As of 2025, large companies covered by the CSRD will have to comply with the ESRS defined by Europe when drawing up their sustainability reports (for the 2024 financial year). Two CSRD project managers share their experience of implementing ESRS in their companies.
The Corporate Sustainability Reporting Directive (CSRD) was published in the OJEU on 16 December 2022. The French government must transpose it into French law by the end of 2023. It provides for the mandatory use of reporting standards, ‘European Sustainability Reporting Standards’ (ESRS), to create a common language and enable comparisons between sustainability information published by companies. A first set of draft standards, covering the reporting obligations of large companies, was sent by EFRAG to the European Commission in November 2022. They were finally adopted by delegated act on 31 July 2023.
Two CSRD project managers from two large French groups, specialising in the automotive (interviewee 1) and cosmetics (interviewee 2) industries, answered our questions on the implementation of ESRS within their companies, and shared with us their advice and recommendations (action plan, double materiality assessment, transformation challenges, etc).
How did you react to the draft ESRS published by EFRAG?
Interviewee 1:
It's not unusual to feel discouraged by the growing number of regulations to come. The texts are indeed very complex, with a multi-layered approach:
- the CSRD;
- agnostic standards, which apply to all companies, whatever their sector of activity;
- specific standards, which will apply to different sectors, meaning that, for groups with multiple activities, several standards will have to be applied;
- and, finally, entity-specific disclosures.
This step-by-step approach will increase the burden and weight of the information to be provided over time.
To avoid panicking in the face of this mountain of texts, we need to think about the context that gave rise to these new regulations. The aim of these regulations is to make companies' CSR communications comparable. Stakeholders are confronted with a huge diversity of CSR messages, with different formats and KPIs, sometimes identical indicator labels, but completely different calculation methods.
What are your recommendations in terms of action for plans implementing ESRS?
Interviewee 1:
The 1st step is to take the time to understand the texts and share a common interpretation internally, because the texts are far from obvious.
The 2nd step is to identify the people in the company who will be responsible for implementing this new reporting system. We'll need to broaden the scope of the people who were previously involved in sustainability reports, and involve all the functions concerned by this new approach to sustainability. It will also be necessary to train them in ESRS, so that everyone understands the scope of the change in mindset. In effect, this is a new approach to sustainability, since we start from risks and opportunities. We're going to be asking questions about the company's business model, its governance, its processes and the policies it has or hasn't put in place. It will therefore be necessary to involve skills that are not necessarily all coordinated around the issue of sustainability reporting, such as risk management, management control, operational functions and corporate strategy.
The 3rd step is ‘gap analysis’, which consists of measuring the gap between the regulatory expectations and the company's reality – that is, identifying the information already published by the company, that which it is possible to obtain easily, and all the information that is missing. Finally, the last stage involves resolving the gap between the company's reality and what is expected by the ESRS.
In our company, we have begun work on a materiality assessment, which I believe is the cornerstone of the system. Indeed, it is on the basis of this materiality assessment that we will be able to engage the right levels of involvement of operational functions in ESRS-based reporting. Implementing these new regulations will involve a real effort on the part of companies, even those already subject to reporting, so my recommendation is to anticipate.
Interviewee 2:
The exercise we're asked to carry out undeniably requires anticipation.
When we take a step back in ESG reporting, we can see that we've moved from an exhaustive approach with the pre-existing law (Grenelle law) to a materiality approach based on risk management. In the future, with the CSRD and ESRS, companies will be asked to revisit the materiality of ESG issues by integrating impacts and opportunities, with the dual focus of impact materiality and financial materiality. Once the subject has been considered material, companies will be asked to return to an exhaustive approach, adopting numerous standardised KPIs. This represents a considerable amount of work, especially for companies producing their first ESG reports. It is therefore advisable to start as soon as possible and, ideally, to use the 2023 financial year (and therefore the 2024 reporting) to test the new KPIs to be implemented.
Undeniably, the action plan starts with the double materiality matrix that we produced last year on the basis of the draft ESRS submitted for public consultation by EFRAG in April 2022.
On the ‘gap analysis’, we decoupled the quantitative part from the qualitative part to make the work more digestible. Faced with the increase in the number of KPIs to be produced, and with a new level of granularity, we took advantage of the opportunity to try to simplify the work of the teams by refocusing on the essentials, while also seeking to optimise processes and to pool resources to achieve an integrated vision. On this basis, we have identified three categories of KPIs:
- KPIs that already correspond to those set out in the draft standards prepared by EFRAG;
- KPIs to be created to comply with the texts; these are essentially forward-looking KPIs with a financial angle; and
- KPIs historically monitored by the company, but which do not correspond exactly to what is required by the ESRS projects.
We quickly identified ‘quick wins’, such as a ratio of greenhouse gas emissions to sales. Other KPIs, on the other hand, require more thought. This is the case for KPIs based on different units, or for certain subjects on which we have historically focused but for which the standards projects require less granularity.
Have you identified any areas of concern regarding the implementation of ESRS?
Interviewee 1:
I've identified two warning signs. My first point concerns the need to work more closely with the finance departments as soon as possible, because some of the indicators required by the draft ESRS are financial elements, but are not available from the finance departments. For example, it's far from easy to quantify risks and opportunities in Euros. It will therefore be necessary to anticipate the various needs of the finance departments.
My second point of warning concerns the ‘Own workforce’ part of the Social pillar of ESRS. For example, when it comes to accidents in the workplace, national regulations apply and, in France, our regulations include many more accidents in the definition of ‘accidents in the workplace’ than in other countries. This means that France is at greater risk of appearing as the country with the highest number of workplace accidents. This is a warning point that has been brought to the attention of EFRAG and the European Commission.
You told us that you had already implemented a materiality assessment. What are your points of attention concerning the principle of double materiality?
Interviewee 1:
As you know, there are two aspects to consider. Firstly, there's financial materiality, that is the effects of sustainability factors on the company. Despite the existence of rules defining this, there is considerable room for interpretation: how is this economic materiality defined? How do we combine it with the risk assessments carried out within the company? It's not easy to define a methodology, and there's a real lack of guidance, especially for new companies about to join the scheme.
Then there's impact materiality, which consists of looking at how the company's activities have an impact on society and the environment. What is particularly new in impact materiality is the strengthening of the role of stakeholders in the system. The principle of double materiality requires issues with a strong impact or significant economic materiality to be considered. It is possible to imagine an issue with low economic materiality but high impact materiality. The issue will then be considered as material, and this is where the role of stakeholders becomes decisive.
Another point to bear in mind is that it is from this materiality matrix that the extent of reporting will derive, since, apart from the mandatory application of certain ESRS, all other ESRS will be subject to the materiality assessment carried out by the company. The role of stakeholders will therefore play a decisive role in the volume of our reporting and the amount of effort required.
A final point of warning will concern major groups in particular: the fact of deeming a subject to be non-material risks being a trap, because stakeholders will undoubtedly still expect to have information on certain subjects, even if these subjects have been considered non-material and set aside by companies.
In addition to these warning points, I have identified four major difficulties concerning the principle of double materiality:
- The first difficulty is to educate stakeholders about the dual materiality approach. It's not easy to explain the notion of materiality impact to them, to ensure that the questions they are asked are understandable, and to convince them to give us a little of their time for a complex questionnaire. I recommend that companies call on a neutral third party to conduct these materiality analyses, to ensure that all their stakeholders are treated fairly.
- The second difficulty is to refine our calculations of economic materiality by estimating in Euros the risks and opportunities for each CSR issue.
- The third difficulty is the amount of time we have to devote to the task, since the work involved is substantial. There are major organisational impacts, and we need to be able to mobilise resources that will have the time to deal with the new regulations. Internal control has to be involved, tools have to be developed to capture data in a more ergonomic way and, above all, reporting has to be carried out in a much shorter time than before.
- The final difficulty is that of being alone in the face of regulatory texts: how can we be sure of the correct interpretation of double materiality?
What do you see as the prospects and challenges for the transformation of the ESRS?
Interviewee 2:
Reporting must remain at the service of strategy and serve to steer performance. We must therefore avoid the predictable pitfall of a purely ‘compliance’ exercise, which would empty the teams' work of its content and distract them from the real challenge, which is to work towards transformation. With the CSRD and ESRS, we have changed the paradigm. In contrast to the current sustainability report, reporting is no longer simply a matter of reporting performance based on sound risk management; we now need to be able to project our business model over the short, medium and long term, anticipating the risks weighing on our business, but also taking into account the impacts generated by our business, and ultimately valuing the opportunities that could emerge from it. And, since it is not possible to publish impacts without presenting moderation or mitigation objectives, reporting undeniably encourages action.
Furthermore, to avoid ‘greenwashing’, action plans and the resources allocated to achieve the objectives defined by the company must be published, which implies being ambitious, but at the same time pragmatic and transparent. The regulator is therefore accelerating the potential of reporting as a self-regulatory tool that encourages reflection in a given direction, and de facto encourages the company to take action.
Many say that we're getting closer to the requirements of financial reporting, and rightly so in many respects, but this forward-looking part where the regulator and standard-setter encourage companies to set targets, publish action plans and allocate resources is quite unique. It is therefore important that these forward-looking data are based on reliable processes that are argued and shared with experts, both internal and external, statutory auditors, independent third parties and other stakeholders. It is also essential to promote acclimatisation to these new requirements at all levels, particularly with regard to the audit committee, which will be responsible for monitoring the integrity of the process for drawing up sustainability information, in the same way as for financial statements.