Corporate social responsibility (CSR) and environmental, social and governance (ESG) requirements for companies are increasing. One of the most significant developments is the publication of the European Corporate Sustainability Reporting Directive earlier this year. Under this directive, thousands of companies in the Netherlands are expected to prepare and publish a sustainability report. This will be done using binding sustainability reporting standards, the ESRS. The implementation of this directive in the Netherlands and the adoption and publication of these standards are still ongoing. But it is already clear that the impact on Dutch companies will be significant. The non-binding approach to sustainability reporting is truly a thing of the past. Or, in the words of the regulator, the AFM: ‘CSRD: no time to lose!’
Compliance is meeting expectations. In the article we published last month, we took a closer look at the large listed company, which already had to report on sustainability issues from 2018 (fiscal year 2017) under the previous NFRD regime. This month, we discuss the B.V. that qualifies as ‘large’ under the CSRD. This is because large B.V.’s are facing legally required ‘sustainability reporting’ for the first time. Usually these companies have no (or little) experience with this. Therefore, they still need to take considerable steps to prepare a sustainability report that meets the far-reaching requirements of the CSRD and ESRS. In this article, we discuss a large private limited liability company (LBV) using a fictitious example case study.
LBV is a large B.V. as mentioned above. So, what exactly constitutes ‘large’? The size of a company is determined using three criteria: balance sheet total (assets), net sales and number of employees. The company must meet two of the three thresholds for two consecutive fiscal years. The threshold values for the large category are now :
The European Commission recently submitted a proposal to apply inflation correction to the financial criteria ‘assets (balance sheet total)’ and ‘net turnover’, according to which these would be increased by 25%. So then for ‘large’ it would become €25 million and €50 million respectively.
Substantial steps required
In 2026, ‘large’ companies will be required for the first time to report on their sustainability performance for fiscal year 2025. This means that by the end of 2024, this group of companies must have their data collection, management and internal processes for sustainability reporting in place to be able to do so. This may sound far away, but as mentioned earlier, there is no time to lose. This is even more true for companies that have little to no experience or knowledge of sustainability reporting. After all, they need to make significant organisational adjustments and other efforts to identify and capture their ESG data and to be able to measure and monitor their status and progress on the various sustainability topics.
Where to start?
LBV recognizes that sustainability and CSR are not just “buzzwords,” but, actual steps must be taken to enact the essential changes. LBV has only recently become familiar with the text of the CSRD and ESRS and their impact. Management is determined to address the implementation of these new regulations in a timely and appropriate manner. But it also feels overwhelmed by the comprehensive and complex disclosure requirements and is unsure where to begin.
GAP analysis: where does the company stand now?
As a first step, LBV conducted a so-called GAP analysis to determine what its current situation is against the final text of the ESRS. With this insight, LBV knows for which sustainability aspects policies, actions, objectives and measures must(s) be drawn up and taken. LBV then asked both internally and among its stakeholders what the company stands for, what it wants to achieve and what the potential impact, risks and opportunities are from a sustainability perspective in order to identify its objectives and core values. This is then a good starting point for formulating ESG objectives for the sustainability report to be prepared in due course. So engage in discussions about this, both with each other and with your stakeholders!
Stakeholders expect to gain insight into the intrinsic motivation and efforts regarding all non-financial aspects of business operations through the sustainability report. By sharing this information, LBV increases confidence in how it operates sustainably, now and in the future. A visible lack of that motivation and effort in this area potentially jeopardizes healthy business operations in the longer term. Issuing a sustainability report also provides the company with an opportunity to distinguish itself positively from other, similar, companies. The CSRD can thus be considered a good instrument for (steering for) long-term value creation.
Implementation plan: roadmap
It takes time and effort to define a strategy and take measures to become more sustainable. Ultimately, LBV itself must demonstrably work on developing its sustainability goals and integrate them into its strategy. Next, it is necessary to set time-bound qualitative and quantitative targets and actions for material ESG themes. It is necessary to analyze how each objective for a sustainability theme can be operationalized. This is the only way to drive long-term value creation. But remember: reporting in itself is not the ultimate goal; it is about providing transparency on actual change, with positive ESG impact.
LBV has created a concrete and dynamic implementation plan in the form of a roadmap to move ambitiously and in a well-organised way through this process. In this way, LBV has defined time-bound and concrete objectives that are clear to everyone, so that everyone is “speaking the same language” when it comes to sustainability. Remember, there is no “one-size-fits-all” approach. The implementation process and commitment to becoming more sustainable can seem overwhelming at first, but LBV has cut this into manageable pieces so that it can keep an overview. LBV has also looked at best practices from its peers and joined covenants for international corporate social responsibility (CSR) within the sector in which it operates.
Complying with the new CSRD and ESRS rules basically amounts to a data challenge. LBV can only meet this challenge if it has the data required for reporting, of the required quality. Or, reasoned the other way, “no data, no compliance”. The adequate collection and management of sustainability data is very important for LBV to measure, assess and steer its sustainability performance.
LBV found out during the GAP analysis that the data it already has is scattered across different IT systems and departments. Consolidating data from different systems, locations and departments is necessary to get a complete picture of sustainability data. The lack of that data and standardized reporting practices is an obstacle to accurate reporting. LBV has adopted an integrated approach to data collection and analysis that allows it to generate reliable reports that fully meet the standards of the ESRS that are material to it. This approach aims to address the challenges of fragmented data and lack of uniform reporting practices, paving the way for accurate and standardized sustainability reports.
The path to sustainability reporting under the CSRD amounts to an impactful transformation for LBV. After LBV translated concrete ESG goals into a pragmatic strategy, motivated employees were given the responsibility of contributing to their effective implementation. To achieve this, a “Sustainability Team,” hereafter abbreviated to “ST,” was formed at the request of management. This team consists of employees from various departments, including Finance, Legal & Compliance, Risk Management, HR, IT, and acts as the catalyst for change within LBV. This involves workshops, training sessions and individual coaching to create broader support and awareness. This contributes to a culture of shared responsibility for this important issue. Consideration was also given to the expertise still lacking. The ST of LBV has been strengthened with expertise in the field of ESG audits and a data engineer. In addition, the ST is working with external partners, including an ESG reporting software provider and a company specializing in calculating greenhouse gas emissions. The ST reports progress on its work to the board on a monthly basis and discusses those reports in the monthly board meeting.
Double materiality analysis
As a first step, the ST performed the prescribed “dual materiality analysis”. On the basis of this it can be properly (substantiated) assessed which of the total of 10 ESRSs are relevant (= material) to the LBV. This analysis is ‘double’ because it addresses the following two aspects: (i) how is the LBV affected (financially) by developments in the field of sustainability, e.g. climate change and (ii) what influence does the LBV itself have on its environment, e.g. the effect of the use of fossil fuels by the LBV and its chain partners. In short, the materiality analysis is an inventory study that includes both the company and its stakeholders, resulting in a holistic overview of sustainability topics that should be prioritized and where the company can make the most impact. This survey serves as the starting point for the sustainability report. The insights gained from this process then determine which thematic standards, (sub)themes, disclosures, data points and critical performance indicators (KPIs) should be included in the final sustainability report. The sustainability report meets the CSRD if all material sustainability information is accurately and completely represented.
LBV must be able to account for everything it reports on ESG to its auditor. After all, based on the CSRD, the accountant must ultimately provide a (for the time being) limited assurance on the sustainability report to be published. Given this requirement, the ST has regular contact with the LBV accountant.
LBV expects to gain a competitive advantage from annually reporting progress in achieving its sustainability goals. In addition, companies that are part of LBV’s value chain are eager to work with business partners that have demonstrably sustainable operations, strengthening their position as preferred business partners. Moreover, banks like to do business with sustainable companies. For example, there are increasing opportunities to finance business activities by means of a loan with an attractive interest rate discount, the so-called ‘Sustainability Linked Loan’, provided that you then demonstrably achieve the associated sustainability performance targets. Using the ESRS, KPIs can be determined and recorded, which are then reported to the bank. Also important in this context is the fact that the younger generation of employees increasingly values working for a sustainable employer. With the current tight labor market, LBV distinguishes itself as a sustainable, and therefore an attractive employer.
Is your company also moving towards sustainability reporting? We offer you a unique blend of the multidisciplinary knowledge and decisiveness you need to demonstrably comply with the CSRD. Wondering how our combination of Risk & Compliance, Data and Transformation expertise can help your organisation move forward?