CSRD, ESRS, ISSB, TNFD: The ESG Alphabet Soup is Driving Businesses to Move from Disclosure to Governance

• Net turnover of €50 million or more
• Total assets of €25 million or more
• 250+ employees 

• January 1, 2024: Companies that are already obligated to report under the EU NFRD are required to start reporting from FY2024 with their first CSRD report issued in 2025.
• January 1,  2025: Large companies covered by the CSRD need to start reporting from FY2025 with their first CSRD report issued in 2026. 
• January 1, 2026: listed SMEs must implement the CSRD from FY2026 with their first CSRD report issued in 2027. 
• January 1, 2028: Non-EU companies with large EU subsidiaries must implement the CSRD from FY2028 with their first CSRD report issued in 2029. 

• Governance 
• Strategy 
• Management of impacts, risks and opportunities
• Metrics and targets

What about the International Sustainability Standards Board (ISSB)?

In June 2023, the International Sustainability Standards Board (ISSB) announced its new standards: IFRS S1 - General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 - Climate-related Disclosures. The ISSB standards provide a global framework designed to bring consistency, comparability and reliability to corporate sustainability reporting to meet investors' and creditors' needs for ESG information to support their investment decisions.

Several governments and regulators around the world, including IOSCO and the UK have expressed an interest in adopting the standards and integrating them into their sustainability reporting regimes.

Additionally, the ISSB has taken over the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, with the Financial Stability Board officially disbanding the TCFD during COP28.

What about the Taskforce on Nature-related Financial Disclosures (TNFD) Framework?

In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published its final recommendations for nature-related risk management and disclosure. The TNFD recommendations are largely consistent with the ISSB standards and the impact materiality approach used by the Global Reporting Initiative (GRI) that has been incorporated into the ESRS. 

Putting the ‘G’ into ESG with a Focus on Governance

These reporting regulations are not really about reporting. They're about building a governance process. Here's the evidence:

• Out of 82 disclosure requirements in the ESRS, around 50% are about targets, policies, actions, and governance oversight - not metrics or KPIs.
• Not by chance, the first disclosure requirement you can find in the climate standard (ESRS E1-1) is: "Transition plan for climate change mitigation". Not scope 1, 2, or 3 emissions - but "do you have a strategy and what is it?". 
• The materiality assessment is not simply used to determine a threshold for reporting and disclosure, but to define accountability and set up ongoing governance oversight.
• ESRS 2 GOV 2 demands to disclose: "whether, by whom and how frequently the administrative, management and supervisory bodies, including their relevant committees, are informed about material impacts, risks and opportunities (i.e. the output of the double materiality assessment), the implementation of due diligence, and the results and effectiveness of policies, actions, metrics and targets adopted to address them. 
  
  In other words, companies working on the implementation of CSRD and/or IFRS (IFRS is very similar in terms of governance requirements as both ESRS and IFRS borrow from the TCFD recommendations) cannot look at these only from a reporting perspective. If they do so, they will struggle to meet the minimum requirements, have headaches with auditors and supervisory authorities, and find themselves in a difficult position to comply with other upcoming regulations such as CSDDD.
  
  So, now is the time for companies to take a more holistic and integrated approach and not just because the regulators are introducing requirements that compel them to do so. Unfortunately, there’s been no lack of crises in recent years (COVID, geopolitical conflicts and the impact of climate change) to underpin the need for good governance where accountability and action based on what’s material and important to a business are the main focus. It’s become increasingly important for companies to (re)assess their approach, establish a committee who are empowered to drive the necessary changes, invest in effective programs and implement robust tech-enabled processes that enable them to identify and navigate impacts, risks, and opportunities with confidence and ease. 
  
  Gathering and Analyzing the Right Data for Strategic Decision-Making
  
  Data still plays a central role in the shift from disclosure to governance, but just not as the first step in a company's ESG journey. It may sound counterintuitive, as only a couple years ago the main advice you would get from leading organizations was “just get started, doesn’t matter where - measure something and report out”. That advice doesn’t apply anymore in a context characterized with heightened regulatory and public scrutiny. Companies must gather and analyze data from various sources (internal stakeholders, regulators, policymakers, media, competitors, suppliers etc.) to inform their ESG strategy and establish the key material issues to prioritize. It's imperative that companies hone in on the areas where they can make a meaningful positive impact and set targets accordingly. There’s no point in rushing into ESRS gap analysis and data gathering without having completed the strategic and governance steps first. Then it's time to monitor and report on progress as well as keep up-to-speed with changes and developments in the broader ESG landscape. It’s a bit of a cliché, but it’s a case of getting the right data in front of the right decision-makers at the right time so they can make objective, evidence-based decisions. Only then can companies truly understand and own their ESG strategies.    
  
  Market-leading companies worldwide are using Datamaran’s AI-powered platform to lead with governance and proactively monitor their ESG risks and opportunities in real-time. To find out more, complete the discovery call form below.