ESG — ITS DEFINITION
ESG is a measure of the environmental, social, and (corporate) governance impact of business operations alongside the financial value they create.
- ENVIRONMENTAL FACTORSconcern a firm or company’s interaction with the environment — its use of energy and natural resources, the waste and pollution it might be generating, and its treatment of flora and fauna.
- SOCIAL FACTORSare about a company’s relationship with its employees, stakeholders, and the local community. Social factors include racial and gender representation issues.
- CORPORATE GOVERNANCE FACTORSrelate to a company’s management structure and shareholder privileges, transparency in accounting and reporting, and the strength of its value system.
THE NEED FOR ESG REPORTING
As COVID-19 continues to ravage national and global economies, there is a growing realization that any business activity must be as sustainable as it is profitable. Investors today are conscious of the impact their investments might indirectly have on the climate, environment, and propagation of social problems. Such consciousness has led to calls for measuring the ESG footprint of companies, hence the need for ESG reporting.
ESG REPORTING IN THE EU
The European Commission 2019 announced the Green Deal —a commitment to make Europe a climate-neutral and sustainable economy by 2050. Among a host of vital efforts in that direction are those that seek entities to report on the sustainability of their activities.
Non-Financial Reporting Directive:
- NFRD, which came into effect in 2018, currently governs sustainability disclosures in the EU.
- NFRD is limited in scope as it only applies to large companies with more than 500 employees and publicly listed companies. That works out to just about 11,000 EU companies.
- The reporting companies are free to choose from a wide range of sustainability reporting frameworks to make their disclosures under NFRD.
Corporate Sustainability Reporting Directive:
- The European Commission on 21 April 2021 adopted a proposal for the CSRD, which will eventually replace the NFRD.
- CSRD is wider in scope, covering all large companies and all companies listed on EU-regulated markets (barring listed micro-enterprises). Around 50,000 EU companies would make sustainability disclosures under CSRD.
- Reporting under CSRD will be in accordance with EU sustainability reporting standards.
- Companies need to digitally tag the information they report under CSRD to facilitate machine-readability, and thereby comparability of data. CSRD also requires the reported information to be audited.
- Large companies will have to comply with the CSRD reporting requirements from 1 January 2023, with their reports being published from 2024. SMEs, on the other hand, will have to meet the requirements from 1 January 2026.
Sustainable Finance Disclosure Regulation:
- SFDR, which came into force on 10 March 2021, applies to EU investment firms, EU alternative investment fund managers, and non-EU alternative investment fund managers marketing their funds in the EU.
- Entities falling under such a description are asset managers, pension funds, banks, insurance companies, venture capital funds, and credit institutions.
- SFDR requires such entities to make public their policies on factoring sustainability risks in their investment decisions.
Why go with IRIS CARBON® for ESG reporting?
Sustainability disclosures under the CSRD regime will have to be made in a digital format in accordance with EU sustainability reporting standards. The digital format in question is Inline XBRL*, which is already in use in Europe for ESMA’s European Single Electronic Format (ESEF) reporting.
IRIS CARBON® — a collaborative SaaS solution — is used by companies across the EU for ESEF reporting. The solution also assists companies in regions including the US, UK, and South Africa with similar iXBRL filing requirements.
With over 16 years of XBRL-based reporting, IRIS CARBON® is the best bet for your ESG reporting needs.
*XBRL stands for eXtensible Business Reporting Language