Sustainability reporting: the conundrum of ESG Data

1 – From voluntary to mandatory sustainability reporting

 In Europe, since 2014, the NFRD (Non-Financial Reporting Directive) mandates certain companies to provide non-financial information, often in the form of ‘sustainability reports’, along with their annual reports. However, in April 2021 the scope of the NFRD has been expanded into the CSRD (Corporate Sustainability Reporting Directive) with some key differentiating elements:

·       it expanded the scope of companies affected – 50.000 companies impacted in EU alone

·       it introduced the mandatory European Sustainability Reporting Standards (ESRS), and

·       it requires an audit as an assurance on reported information, quite similarly as to what is required on financial information

The integration of financial and sustainability reporting is a key focus for IOGP Europe’s member companies. Representing over 1,1 million workers in Europe, these companies are central to the net- zero transition set out in the European Climate Law.

Several of them have even restructured their internal organizations to align with the CSRD. This involves redefining roles, responsibilities, processes, and timelines for the creation and approval of both mandatory and voluntary reports.

By merging sustainability reporting with financial reporting, companies can efficiently adapt to the new sustainability reporting requirements.

Although our sector is being very supportive of the establishment of CSRD, this implementation implies important challenges for companies, as described by one of our members below.

 2 – Challenges of the CSRD implementation

As a concrete example, let’s take Eni as a company subject to the CSRD : their focus is currently on the new ESRS.

Just like other IOGP Europe members, Eni looks favorably on the introduction of these standards and sees them as an occasion to better reflect its positioning on ESG issues in the external communication, rather than as a mere compliance obligation. The new CSRD should therefore be seen as an opportunity for the presentation of the “value creation” within the company strengthening at the same time the comparability with other peers. Notwithstanding this, there are some different areas of the new standards which can be considered more challenging and, sometimes, not very clear.

 One example of the impact of the CSRD is related to the definition of the reporting perimeter and the related extension to the value chain. The capacity of the undertaking to obtain data from its value chain participants, constitutes a critical point even for companies with a high potential leverage or strong relations towards suppliers/clients, as the ones in the oil and gas sectors The data collection process might involve difficulty and limitation in terms of data consistency, comparability and reliability, and in general about the governance of reported data. By including counterparties in its value chain, the undertaking will report data outside its direct control without the possibility to directly verify them and assure the overall level of quality of the other KPIs included in its sustainability report. Indeed, the undertaking can only guarantee about data from its own operations, but it will not necessarily have the knowledge about the data collection process from the value chain counterpart or on the effectiveness of its (eventual) internal control system over sustainability.

The extension of the responsibility of the information disclosed to the whole value chain will necessarily create issues in terms of clarity of assurance of the reported data, including cases of potential duplication of information. Moreover, this would raise a lot of questions on the issue of legal liability of European undertakings in respect of the information that will be shared in the Annual reports about their value chain.

In order to disclose adequate data from the value chain it would be fundamental to collect it properly, especially from the SMEs that are part of it. On this point, the relevance of the specific standards that is going to be developed for SMEs is key and the data requested should be proportional to their size and capacity to collect the related information, without creating an excessive burden in establishing this process which, for most of these companies, would be a new one. 

If the SMEs are able to set up a robust disclosure on the information requested by the Directive, this would be of great support also for larger companies relying on this information.

As a further consideration, having defined a clear decarbonization strategy and just-transition framework even before the CSRD, Eni was aware about the importance of engaging with our stakeholders to support their transformation process. To foster a widespread awareness of sustainability along the entire value chain and offer concrete solutions and opportunities to companies, Eni has put in place several tools aimed at supporting suppliers and more generally the entire business system in the path of sustainable development. Among those tools, Eni has contributed to the creation and promotion of a dedicated platform, “Open-es” that aims to create an alliance open to all companies and industries, not only partners of Eni, engaged in involving their value chains in a common path of improvement of their sustainability performance. The platform is open to both suppliers and clients, and it enables all companies to measure, monitor and share their sustainability performances and the ones of their supply chain with a simple and flexible approach, so that they can play a leading role in the growth of their industrial ecosystem in terms of sustainable development.

This platform is currently based on the “World Economic Forum stakeholder capitalism metrics” but in the foreseeable future and in order to take into account the legislative evolution brought up by the new ESRS standards, the platform would probably shift towards the ESRS standards as most of the companies participating in the platform will soon have to report on those metrics.

 3 – Interoperability of reporting standards

In 2023, the concept of ‘Interoperability’ emerged as a significant topic in the ESG sector. The purpose is to minimize redundancy in global standards and prevent conflicting reporting requirements on the same subjects.

At a national and jurisdictional level, it involves aligning emerging sustainability reporting requirements with global standards, while also considering national priorities and existing laws. This approach enhances the existing disclosure practices of organizations.

Today, three primary sets of standards govern sustainability reporting globally:

·       The International Financial Reporting Standards (IFRS) from the International Sustainability Standards Board (ISSB),

·       The Global Reporting Initiative (GRI) Standards, and

·       The ESRS (under the CSRD) from EFRAG (European Financial Reporting Advisory Group).

The ISSB standards aim to establish a global baseline for investor-focused sustainability reporting, which local jurisdictions can build upon. There is significant overlap among standards issued by the ISSB Board, GRI, and EFRAG, with the (just disbanded at COP28) Task Force on Climate related

Financial Disclosure (TCFD) framework serving as a common input. The crux of the issue is for globally operating companies applying multiple frameworks.

Indeed, compatibility issues could amplify if the requirements are not aligned. A crucial practical consideration is to harmonize calculation methodologies to minimize different data requirements. Achieving a global baseline will facilitate companies in applying these standards, promoting consistent reporting across jurisdictions. This reporting would be internationally comparable and would also meet local needs. Nevertheless, a lack of alignment in some areas may pose practical challenges for companies aiming to design coherent and consistent reporting that satisfies both global investors and jurisdictional requirements.

However, promising progress has been made in this area:

·       ISSB and EFRAG, of which both standards come into effect in 2024, announced together with the European Commission in July 2023 that they are working together to maximize the

interoperability of the standards, especially on the climate-disclosure alignment.

·       GRI and EFRAG, signed a cooperation agreement in November 2023: as stated,

interoperability will prevent the need for double reporting and results in a user-friendly reporting system without undue complexity. As a consequence, entities reporting under ESRS will be deemed reporting ‘with reference’ to the GRI standards and existing GRI reporters will be able to leverage their current reporting efforts to prepare their ESRS “Sustainability

Bye 2023, year of Standard Setting. Hello 2024, year of implementation !

We strongly advocate for a collective effort, urging the global collaboration of regulators, lenders, and corporations to harmonize information requests from companies.

The focus on ‘interoperability’ in the ESG sector is a significant step towards achieving a globally consistent standard for sustainability reporting, while the collaborative efforts of GRI, EFRAG and ISSB are paving the way for a more integrated and efficient reporting system.

It is essential to view reporting as just one facet of a comprehensive corporate sustainability strategy : it serves as the foundation for all corporate activities, including sustainability reporting.

Emphasizing the importance of quality over quantity, we recognize that an inundation of data without adequate quality will not yield the desired outcome. The data disclosed plays a crucial role for financial market participants in making sustainable investment decisions, aligning with the principles outlined in the European Green Deal. The ultimate goal is to facilitate the transition of challenging industries, such as the energy sector, to achieve net-zero emissions.