Here are a few examples of how impacts and dependencies are sources of risks or opportunities:
- when the undertaking’s business modeldepends on a natural resource – for example water – it is likely to be affected by changes in the quality, availability and pricing of that resource;
- when the undertaking’s activities result in negative impacts, e.g., on local communities, the activities could become subject to stricter government regulation and/or the impact could trigger consequences of a reputational nature. These might have negative effects on the undertaking’s brand and higher recruitment costs might arise; and
- when the undertaking’s business partners face material sustainability-related risks, the undertaking could be exposed to related consequences as well.
Along with ESG reporting obligations comes an increasing risk of prosecution on the grounds of green-washing or social-washing. There are already cases being filed in the UK and USA against companies that have made ‘Net Zero’ or ‘Carbon Neutral’ claims, so we strongly advise avoiding these terms. If you have any doubt whatsoever about your claims we strongly recommend seeking legal advice. There are a variety of risks that you should consider when communicating your ESG credentials:
1. Greenwashing: Some organisations or individuals may claim to be ‘Net Zero’ or ‘Carbon Neutral’ without implementing substantial changes or taking real action to reduce emissions. This can mislead the public into thinking meaningful progress is being made when it is not and are grounds for prosecution.
2. Offsetting reliance: ‘Net Zero’ or ‘Carbon Neutral’ targets often rely on offsetting emissions through activities like tree planting or buying carbon credits. While offsets can play a role, relying too heavily on them without reducing emissions at the source may not address the root problem effectively. At worse this can be a public relations problem and could possibly form the grounds for prosecution.
3. Technological uncertainties: Achieving ‘Net Zero’ or ‘Carbon Neutral’ often requires the deployment of new and unproven technologies, such as carbon capture and storage. The effectiveness and scalability of these technologies are still being tested, which poses risks in meeting ambitious carbon goals and should therefore we recommend exercising caution when making any claims.
4. Social and environmental justice: The transition to ‘Net Zero’ or ‘Carbon Neutral’ could unintentionally exacerbate social and environmental inequalities. For example, certain communities may bear disproportionate burdens due to the location of renewable energy projects or the extraction of resources required for clean technologies. So, we recommend that when making claims about carbon reduction, that you also link them to verifiable social benefits.
5. Lack of transparency: The lack of standardised definitions and reporting frameworks for ‘Net Zero’ or ‘Carbon Neutral’ can make it difficult to assess the credibility and comparability of different claims. This lack of transparency may undermine trust and hinder progress in the overall transition to a sustainable future.
It is important to approach ‘Net Zero’ or ‘Carbon Neutral’ commitments with caution, ensuring they are backed by comprehensive plans, transparent reporting, emission reductions at the source, and a focus on social and environmental justice. It is for these reasons that we recommend using the following terms interchangeably or in conjunction with each other, highlighting the shared goal of reducing carbon emissions and mitigating climate change:
Low-Carbon: Indicating activities or practices that cause or result in only a relatively small net release of CO2 emissions into the atmosphere.
Low-Emission: Indicating activities or practices that cause or result in reduced GHG emissions into the atmosphere.
Carbon-Light: Describing processes, technologies, or lifestyles that have minimized GHG emissions or have a lower carbon footprint compared to conventional alternatives.
Decarbonised: Referring to processes, industries, or energy sources that have undergone a significant reduction in carbon emissions or have transitioned to carbon-free alternatives.
Greenhouse Gas-Reducing: Describing measures or initiatives aimed at lowering emissions of greenhouse gases.
Climate-Friendly: Signifying actions, technologies, or practices that have a positive impact on the climate by reducing or mitigating GHG emissions.
Smaller companies (not yet obligated to report) may also want to know if there are any benefits from starting before they must.
The undertaking can omit all disclosure requirements in a topical standard if it assessed that the topic in question is not material. In that case it may disclose a brief explanation of the conclusions of the materiality assessment for that topic but shall disclose a detailed explanation in the case of ESRS E1 climate change (IRO-2 ESRS 2).
Disclosure requirements in relation to action plans, targets, policies, scenario analysis and transition plans are proportionate because they are contingent on the undertaking having these, which may depend on the size, capacity, resources, and skills of the undertaking.
The flowchart below does not cover the situation in which the undertaking assesses a sustainability matter as material but it is not covered by a topical standard, in which case the undertaking shall make additional entity specific disclosures (ESRS 1 (30 (b)).