Starting January 1st, 2024, the European Union will implement stricter transparency rules for larger, listed companies regarding their Environmental, social, and governance (ESG) or ‘sustainability’ information. These rules, known as the Corporate Sustainability Reporting Directive (CSRD), require these companies to report on their impact on people and the environment using a specific framework in their annual ESG reports.
The new directive is also significant for UK companies for two major reasons. First, it’ll be imperative if they operate within the EU, and second, it could affect future financial prospects, as investors are set to become increasingly interested in the environmental impact of their investments.
According to an article from Landmark information Group, next year, larger businesses will be expected to “collect and report on a wide range of ESG metrics, including climate change, social and employee matters, human rights, and anti-corruption and bribery. UK companies will need to ensure that their ESG disclosures are in line with the CSRD guidelines and that they use the required reporting formats.”
The environmental part of corporate ESG (Environmental, Social, and Governance) focuses on a company's environmental impact and sustainability practices. It encompasses a wide range of factors related to how a company interacts with the natural environment and its efforts to minimise negative environmental effects while promoting positive ones.
Depending on the organisation, it can include:
Social and societal aspects have to do with how the company treats people. Is everyone equal, and are there equal opportunities? How does the company deal with privacy issues and data protection? Do people work safely, and to what extent are human rights at stake anywhere in the business chain? Customer satisfaction and limiting customer dependency on the company also play a role.
Concerning the governance aspect, this involves the extent to which companies prevent things like bribery and corruption, for example. Is there diversity in the daily board of directors? And does the remuneration of executives take place fairly and in line with actual performance?
The CSRD explains the rules for disclosing information regarding ESG reports. It provides standards for ESG reporting on people, the environment, and related governance. The primary purpose of the guideline is to ensure more transparent reporting and better quality of the data provided. CSRD also promotes the comparability of information regarding company sustainability practices in a broad sense.
Among other things, the directive aims to enable investors to focus on making sustainable and social investments. It expects to make high-quality and comparable sustainability information publicly available to create more sustainable investment policies, which will move companies to keep improving in these areas.
An ESG report, in line with CSRD's guidelines, contains both qualitative and quantitative data under the three themes mentioned above, including numbers and intended plans.
Environmental: What CO2 emissions a company realises, along with the relevant targets for the coming periods, and how the company combats climate change and reduces its emissions
Social: How satisfied employees are with their working environment, how the company tries to maintain and improve safety in that environment, and what measures it takes regarding gender inclusiveness. The company is also responsible for what happens further down the supply chain.
Governance: How are a company's internal emission and inclusion controls designed? What is the procedure by which executive compensation is determined? And is there a whistle-blowing procedure?
The CSRD is designed to create optimal transparency regarding ESG performance. It intended to make the various factors between companies much more comparable and stop companies from concealing poor performance.
Timeliness is crucial in this process, since stakeholders want access to the most up-to-date ESG information during and after the fiscal year-end. Business leaders should have access to ESG information and reporting per unit of time, preferably monthly. That way, they can observe trends quickly and anticipate any adjustments to their sustainability policy.
Most companies are required to report under ESG by 1st of January 2024. And many organisations have already started to prepare for this, with the finance team playing a major role.
Typically, finance mainly focuses on accurate financial reporting and maximising profits. However, in the future, it will also be imperative for finance to help measure each activity and investment on the three ESG pillars, the operating result, and the supplier chain.
The finance team will need to find the right balance and technology quickly.
Employee corporate spending is one of the most critical data sources concerning ESG reporting. The financial transactions carried out by employees on behalf of the company provide a lot of information on attitudes towards sustainability in the workplace.
Do they buy their goods from suppliers who also score well on the sustainability ladder? Do they make sustainable purchasing decisions? Can they develop their knowledge and skills by booking and attending external courses? Do they make unnecessary flight hours or travel by energy-neutral transport?
If companies want to answer these questions, they need to consider ESG when tracking corporate spending.
The problem? Corporate spending is already difficult to track. Who is spending, where, and on what is often not very transparent, so steering on ESG is a big challenge.
With the introduction of CSRD, companies are preparing to put ESG and sustainability tracking measures in place. This will not only help them meet the directives and new obligations, but can also give them a competitive advantage when it comes to investment, recruitment, and even customers.
At Payhawk, our spend management solution, including corporate cards, expense management software, subscriptions, and more, lets you track, control, and group spending so that you can set limits on and categorise any spend that affects your ESG impact.
Learn more in a no-obligation demo. And read the customer story from leading corporate decarbonisation and ESG optimisation solutions provider, Plan A to see why they chose Payhawk to support their lean finance team.
In her role as Content Manager, Nerissa Goedhart harbors her passion for sharing valuable insights and solutions through engaging content. This, with a clear mission to assist and empower businesses in the region by elevating their expense management.