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2.6.2023

The EU’s Sustainable Finance Framework and Application for non-EU Fund Companies

An overview of: EU Taxonomy, Corporate Sustainability Reporting Directive (CSRD), and Sustainable Finance Disclosure Regulation (SFDR) 

 

Background 

The European Union passed the Green Deal in 2019. The ultimate objective is to transform the EU into a modern, resource-efficient and competitive economy, with the following aims: 

  1. no net emissions of greenhouse gases by 2050 (i.e.: climate-neutrality) 
  2. economic growth decoupled from resource use 
  3. no person and no place left behind 

To help achieve the first aim, the EU is aiming for greenhouse gas emissions to be cut by 55% (in comparison to 1990 levels) by 2030. 

As part of the Green Deal, the EU has outlined the Sustainable Finance Framework, which is intended to help embed sustainability factors at various levels of the economy.  

The three most important elements that comprise the Sustainable Finance Framework are: 

  1. the EU Taxonomy Regulation 
  2. the Corporate Sustainability Reporting Directive (CSRD) 
  3. the Sustainable Finance Disclosure Regulation (SFDR) 

 

The three elements are separate, but closely interlinked. While the EU Taxonomy provides the classification framework for sustainable activities, the CSRD regulates sustainability reporting and the SFDR defines the disclosure requirements for selling financial products.  

 

The EU Taxonomy Regulation 

The EU Taxonomy Regulation (“the Taxonomy”) sets criteria to determine whether an economic activity can be considered sustainable.  

The Taxonomy provides companies and investors with appropriate definitions of economic activities that can be considered environmentally sustainable. The aim is to create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.[1] 

The Taxonomy establishes six environmental objectives: 

  1. Climate change mitigation 
  2. Climate change adaptation 
  3. The sustainable use and protection of water and marine resources 
  4. The transition to a circular economy 
  5. Pollution prevention and control 
  6. The protection and restoration of biodiversity and ecosystems 

It sets out four overarching conditions that an economic activity must meet in order to qualify as environmentally sustainable. According to the Taxonomy, a sustainable economic activity has to be (i) assigned to a defined taxonomy activity, (ii) contribute substantially to one of six environmental objectives above, (iii) not significantly harm any of the remaining environmental objectives, and (iv) comply with a series of minimum social safeguards.[2] 

The Taxonomy has applied to certain, large EU companies from 1 January 2021.  

The Taxonomy will apply to non-EU companies with a net turnover over €150,000,000 (c. $165 million) in the EU, if they have at least one subsidiary or branch in the EU and exceed certain other thresholds. For such companies, the Taxonomy will apply from January 1, 2028, with reports due in 2029. 

 

The Corporate Sustainability Reporting Directive 

The Corporate Sustainability Reporting Directive (“CSRD”) establishes a uniform framework for the reporting of non-financial data for companies operating in the European Union. 

The CSRD aims to provide greater transparency and more comparable and standardised information on how companies perform from a sustainability perspective. This information is essential for funds and fund managers seeking to integrate ESG considerations into their investment decisions and to comply with their obligations under the EU Sustainable Finance Framework.[3] 

The CSRD will replace the existing Non-Financial Reporting Directive (NFRD), significantly extending the scope of companies required to report and expanding the range of reporting requirements. Companies will have to cover key ESG areas such as the environment, human rights, social responsibility, and diversity in their reports. 

A key concept introduced by the CSRD is double materiality. Double materiality means that companies must consider and report on not only the impact of environmental changes on their business, but also on the impact of their operations on the environment (including social and governance issues). 

The CSRD is applicable to non-EU parent companies which either: 

  1. have securities listed on an EU regulated market and have more than 500 employees, or 
  2. have a qualifying EU branch or subsidiary (see below) and generate net turnover of more than €150 million in the EU over two consecutive years. 

A qualifying EU branch is one having net turnover of more than €40 million.  

A qualifying EU subsidiary is a large company being one that exceeds any two of:  

       i. 250 employees;

      ii. €40 million net turnover; or  

     iii. €20 million total assets;  

or a small or medium-sized entity (SME) with securities listed on an EU regulated market. 

The CSRD will begin to impact the 2024 reporting period for in-scope, EU companies.  

For non-EU parent companies, CSRD consolidated sustainability reporting requirements on their EU operations will be required from their 2028 financial year. However, if the non-EU Parent company has securities listed on an EU regulated market and has more than 500 employees, its individual and consolidated reporting obligations will start from its 2024 financial year. 

 

Sustainable Finance Disclosure Regulation 

The Sustainable Finance Disclosure Regulation (“SFDR”) is a set of rules which require financial market participants (i.e.: fund managers) to provide information about how they deal with negative environmental and social impacts and risks of their investments.[4] 

The disclosure requirements of the SFDR are intended to illustrate to investors and the public the extent to which companies or products meet sustainability benchmarks. Fund managers must disclose how sustainability risks are considered in their investment process, what metrics they use to assess ESG factors, and how they consider investment decisions that might result in negative effects on sustainability factors. 

The SFDR requires disclosures at the company level as well as at the product level. 

In addition, financial companies must disclose their Principal Adverse Impacts (PAIs) on Sustainability. PAIs consist of mandatory, core indicators and additional opt-in indicators from the areas of greenhouse gas emissions, energy efficiency, biodiversity, water, waste, social and employee affairs, human rights and corruption. The information on PAIs must be published on in-scope companies’ websites. 

At the product level, the SFDR distinguishes three categories of financial products, with different levels of disclosure requirements depending on classification: 

  • General financial products (“Article 6 funds”) 
  • ESG financial products with environmental or social characteristics (“Article 8” or “light green funds”) 
  • ESG financial products with the aim of sustainable investment (“Article 9” or “dark green funds”) 

Mandatory disclosure of sustainability data under SFDR has been in place since 10 March 2021. 

Non-EU fund managers will be in scope to the extent that they register any of their funds for marketing under national private placement rules in any EU member state. They are also potentially in scope to the extent that they manage or advise EU-domiciled funds, even if those funds are not privately placed in the EU. 

 

The three regulatory requirements above are interlinked with some overlap in terms of content. The Taxonomy defines what is considered sustainable under any financial product level information disclosed by investee companies under the CSRD. The reporting provided by the CSRD will be used by fund managers to satisfy the Principal Adverse Impacts (PAI) disclosures under SFDR.

 

At EisnerAmper we make sustainability simply sustainable.

Authors

 

Peter MacDonald

Partner ESG & Advisory

6 The Courtyard Building
Carmanhall Road
Sandyford
Dublin, D18 CA22
Ireland

L E

 

Sarah Ryan

Manager Risk & Regulatory

6 The Courtyard Building
Carmanhall Road
Sandyford
Dublin, D18 CA22
Ireland

L E

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
26.4.2023

Where to start with ESG Reporting?

Complying with the new EU Corporate Sustainability Reporting Directive (CSRD) and the disclosure requirements set out in the (draft) European Sustainability Reporting Standards (ESRS) might seem overwhelming, particularly for businesses that have not previously prepared sustainability reports. In this article, we describe a workflow approach that will assist businesses in meeting their compliance obligations, and help shape their transition towards a more sustainable and circular business model, delivering benefits for their business and other stakeholders.

As a reminder, the CSRD Sustainability Reporting requirements come into effect as follows:

FY 2024 ->    Listed companies and other Public Interest Entities with more than 500 employees (currently in scope of the EU Non-Financial Reporting Directive (NFRD) and the Taxonomy Directive)

FY 2025 ->    All other ‘large’ companies, i.e. those that exceed any two of the following:
–   Net turnover of €40m
–   Total assets of €20m
–   Average employees of 250

FY 2026*->   Listed SMEs (that are not micro-enterprises), small and non-complex credit institutions and captive insurance undertakings (*with an option to defer until FY 2028)

FY 2028 ->    Third country undertakings with significant operations in the EU
(see our previous post on third country undertakings here)

 

A Sustainability Reporting Workflow

The content of the directive and related standards suggest a logical workflow: starting with the mandatory requirements and working through materiality assessments to develop relevant sustainability disclosures. The steps in a Sustainability Reporting Workflow are summarised in the below diagram and are then addressed under relevant headings.

 

Sustainability Reporting Workflow

 

  1. Identify mandatory disclosure requirements

Undertakings must disclose all material information regarding impacts, risks and opportunities in relation to environmental, social and governance matters. What constitutes material information is determined after performing a double materiality assessment, described below. Regardless of the outcome of the materiality assessment, the standards establish certain information to be mandatorily provided by the undertaking:

  • ESRS 2 – General disclosures
  • EU Law datapoints
  • ESRS E1 – Climate change
  • ESRS S1 – Own workforce, if more than 250 employees

ESRS 2 – General disclosures covers Disclosure Requirements relating to sustainability governance, strategy and business models, the materiality assessment process, and for policies, actions, targets and metrics regarding identified material topics. Undertakings will need to assess their compliance against these requirements and develop a plan to address any shortcomings / gaps.

EU Law datapoints are embedded in the relevant topical standards, and are tabulated in ESRS 2 Appendix C. They are to be reported irrespective of the outcome of the materiality assessment. Undertakings should, by virtue of addressing the relevant existing legal obligations, already be well positioned to respond to these disclosure requirements and will benefit from the reporting framework and guidance provided by these standards.

ESRS E1 – Climate change covers Disclosure Requirements regarding climate-related hazards that can lead to physical climate risks for the undertaking and its adaptation solutions to reduce these risks. It also covers transition risks arising from the identified adaptation solutions to climate related hazards. These Disclosure Requirements are categorised under: “Climate change mitigation”, “Climate change adaptation” and “Energy”.

Climate change mitigation relates to the undertaking’s endeavours towards holding the increase in the global average temperature to well below 2 °C and pursuing efforts to limit it to 1.5 °C above pre-industrial levels, as laid down in the Paris Agreement.

Climate change adaptation relates to the undertaking’s process of adjustment to actual and expected climate change.

Energy covers requirements related to all types of energy production and consumption.

ESRS S1 – Own workforce itemises certain Disclosure Requirements that are mandatory for undertakings with more than 250 employees. These disclosures include an explanation of the general approach the undertaking takes to identify and manage any material actual and potential impacts on its own workforce in relation to a comprehensive listing of social, including human rights, factors.

Own workforce is understood to include both workers who are in an employment relationship with the undertaking (“employees”) and non-employee workers who are either individuals with contracts with the undertaking to supply labour (“self-employed workers”) or workers provided by undertakings primarily engaged in “employment activities” (NACE Code N.78). Workers in the undertaking’s upstream or downstream value chain are covered in another (not mandatory) standard.

 

  1. Identify material disclosures

An enterprise conducts a materiality assessment to identify disclosure requirements arising from material impacts, risks and opportunities in the following phases:

Topical standard level – When a topical standard is assessed not to be material for the undertaking, the undertaking may omit all the Disclosure Requirements in the topical standard. The undertaking shall report a brief explanation of the conclusions of its materiality assessment for the topic. For example, where an in-scope special purpose entity has no employees, it may reasonably conclude that ESRS S1 – Own workforce is not material and therefore omitted entirely, with an appropriate explanation.

Disclosure Requirement level – When a topical standard is assessed to be material for the undertaking, the undertaking shall assess the materiality of all Disclosure Requirements of the relevant standard. When a specific Disclosure Requirement is assessed as not material for the undertaking, the undertaking may omit the specific Disclosure Requirement. For example, where a company does not have non-employee workers (e.g. self-employed contractors), it may reasonably conclude that DR S1-7 – Characteristics of non-employee workers in the undertaking’s own workforce is not material and therefore omitted from the ESRS S1 – Own workforce disclosures.

Entity specific disclosures – When the undertaking concludes that an impact, risk or opportunity not covered or covered with insufficient granularity by a standard is material due to its specific facts and circumstances, it shall provide additional entity-specific disclosures to cover such impact, risk or opportunity. Where the undertaking develops such material entity-specific disclosures it shall report those disclosures alongside the most relevant sector-agnostic and sector-specific disclosures.

Policies, Actions and Targets – If the undertaking cannot provide relevant disclosures on a material sustainability matter because it has not adopted policies and/or actions and/or targets with reference to the specific material sustainability matter concerned, it shall disclose this to be the case, and provide reasons for not having adopted policies and/or actions and/or targets. The undertaking may report a timeframe in which it aims to adopt them.

The table below illustrates the impact of the materiality assessment on sustainability disclosures.

 

Disclosures subject to the materiality assessment

 

Applying the double materiality assessment

Performing a materiality assessment is necessary for the undertaking to identify the material impacts, risks and opportunities to be reported. A sustainability matter is material when it meets the criteria defined for impact materiality or for financial materiality. Although impact materiality and financial materiality are inter-related, in general the starting point is the assessment of impacts. A sustainability impact may be financially material from inception or become financially material over time. Material impacts are included irrespective of their financial materiality assessment.

The undertaking determines appropriate thresholds to determine which identified impacts, risks and opportunities are material sustainability matters for reporting purposes.

Impact materiality – An undertaking’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- and long-term time horizons are its material impacts. Impacts include those caused or contributed to by the undertaking and those which are directly linked to the undertaking’s own operations, products, or services, or through its business relationships. Business relationships include the undertaking’s upstream and downstream value chain and are not limited to direct contractual relationships.

Materiality of negative impacts considers the severity of actual negative impacts and the likelihood and severity of potential negative impacts. Materiality of positive impacts considers the effectiveness of actual impacts and the likelihood and effectiveness of potential positive impacts. Severity and effectiveness are assessed based on the scale (how grave or beneficial the impact is), the scope (how widespread the impact is), and permanence (how remediable the negative impact is, or how transient the positive impact is).

The undertaking’s actions to address certain impacts or risks, or to benefit from certain opportunities in relation to an identified material sustainability matter, might itself have material negative impacts or cause material risks in relation to other sustainability matters. For example, action plans to decarbonise own operations by abandoning a plant may have material negative impacts on their own workforce, workers in the value chain or affected communities. In such circumstances, undertakings shall disclose these material negative impacts or risks with a cross-reference to the affected sustainability topic disclosures.

 

Impact materiality assessment

 

Engagement with affected stakeholders is central to the undertaking’s ongoing due diligence process to identify actual or potential negative impacts, and to assess and identify material impacts for the purpose of sustainability reporting. Affected stakeholders are individuals or groups whose interests are affected or could be affected – positively or negatively – by the undertaking’s activities and its direct and indirect business relationships across its value chain. Common categories of stakeholders are: employees and other workers, suppliers, consumers, customers, end users, local communities and vulnerable groups, and authorities (including regulators, supervisors and central banks). Nature may be considered a silent stakeholder.

Financial materiality – The scope of financial materiality for sustainability reporting is an expansion of the scope of materiality used in the process of determining which information should be included in the undertaking’s financial statements. A sustainability matter is material from a financial perspective if it triggers or may trigger material financial effects on the undertaking, including: cash flows, development, performance, position, cost of capital or access to finance in the short-, medium- and long-term time horizons.

Risks and opportunities may derive from past or future events and may impact:

  1. assets and liabilities already recognised in financial reporting or that may be recognised as a result of future events; or
  2. other factors of value creation not recognised in financial reporting but having a significant influence on financial performance, such as natural, intellectual (organisational), human, social and relationship capitals.

The financial materiality of a sustainability matter is not constrained to matters that are within the control of the undertaking but includes information on material risks and opportunities attributable to business relationships with other undertakings/stakeholders beyond the scope of consolidation used in the preparation of financial statements.

The materiality of risks and opportunities is assessed based on a combination of the likelihood of occurrence and the size of the potential financial effects.

 

  1. Obtaining metrics and tracking effectiveness

The Disclosure Requirements contained in the standards prescribe disclosure content regarding Policies, Targets, Actions, and Metrics related to a specific sustainability matter:

Policies – refer to general objectives or management decisions implementing the undertaking’s strategy towards a material sustainability matter.

Targets – refer to measurable, outcome-oriented goals that the undertaking aims to achieve.

Actions – including action plans and transition plans, are implemented to ensure that the undertaking delivers against the policies and targets.

Metrics – are qualitative and quantitative indicators that the undertaking uses to measure and report on effectiveness of delivery against policies, targets and actions over time.

For most Disclosure Requirement sets, the standard prescribes the relevant metrics. For example, ESRS E1 Climate Change DR E1-5 Energy consumption and mix requires disclosure of total energy consumption in MWh related to own operations across 6 categories of non-renewable sources and 3 categories of renewable sources, and where applicable, the disaggregated renewable and non-renewable energy production. In some cases, identifying and obtaining the relevant datapoints will involve reference to sector-specific or cross-sector methodologies, such as the Science-based Target Initiative.

For each metric the undertaking shall describe how the metric is used to track effectiveness, shall use clear and precise names and descriptions, and disclose whether the metric is externally validated. Information presented should be disaggregated for a proper understanding of the material sustainability matter, by country or region, by sector, or by site or significant asset.

Past, present and future is linked by presenting one year of comparative information for all metrics disclosed in the current year, and reporting against a base year, and where relevant presenting forward-looking information, for an understanding of progress towards targets.

The use of reasonable assumptions and estimates, including scenario or sensitivity analysis, is an essential part of preparing sustainability-related metrics and does not undermine the usefulness of the information, provided that the assumptions and estimates are accurately described and explained. Even a high level of measurement uncertainty would not necessarily prevent such an assumption or estimate from providing useful information or meeting the qualitative characteristics of information.

 

  1. Develop sustainability disclosures

The (draft) ESRS 1 – General requirements standard provides guidance on the content and structure of the sustainability statements, including a non-binding example structure. The standard expects all required sustainability disclosures to be in a single section of the company’s management report, which accompanies its annual financial statements. Information already provided in another part of the sustainability report or elsewhere in the company’s financial statements, management report, corporate governance report or remuneration report, may be included by reference to avoid duplication.

Relationships between information in the sustainability statements and other information in the annual report must be described clearly and concisely, to illustrate consistency of data and assumptions. Sustainability disclosures and datapoints must be linked with specific references to relevant paragraphs and include reconciliations for financial or other quantitative data.

For example, sustainability targets for reducing use of natural resources may need to be linked to the strategic response to limit impact through related investments in new assets or divesting of existing assets. This information may also need to be reconciled with financial statement metrics on production costs and related financial performance targets.

The Sustainability Reporting Workflow and Double Materiality assessment process is illustrated in the below diagram:

Developing disclosures for material sustainability matters

 

  1. Annual Sustainability Report

Drawing up and publishing information in compliance with the sustainability reporting standards is the collective responsibility of the members of the administrative, management and supervisory bodies of an undertaking, as an extension of their responsibilities for financial statements and other management reports.

The standards require an undertaking to disclose how the administrative, management and supervisory bodies are informed about sustainability matters and how these matters were addressed during the reporting period. An undertaking shall also disclose information about the integration of its sustainability-related performance in incentive schemes and how the interests and views of its stakeholders are taken into account.

  1. Independent Assurance

The sustainability report shall be accompanied by an assurance opinion expressed by a person or firm authorised to give an opinion as regards the compliance of the sustainability reporting with the requirements of the CSRD, including the compliance of the sustainability reporting with the sustainability reporting standards to be adopted (the ESRSs). (See our previous post on the assurance requirements here.)

 

Start here, start now!

Preparing for your first Annual Sustainability Report for FY 2024 (listed and other public interest entities) or FY 2025 (other ‘large’ companies) will require careful and thorough planning. Following a governance-based structured sustainability reporting workflow will ensure that your sustainability report is:

  • compliant with the relevant EU regulations and related reporting standards;
  • supported by documented processes, decisions and evidence; and
  • ready for independent assurance.

 

At EisnerAmper we make sustainability simply sustainable.

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
31.3.2023

Does EU Sustainability reporting affect Non-EU parent groups?

Yes. Consolidated sustainability reporting at the EU-level may be required, in addition to the separate sustainability reporting required for all EU companies in scope.

The new EU Corporate Sustainability Reporting Directive (CSRD) seeks to level the playing field for all companies operating in the EU by requiring consolidated sustainability reporting by third-country undertakings with significant activity in the EU, and ensuring that stakeholders have access to transparent and verifiable information.

Third country undertakings

Third-country undertakings are non-EU parent companies which either:

  1. have securities listed on an EU regulated market and have more than 500 employees, or
  2. have a qualifying EU branch or subsidiary (see below), and generate
    net turnover of more than €150 million in the EU over two consecutive years.

These third-country undertakings are subject to consolidated sustainability reporting requirements on their EU operations from financial year 2028. The required disclosures are tailored to focus on environmental and social impacts, and will be subject to EU reporting standards specific to third-country undertakings. An exemption may apply if the non-EU parent reports sustainability information in accordance with equivalent sustainability reporting standards.

Qualifying branch or subsidiary

A qualifying EU branch is one having net turnover of more than €40 million. A qualifying EU subsidiary is a large company being one that exceeds any two of: 250 employees; €40 million net turnover; or €20 million total assets, or a small or medium-sized entity (SME) with securities listed on an EU regulated market. An SME is a company that exceeds any two of: 10 employees; €700,000 net turnover; or €350,000 total assets.

The qualifying EU branch or subsidiary is responsible for publishing the consolidated sustainability report on behalf of its non-EU parent, on a best efforts basis, and must include a statement if any required information is not provided. The sustainability report must be accompanied by an assurance opinion issued by persons authorised in the third-country of the non-EU parent or in the member state of the qualifying branch or subsidiary.

Illustration

This illustration aims to demonstrate an example of how a non-EU parent group may be brought into sustainability reporting earlier than required in their home jurisdiction – detailed analysis should always be performed to determine the specific application of the EU Sustainability Reporting rules.

Irish Operating Co – in scope of the CSRD sustainability reporting requirements starting from its 2025 financial year, as it meets the definition of a “large company” due to exceeding at least two of the three size criteria.

German Debt Co – in scope of the CSRD sustainability reporting requirements for SMEs starting from its 2026 financial year with an option to defer to its 2028 financial year, as it has securities listed on an EU regulated market and is assumed to meet the SME size requirements described above.

French Trading Co – not in scope of the CSRD sustainability reporting requirements on its own operations, but it must provide sustainability information to the qualifying EU branch or subsidiary for purposes of EU-level consolidated reporting starting from its 2028 financial year.

US Parent Co –  in scope of the CSRD consolidated sustainability reporting requirements on its EU operations from its 2028 financial year, as it meets the third-country undertaking requirements described above. (If US Parent Co had securities listed on an EU regulated market and more than 500 employees, its individual and consolidated reporting obligations would start from its 2024 financial year.)

Ripple effects

The EU sustainability reporting requirements will have ripple effects for other jurisdictions. Decisions taken at EU branch or subsidiary level could impact the wider group’s approach to sustainability. Non-EU parents with substantial operations in the EU are advised to consider carefully their EU sustainability reporting obligations, in good time.

At EisnerAmper we make sustainability simply sustainable.

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
24.3.2023

Sustainability Assurance is coming, fast!

Sustainability Assurance is coming, fast! | ESG | EisnerAmper

This week the International Auditing and Assurance Standards Board (IAASB) considered a near-complete draft proposed standard for assurance on sustainability reporting. The current project timeline indicates an Exposure Draft in September 2023 and final approval of the proposed International Standard on Sustainability Assurance (ISSA) 5000 by December 2024 – just in time for the first reporting cycle for EU listed companies and other large EU Public Interest Entities (PIEs).

So, what does this mean for sustainability reporters, and for independent assurance practitioners?

Just-about-in-time

Enterprises in scope of the EU Corporate Sustainability Reporting Directive (CSRD) starting from FY2024 will be applying European Sustainability Reporting Standards (ESRS) from the European Financial Reporting Advisory Group (EFRAG), currently in draft. The independent assurance practitioners will also be applying the ISSA 5000 sustainability assurance standard, currently in draft, and yet to be endorsed by the European Commission as stipulated in the CSRD. Then there is the International Ethics Standards Board for Accountants (IESBA) nascent project to develop independence and ethics standards relevant to assurance on sustainability reporting by all sustainability assurance practitioners (Professional Accountants are already bound to comply with international or national Codes of Ethics).

This just-about-in-time approach is not familiar territory for standard setters, reporters or practitioners – yet the urgent need to provide comprehensive and reliable sustainability information is driving a collective effort to get this done. A steady hand will be required to navigate over the next few years until the standards, and their application, settles down.

Preparing for assurance

The proposed ISSA 5000 standard is described as an ‘overarching’ standard: the IAASB envisages that a suite of standards will likely need to be developed over time – to provide more specificity. The proposed overarching standard will cover the entire engagement from acceptance to reporting; will apply to assurance on sustainability information reported under different reporting frameworks; and is implementable by all assurance practitioners.

In planning their Sustainability Reporting procedures, reporters should be aware of the options in selecting an independent sustainability assurance practitioner, and the approach their assurance practitioner will apply. Key topics to be considered include:

Independent Sustainability Assurance Practitioners – The CSRD allows Member States to authorise independent assurance services providers (who are accredited in accordance with Regulation (EC) 765/2008 on accreditation and market surveillance) other than statutory auditors or audit firms to carry out assurance of sustainability reporting. Member states are required to ensure that consistent requirements are set out for all persons and firms, including statutory auditors and audit firms, who are allowed to provide the opinion on the assurance of sustainability reporting – providing a level playing field.

Member States are at various stages of consultation leading to transposing the directive into national law – there is no indication whether this option will be taken in Ireland or elsewhere in the Union. Member States that do take the option will need to ensure that appropriate accreditation and surveillance is in place, and assurance providers will need to demonstrate professional competence and capability to carry out the sustainability assurance engagement. This is a topic for another article, but preparers should take this into account when planning their sustainability reporting and assurance process.

Evidence – Assurance practitioners must evaluate the relevance and reliability of information intended to be used as evidence. This also includes determining whether the evidence needed to support the disclosures can be expected to be obtained. Reporters need to consider factors such as document retention policies including electronic information systems. Where evidence is needed from organisations not controlled by the entity, such as value chain actors, the entity will need to consider whether it has contractual arrangements for access to the relevant persons or information, or whether these organisations may provide independent assurance reports on controls, measurements or evaluations of the underlying subject matter.

Documentation – Similar to other assurance standards, sustainability assurance practitioners must maintain documentation to support their conclusions on the sustainability disclosures that is sufficient and appropriate to enable a practitioner experienced in sustainability assurance, having no previous connection with the assurance engagement, to understand the nature, timing and extent of the procedures performed; the results and evidence obtained; and significant matters, judgements and conclusions. This may include evidence obtained from work performed by a Management’s Expert or others outside of the reporting entity. The practitioner must evaluate the competence, capabilities and objectivity of the persons providing such evidence, and the authenticity of the documentation. Any doubts would lead to additional risk assessment and assurance procedures, and possibly a different overall conclusion to the engagement.

Risks of Material Misstatement – The assurance practitioner must perform risk procedures to identify disclosures where material misstatements are likely to arise, and potentially update this risk assessment based on information obtained during the engagement. (Reasonable assurance engagements will require a more robust risk assessment process). This involves understanding the entity’s control environment and internal controls relevant to sustainability disclosures, including information systems and the entity’s own risk assessment process. Based on these assessments, the practitioner will design the nature, timing and extent of assurance procedures to support their conclusion on the sustainability disclosures.

Preparing for assurance on the Sustainability Report is not a task to be taken lightly.

At EisnerAmper we make sustainability simply sustainable.

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
15.3.2023

We have already reported on sustainability, what’s new?

We have already reported on sustainability, what's new? | ESG Insights | EisnerAmper Ireland

The EU Corporate Sustainability Reporting Directive (CSRD) will require companies to publish a comprehensive Annual Sustainability Report, in accordance with the European Sustainability Reporting Standards issued by the European Financial Reporting Advisory Group (EFRAG), and obtain independent assurance on this report. This is a significant step up from the voluntary disclosures published by many companies to date – and a huge leap for companies publishing ESG information for the first time. Compared to voluntary disclosures, reporting under the new standards will provide: 

  • consistency;  
  • transparency;  and
  • verifiability.

The CSRD elevates sustainability reporting to the same level as financial reporting – companies will need to apply the same rigour to sustainability policies, measurements, analysis and disclosures.  Boards will also need to exercise consistent governance over sustainability, financial and other operational reports

Your new Annual Sustainability Report must: 

  • Be included in your annual report, together with an independent assurance report 
  • Show how your business model is compatible with the objective of limiting global warming to 1.5 °C and achieving climate neutrality by 2050, based on the latest science; 
  • Describe your comprehensive double materiality assessment (sustainability risks to the business and the sustainability impacts of the business) and how you respond to the identified material risks; and  
  • Disclose historical and forward-looking information on specific quantitative and qualitative datapoints. 

Now is the time to review your plans for sustainability reporting readiness. 

At EisnerAmper we make sustainability simply sustainable.

Contact Us

Learn more about our ESG Services here. 

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
8.3.2023

What is the Social part of ESG?

What is the social part of ESG? | ESG Insights | EisnerAmper Ireland

The Social part is concerned with the quality of the relationships between your business and all stakeholders, including employees, customers, suppliers and affected communities. The social disclosure requirements under the new Corporate Sustainability Reporting Directive (CSRD) are set out in 4 separate draft standards issued by EFRAG: 

  • Own workforce;  
  • Workers in the value chain;  
  • Affected communities; and  
  • Consumers and end-users 

These standards reflect the UN Guiding Principles on Business and Human Rights (UNG), the OECD Guidelines for Multinational Enterprises, and other internationally recognised principles and frameworks.  

Businesses must perform a thorough assessment to identify (i) those areas where their actions have a material impact on stakeholders, and (ii) areas presenting material risks or opportunities to the business. For each identified material impact, risk or opportunity, businesses will need to disclose information on their policies, actions and metrics – for certain companies the standards require disclosures for high-impact areas regardless of materiality.  

Workers 

The standards require disclosure of processes to engage with own workforce and workers in the value chain and how their interests, views, rights and expectations inform the business’ strategy and business model. Potential material areas to be assessed include topics such as:  

  • working conditions;  
  • social partner involvement; 
  • channels to raise concerns (whistleblowing);  
  • collective bargaining;  
  • adequate wages; 
  • equality;  
  • non-discrimination;  
  • diversity and inclusion;  
  • work-life balance; 
  • human rights;  
  • gender pay gap; and  
  • people with disabilities

Communities 

Companies have an impact on communities, either directly linked to the company’s own operations, products or services or through its business relationships. Disclosures should explain the approach to identify and manage any material actual or potential impacts on affected communities and processes for engaging with those communities. This includes time-bound and outcome-oriented targets for reducing negative impacts, advancing positive impacts, and managing material risks and opportunities related to affected communities. 

Consumers and end-users 

Companies must consider how their strategy and business model impacts consumers and end-users, including those in the downstream value chain – for example, providing products that harm if overused or sales-maximising incentives that put consumers at risk. Disclosures are aimed at enabling users to understand material impacts on consumers and end-users, as well as how dependencies on consumers and end-users may create material risks or opportunities for the company. 

Far from being merely a compliance process, the social standards set out a blueprint for companies to create a sustainable workplace for all stakeholders while strengthening their business model.  

This is the Social in ESG. 

At EisnerAmper we make sustainability simply sustainable.

Contact Us

Learn more about our ESG Services here. 

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
1.3.2023

Does Sustainability Reporting impact Business Conduct?

Does Sustainability Reporting impact business conduct? | ESG Insights | EisnerAmper Ireland

Definitely.  Under the new EU Corporate Sustainability Reporting Directive (CSRD), companies must disclose information on business conduct matters, including:  

  • corporate culture;
  • relationships with suppliers;
  • avoiding corruption and bribery;
  • protection of whistle-blowers;
  • animal welfare; and
  • payment practices

These requirements are set out in the (draft) European Sustainability Reporting Standard G1 – Business ConductCompanies must describe the role and the expertise of administrative, management and supervisory bodies, and the process to identify and assess material impacts, risks and opportunities arising from business conduct matters.   

Preparing meaningful disclosures under the Business Conduct standard will require companies to re-examine how they conduct business at the deepest level.  Boards and Executives will need to embrace sustainability by adopting  transparent business practices aligned with the global frameworks embodied in the standardAdopting these business practices will benefit your business and all stakeholders.  Putting your head in the sand is not an option.

At EisnerAmper we make sustainability simply sustainable.

Contact Us

Learn more about our ESG Services here. 

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
22.2.2023

Is the European Green Deal a BIG DEAL for my business?

Is the European Green Deal a BIG DEAL for my business? | ESG Insights | EisnerAmper Ireland

Yes, and here are a few reasons why –

The European Green Deal aims to decouple economic growth from resource use and ensure that all regions and Union citizens participate in a socially just transition to a sustainable economic system whereby no person and no place is left behind. This is addressed through several policy initiatives, including the Non-Financial Reporting Directive (NFRD), the Taxonomy Directive, the Sustainable Finance Reporting Directive (SFDR) and the Corporate Sustainability Directive (CSRD).

As part of the Green Deal initiative, the CSRD requires all in-scope companies to publish a comprehensive Annual Sustainability Report starting from 2024, including policies, business models, targets, actions and metrics, and how these are aligned with environment, social and governance objectives. This directive expands on the NFRD by bringing many more companies into scope and requiring more extensive disclosures. Companies will need to assess the impact of their actions on the environment, employees and communities in addition to considering the risks to their business from climate change and other external factors. This impact and risk assessment informs the policies, targets, actions and metrics to be disclosed.

But, transitioning to a sustainable business model also has direct benefits for your business:

  • customers demand more sustainable products and services;
  • employees want their work to be fair and positive for the environment;
  • investors seek out opportunities to deploy their capital responsibly; and
  • communities favour companies that care.

Preparing to tell a compelling and verifiable story in your first Annual Sustainability Report will shape your transition to a sustainable business model, and bring lasting benefits to your business and all stakeholders.

Going sustainable is simply good business.

At EisnerAmper we make sustainability simply sustainable.

Contact Us

Learn more about our ESG Services here. 

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
15.2.2023

Already gone green, so what’s the fuss?

Already gone green, so what's the fuss? | ESG Insights | EisnerAmper Ireland

The fuss is that most businesses are only scratching the sustainability surface.  The EU Corporate Sustainability Reporting Directive (CSRD) which was adopted by the European Council on 28 November 2022 is a game changer. 

All EU companies that exceed any two of:  

  • 250 employees;  
  • €20 million turnover; or  
  • €40 million total assets,  

will be required to publish a comprehensive Annual Sustainability Report, together with their 2025 Annual Financial Report.  The Sustainability Report must comply with the European Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG).  The first set of draft standards includes 84 Disclosure Requirements across Environment, Social and Governance topics. These standards will be complemented by sector specific standards.  

EU Commissioner Mairead McGuiness noted as hugely significant that, for the first time, the EU is putting sustainability reporting on an equal footing with financial reporting – “We need accurate and reliable information to ensure that investments are being made towards a more sustainable future. This is ground-breaking legislation.”  

Businesses that transparently report sustainable policies, actions and metrics will attract investors, customers and employees, adding long-term value for all stakeholders. 

At EisnerAmper we make sustainability simply sustainable. 

How EisnerAmper Ireland can help 

At EisnerAmper Ireland,we have the technical knowledge to simplify the complexity of your regulatory, compliance and reporting obligations, and the business experience to support your sustainability transformation.  We apply our proven governance, risk, accounting and assurance methodologies to deliver practical and sustainable solutions, tailored for your business.  

Our sustainability solutions and services enable you to:
  • Understand how ESG impacts your business, workforce, customers, and community;  
  • Develop your sustainability goals, policies and relevant metrics;  
  • Map your current state to the regulatory requirements;  
  • Design action plans to remediate and enhance processes;  
  • Tell a compelling and verifiable story in your Sustainability Report;  
  • Prepare for independent assurance on your sustainability disclosures; and  
  • Embed sustainability in your continuous improvement business cycle.  

If we can help you or your business in any way, please do get in touch – we’d be delighted to help. 

Contact Us

Learn more about our ESG Services here. 

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
3.2.2023

Making Sustainability Simply Sustainable

Making Sustainability Simply Sustainable | ESG Insights | EisnerAmper Ireland

The European Green Deal is a roadmap to making the EU’s economy sustainable by turning climate and environmental challenges into opportunities across all policy areas and making the transition fair and inclusive for all.  

In implementing the Green Deal, the EU has introduced several new policy instruments, including the Corporate Sustainability Reporting Directive (CSRD), which will require companies in scope to disclose information on:  

  • risks and opportunities arising from social and environmental issues; and 
  • impacts of their activities on people and the environment.  

This will help investors, civil society organisations, consumers and other stakeholders to evaluate the sustainability performance of companies, alongside their financial performance.  

The CSRD extends the scope and reporting requirements of existing EU corporate reporting initiatives, such as the Non-Financial Reporting Directive (NFRD) and the Taxonomy Directive.  The transition to a sustainable economy means that collecting and sharing reliable sustainability information is good business practice for companies of all sizes.

Transitioning to a sustainable business model will prepare you to tell a compelling and verifiable story in your Annual Sustainability Report, and deliver value for all stakeholders, making a difference for business, communities and the planet.

At EisnerAmper we make sustainability simply sustainable. 

How EisnerAmper Ireland can help 

At EisnerAmper Ireland,we have the technical knowledge to simplify the complexity of your regulatory, compliance and reporting obligations, and the business experience to support your sustainability transformation.  We apply our proven governance, risk, accounting and assurance methodologies to deliver practical and sustainable solutions, tailored for your business.  

Our sustainability solutions and services enable you to:
  • Understand how ESG impacts your business, workforce, customers, and community;  
  • Develop your sustainability goals, policies and relevant metrics;  
  • Map your current state to the regulatory requirements;  
  • Design action plans to remediate and enhance processes;  
  • Tell a compelling and verifiable story in your Sustainability Report;  
  • Prepare for independent assurance on your sustainability disclosures; and  
  • Embed sustainability in your continuous improvement business cycle.  

If we can help you or your business in any way, please do get in touch – we’d be delighted to help. 

Contact Us

Learn more about our ESG Services here. 

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
25.11.2022

Key Outcomes from COP27

Key Outcomes from COP27 | ESG | EisnerAmper Ireland

The 27th Conference of the Parties on Climate Change (COP27) took place in Sharm el-Sheikh, Egypt from November 6th to 20th 2022. It saw political leaders, climate activists, NGO observers and journalists from almost 200 countries coming together to progress the setting and achieving of the world’s collective climate goals.

A milestone decision was reached as wealthy countries agreed to pay for climate damages in developing nations. However, this was somewhat undermined by the lack of progress on the phasing out of fossil fuels.

Key Outcomes

New climate change Loss-and-Damage Fund agreed

Policymakers from wealthy countries, which account for the majority of historical Greenhouse Gas emissions, have agreed to establish a new fund to support victims of climate disasters. This major milestone comes after developing countries had sought financial aid for almost three decades to help rescue and rebuild efforts after extreme weather events. The fund will assist countries such as Pakistan where floods earlier this year caused an estimated €30 billion worth of damages and Somalia where more than seven million people are facing crisis hunger levels arising from the ongoing drought in the region.

Although the creation of this fund has been agreed, the details of who should pay into the fund, where the money will come from, and which countries will benefit are yet to be decided.

Lack of ambition to phase out fossil fuels

The final overarching deal did not include commitments to reduce the use of fossil fuels. This was in part due to resistance from some nations wishing to exploit their oil and gas reserves; and the energy crisis in Europe which has seen some countries resorting to the use of coal while looking further afield for new sources of natural gas. This outcome means limited progress has been made in relation to last year’s decision at COP26 in Glasgow to phase-down the use of coal.

The final summary text from COP27 states that limiting global warming to 1.5°C above pre-industrial levels, as agreed by 196 Parties at COP21 in Paris in 2015, requires “rapid, deep and sustained reductions in greenhouse gas emissions” by 2030. In Ireland, the focus now turns to the Climate Action Plan 2022 which is due for publication in December 2022. This is a detailed plan for taking decisive action to achieve a 51% reduction in overall greenhouse gas emissions by 2030.

How EisnerAmper Ireland can help

Our multidisciplinary team is on hand to help you chart your ESG journey. We help you navigate the ESG landscape and understand the applicable legislation and frameworks. We also help drive change within your organisation so that sustainability becomes embedded within your strategy, operations and reporting. EisnerAmper’s specialist services include:

  • Supporting organisations through regulatory change;
  • Provision of bespoke board support and training;
  • Designing and developing integrated risk and compliance frameworks;
  • Preparing compliance briefings for discussion with the board; and
  • Supporting the board in responding to and implementing any changes required relating to evolving needs.

If we can help you or your business in any way, please do get in touch – we’d be delighted to help.

Contact Us

Learn more about our ESG Services here.

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights
16.6.2022

Gender Pay Gap Reporting Ireland – Regulations Published

Gender Pay Gap Reporting Ireland – Regulations Published | EisnerAmper Ireland | ESG

On 3 June 2022, the Minister for Children, Equality, Disability, Integration and Youth published the long-awaited Employment Equality Act 1998 (section 20A) (Gender Pay Gap Information) Regulations 2022 (“the Regulations”).

The Regulations provide the underlying obligations and calculation details for the Gender Pay Gap Information Act 2021 (“the Act”) which was signed into law in July 2021. The Act requires organisations to report on their hourly gender pay gap across a range of metrics.

The Regulations provide vital definitions, such as those for ‘allowance’, ‘relevant date’, ‘relevant pay period’, and ‘working hours’.

The Regulations set out how to calculate Hourly Remuneration, Total Number of Working Hours, Bonus Remuneration, as well as setting out details on the format of publication of results by employers.

What we know

Initially, organisations with 250+ employees will be required to report their Gender Pay Gap metrics for the first time in 2022.

Organisations should select their relevant date (i.e. snapshot date) in the month of June. Calculations should be prepared based on relevant employees on this date and reported no later than six months after this date, in December 2022.

Organisations are required to report the following figures:

  1. The mean and median gap in hourly pay between men and women;
  2. The mean and median gap in bonus pay between men and women;
  3. The mean and median gap in hourly pay of part-time male and female employees;
  4. The mean and median gap in hourly pay of male and female employees on temporary contracts;
  5. The percentage of men and women who received bonus pay;
  6. The percentage of men and women who received benefits in kind; and
  7. The percentages of male and female employees who fall within each of:
    • the lower remuneration quartile pay band;
    • the lower middle remuneration quartile pay band;
    • the upper middle remuneration quartile pay band; and
    • the upper remuneration quartile pay band.

The report should also include:

(i) the reasons for any differences; and
(ii) the measures (if any) being taken, or proposed to be taken, by the employer to eliminate or reduce these differences.

The gender pay gap information should be published on the organisation’s website or in some other way that is accessible to all of its employees and to the public.

Ensure Gender Pay Gap Reporting Compliance

While reporting will be mandatory for employers with 250 or more employees initially, by 2024 this threshold will decrease to 150+ employees and in 2025 will decrease further to 50+ employees.

It is recommended that all organisations start performing Gender Pay Gap calculations now. Organisations that understand their Gender Pay Gap metrics can make positive steps to be in a better position when reporting and publishing requirements become applicable.

How EisnerAmper Ireland can help

At EisnerAmper Ireland, our dedicated team of outsourced payroll and advisory professionals possess the tools and the expertise to analyse your payroll data and produce detailed reports highlighting the current gender pay gap in your organisation.

If we can help you or your business in any way, please do get in touch – we’d be delighted to help.

Contact Us

Learn more about our ESG Services here.

Authors

The content above is provided for general information purposes only and is not intended to provide, nor does it constitute, professional advice on any particular matter. If you would like more information or would like to discuss any of the topics raised above, please contact the author(s).

ESG Insights