Pablo Bascones chairs the Sustainability Commission of the Institute of Certified Public Accountants (ICJCE). Graduate in Environmental Sciences, diploma in International Business from the University of Berkeley and Executive MBA from IESE. We spoke with him about the new Corporate Sustainability Reporting Directive (CSRD).
What is the purpose of the obligation to report sustainability information?
The obligation to report is not new, it emerged in 2014 with the Non-Financial Information Directive, which was transposed into the Spanish legal system in 2018 through the Non-Financial Information Law 11/2018. This directive sought to provide sustainability information to the different interest groups of a company, whether shareholders, employees, customers, suppliers, public administration, etc.
The CSRD Directive has modified the aforementioned Directive and its purpose is to standardize and improve the quality of the information that is published, because deficiencies were detected in the application of the 2014 Directive. The obligation to report this information does not apply equally to all companies. It applies gradually depending on the size of the companies. Thus, for the years 2024 to publish results in 2025, it will apply to Public Interest Entities (EIP) with more than 500 employees; in 2025, to large companies (that meet two of the following 3 criteria: 50 million euros of turnover, 25 million euros of assets or more than 250 employees) and in 2026 to listed SMEs.
What content should be included in this type of sustainability reports?
The CSRD directive establishes the need to approve reporting standards by Brussels, of which a first set of 12 standards has already been approved, two of a transversal nature, that is, they speak of general principles and the concept of double materiality. and 10 thematic ones on environmental, social and governance matters. Approval is pending for more than 40 sector standards.
In environmental matters we talk about issues such as climate change, the circular economy, biodiversity, and water resources. In social, employee, consumer and community impact matters. And in matters of governance, business ethics and corporate governance. And on each of these matters it will be necessary to report on governance, strategy, IROs (impacts, risks and opportunities) and performance.
Among all the standards there are more than 1,100 qualitative and quantitative information requirements and, depending on a concept that is double materiality, each organization must determine which information requirements it should respond to out of the more than 1,100, which in In any case there will not be few.
What are the main differences with the Non-Financial Information Law?
There are many, but I would highlight four: double materiality, the standards to apply, digital labeling and the sanctioning and supervision regime. The concept of double materiality is introduced, which requires organizations to evaluate the extent to which a list of sustainability issues are material from an impact point of view (how that aspect impacts the environment) or from a materiality point of view. financial (how that aspect, for example, climate change, impacts your business model at the level of risks and opportunities).
A second relevant difference is that in the past most organizations used the Global Reporting Initiative as a reporting standard. As I have mentioned, we will now have new reporting standards, the ESRS, more complete and difficult to apply, where it is even required to report information from your value chain. Likewise, it is not only necessary to provide historical information, but also prospective information, which implies generating scenarios and assuming many uncertainties.
Also, the companies to which the European Union’s green taxonomy applies will expand as the CSRD directive applies to them. Another differentiating element is the digital labeling of the information to be published, as already occurs in some listed companies with financial information. Finally, the supervision regime and the sanctioning regime are placed at the same level as financial information.
Do Spanish companies start from a favorable situation over European ones?
The starting point of Spanish companies is more favorable than that of the rest of European companies, since in the Spanish transposition of the 2014 Non-Financial Information Directive we went further than in the rest of the member countries. On the one hand, a higher level of indicators to report was required than in other countries.
Secondly, it was applied to a greater number of companies. And, thirdly, verification was mandatory, something that is only mandatory in France, Italy and Spain. With which, we start from an advantageous position. However, there are big differences between the Non-Financial Information Law approved in Spain and the CSRD directive. He told us about value chain information,
What obligations can a large company impose on you when it reports to the companies in its distribution chain?
Supply chains are part of the value chain of companies and it is a critical issue to have reliable suppliers. The focus is placed above all on environmental and human rights issues. Thus, if you are a company with more than 750 employees, you will provide information about your supply chain related to CO2 emissions, but also information at the level of policies and controls that your supply chain has in place.
Who will verify these reports?
This verification can be carried out by the auditor who audits the annual accounts, by an auditor other than the one who audits the annual accounts of the entity that presents the sustainability information or by an independent provider of verification services accredited by ENAC.
Regardless of the subject that verifies the sustainability information, this activity must be subject to compliance with requirements equivalent to those established for the account audit activity.
In particular, equivalent requirements regarding training and examination, quality control systems, professional ethics, independence, objectivity, confidentiality and professional secrecy, appointment and dismissal, work organization, investigations and sanctions, and reporting of irregularities should be established to ensure the equal conditions between all persons and companies authorized by Member States to carry out verification. Planning processes and risk assessment are common in audit work.
How is it approached from the perspective of sustainability verification?
In the same way as in the financial audit process, there is an initial planning and risk assessment process. The big difference is that we are not talking exclusively about euros, but about metrics of very different units such as CO2, m3 of water, people, hours of training, etc., which means that very different risks can arise in the planning phase than those of a financial audit.
Will financial information and sustainability information end up speaking to each other?
The final objective of the standard is to give the same value to financial and sustainability information, the aim being that over time we speak of integrated information. Along the way, there is already a lot of financial information in the sustainability report. For example, all information related to green taxonomy has a financial tinge, but also the financial implications of climate risks, circular economy risks or other matters.
Therefore, the financial and sustainability departments are committed to coordinating, in the same way that in audit firms we must have audit teams and specialist sustainability teams in the verifications.
And what about small companies?
The pressure is going to increase throughout the business fabric for two reasons. On the one hand, I mentioned before that the CSRD directive requires information from your supply chain and, therefore, in some way what companies are going to do is require their suppliers to report certain information so that they can report it in their performance reports. sustainability. Likewise, little by little the directive will be applied to smaller companies. But, on the other hand, and different from the CSRD directive, the due diligence directive was approved in Europe.
This directive aims precisely at due diligence and control of the supply chain in matters of human rights and the environment. Large companies are gradually going to require smaller ones to have certain policies and controls regarding due diligence in human rights and the environment.
What benefit does this type of information provide?
Obviously, as with many standards, there are going to be companies that limit themselves purely to compliance and preparing minimum reports. However, the European sustainability reporting standards provide a very complete battery of measures to help companies reflect on how to focus their management. There are many companies that are taking advantage of this process not only to identify their impacts and risks, but also to work on opportunities and redefine their business model.
And what can you tell us about ‘greenwashing’?
Greenwashing is not something typical of a large company or a small company, it is something typical of the culture of an organization and, in general, what we have been seeing is that sustainability reports have tended to exaggerate the information. In fact, there are already two European directives, beyond the CSRD directive, relating to greenwashing.
This will cause the consumer to complain and demand abusive practices regarding greenwashing. And although they are very focused on product and service, and not so much on reporting, I am convinced that they will help avoid certain statements or assessments that were traditionally made in reports.
In the medium term, will there be a walk through the courts because of exaggerating the data?
Yes, that is going to happen, and in fact it is happening more actively in Anglo-Saxon countries. For example, there have been lawsuits surrounding deceptive advertising practices regarding socially responsible investment products. I think this is not going to stop, it is going to grow and in some way it is going to cause a cultural change so that companies are more serious when publishing certain information. In fact, in recent years there are many Spanish companies that have been very cautious when it comes to telling how they manage sustainability.
Are these actions sanctioned or does the punishment only have reputational overtones?
There is a sanctioning regime for companies and, by the way, for the verifier that will be supervised by the same supervisor of the financial auditors: the Institute of Accounting and Audit of Accounts (ICAC). I think that for companies the reputational risk is going to be much more serious than the sanction.
A company’s reputation is everything and poor practice related to ethics, sustainability or corporate governance can take a company by storm. The new generations value issues related to sustainability much more; they have it much more internalized in their DNA.
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