Towards sustainability reporting: the small B.V.

There are increasing demands on business in terms of sustainability, corporate social responsibility (CSR) and ESG (Environmental, Social, Governance). One of the most significant developments was  the publication of the Corporate Sustainability Reporting Directive (CSRD) earlier last  year. Under that directive, which has yet to be implemented in the Netherlands, 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. These standards, which will take effect after publication in the Official Journal of the EU, outline the appearance of the   sustainability report. 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 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 a large B.V. (‘LBV’) that still needs to take considerable steps to achieve a sustainability report that complies with CSRD and ESRS in all respects. This month, we cover a small B.V. that is not itself subject to reporting requirements, but is part of the value chains of several companies subject to reporting requirements. Those companies have to request certain sustainability information from the direct and indirect business relationships within their value chain. These are often smaller companies that do not themselves fall within the scope of the CSRD. In this article, we discuss the small B.V., (hereinafter referred to as ‘SBV’) using a fictitious example case study.  

Towards sustainability reporting: SBV 

Information requests  

SBV does not have a stock exchange listing and thus falls outside the scope of the CSRD. It is therefore not required to publish its own sustainability report. However, SBV is in the value chains of several companies that are required to do so. It therefore regularly faces requests for information on its own sustainability performance. SBV can only meet these requests if it has started to gain insights, measure, steer and monitor that performance itself in time. If you are a small company doing business and want to continue doing business with large companies, or if you have this ambition, it is wise to prepare well in time for the implementation of the CSRD and ESRS in the Netherlands. 

Why prepare a sustainability report if it is not mandatory?  

Although many companies state that sustainability is a priority, it remains difficult for their stakeholders to determine whether they are actually taking steps and making progress. This makes it complicated for their customers, investors, financiers and insurers, among others, to assess and compare their sustainability performance. Over time, as mandatory sustainability reporting becomes more ‘mature’, and more people become familiar with it, stakeholders will also want to see and be able to request this information from other (smaller) companies. It is therefore advisable for SBV to think about its sustainability targets and performance and collect information on this. It can then share this information with reporting companies if requested.  SBV can thus differentiate itself from other smaller companies. By complying timely and adequately with the information requests of those companies, SBV provides its position as a preferred business partner. And it mitigates the risk that existing business relationships may come under pressure and new business relationships may not be established.  Besides meeting the growing information needs of customers and stakeholders, SBV thus also gains a good understanding itself of the ESG impact, risks and opportunities of its own business activities. This facilitates the identification of sustainability themes where there is still room for improvement and the optimisation of its own longer-term sustainability strategy. 

CSRD: tool for positive change

It takes a lot of time and effort to properly report on sustainability. But SBV is ambitious and proactive and thus started on time. Sound sustainability accountability contributes to the creation and exploitation of opportunities for its business, including: 

• maximising its competitive position (transparent companies are not only able to maintain their competitive advantage, but in many cases even strengthen it); 
• creating trust among financiers and increasing access to capital;  
• anticipating (future) demands from chain partners covered by the CSRD, who need to gather information about their value chains (this strengthens business relationships); 
• protect and enhance corporate reputation and brand image; 
• being an attractive employer for increasingly discerning (potential) employees in an increasingly challenging labour market; 
• increasing trust among consumers, who are also increasingly critical in this area; and 
• promoting cooperation with other companies in the same value chain, whereby insight through sustainability reports makes cooperation with those companies more effective, easier and attractive. 

Voluntary ESRS (VSME ESRS) 

The European Financial Reporting Advisory Group (EFRAG) is developing simplified sustainability reporting standards for voluntary use by small and medium-sized enterprises (SMEs), which includes SBV. These voluntary standards: 

• are tailored to the (more limited) capacities and resources of SMEs (based on the proportionality principle); 
• help SMEs comply with the information requests of their larger chain partners; 
• thereby delineate the boundaries of what reporting companies should reasonably observe, so that there is no disproportionate pressure on SMEs through the so-called ‘trickle down’ effect of the CSRD; and  
• enable SMEs to attract additional investment and financing and thus make a visible and valued contribution to the transition to a more sustainable economy, as described in the European Green Deal.  

In short, the VSME ESRS is a kind of ‘CSRD light‘ regime, enabling SMEs to already (i) anticipate information requests from reporting companies and (ii) meet the increased expectations of their stakeholders. Once EFRAG has drafted the final version of the VSME ESRS, it will publish it on its website (www.efrag.org).  

Where to start? 

SBV is the first to ensure that its management possesses the necessary knowledge about corporate social responsibility and comprehends the importance of being accountable for it. In that context, it is also important to outline the legal context: what expectations must companies meet?  

Below are the practical steps SBV has taken as an organisation towards sustainability reporting:  

• Develop a vision of sustainability: By integrating sustainability into its strategy, SBV gives both itself and its stakeholders clarity on the sustainability themes on which it can and wants to have a positive impact. To this end, SBV also reviews and compares the sustainability reports of companies from which it receives requests for information. It also obtains insights from sector covenants and guidelines.  
• Establish sustainability policies: SBV starts by drafting a sustainability policy that fits well with the specifics of its business. Sustainability issues addressed in this process range from waste management, CO2 reduction, safeguarding human rights and anti-corruption measures. 
• Work with partners: Sustainability reporting is new to everyone, SBV therefore works with its suppliers, customers, and also competitors to promote sustainable business practices throughout the value chain. This also keeps SBV abreast of expectations regarding its company’s sustainability efforts. 
• Education and awareness: A deep understanding within SBV about relevant sustainability issues increases effectiveness in dealing with them in practice. It also strengthens the intrinsic motivation to further promote and embed sustainability within SBV. It ensures through e-learnings and training that everyone within the company ‘speaks the same language’ when it comes to sustainability issues.  
• Formulate targets and critical performance indicators (KPIs): SBV defines what ambition means to it in ESG terms. “What are the KPIs that demonstrate our progress?” It is crucial to properly define the relevant KPIs’ and the corresponding qualitative and quantitative targets, so that progress can then be objectively and convincingly measured and monitored. 
• Start reporting: SBV starts internally with a smaller group of employees and gradually learns what information is valuable to eventually share with its stakeholders. It is well aware that providing information on sustainability efforts is valued (and ultimately considered indispensable) by its stakeholders. 

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How can Projective Group help?  

Is your company also moving towards sustainability reporting? We offer you a unique blend of the multidisciplinary knowledge and decisiveness you need to demonstrably account for your company’s sustainability performance. Wondering how our combination of Risk & Compliance, Data and Transformation expertise can help your organisation move forward?