ESG and Sustainability Reporting

ESG and Sustainability Reporting

• ESG (Environmental, Social, and Governance) measures a company's sustainability performance.
• Sustainability reporting involves disclosing a company's impact on the environment, society, and corporate governance.
• It is driven by legal requirements, investor demands, and societal expectations.
• Sustainable development aims to meet present needs without compromising future generations' ability to meet their needs.
• Sustainability reporting covers issues beyond legal requirements and it focuses on transparency and corporate responsibility.
• ESG professionals understand how environmental, social, and governance factors impact corporate decisions, profitability, the planet, and society.

Corporate Sustainability Reporting Directive (CSRD)

• CSRD is the EU's directive for sustainability reporting.
• It aims to improve and standardize how companies report their sustainability impact.
• It replaces the Non-Financial Reporting Directive (NFRD) and introduces stricter reporting requirements.
• Those affected include publicly traded companies (excluding micro-enterprises with fewer than 10 employees), large non-listed companies meeting at least two of specific criteria; at least 250 employees, at least €50 million in revenue, or at least €25 million in total assets, and Non-EU companies with at least €150 million in EU revenue.
• About 1,300 companies in Finland and 50,000 companies across the EU are covered by CSRD.
• Companies already covered by NFRD started reporting under CSRD in 2025.
• Other companies began reporting in 2026.
• Small and medium-sized publicly traded companies must report starting in 2026, with an option to delay until 2028.
• Non-EU companies with over €150M in EU revenue must report from 2029.

European Sustainability Reporting Standards (ESRS)

• ESRS defines how companies should report their ESG information within the EU.
• ESRS 1 sets the structure and general guidelines for reporting.
• ESRS 2 specifies the information that must always be included.
• ESRS consists of 12 standards divided into three main categories: Environmental, Social, and Governance.
• This includes over 1,100 data requirements.
• The key principle in ESRS is Double Materiality.

Double Materiality

• Companies report how sustainability factors affect their financials (Financial Materiality).
• Companies also report how they affect the environment and society (Impact Materiality).
• The principle ensures companies report their exposure to ESG risks and their impact on the world.
• Companies must disclose both historical and future data.
• Reports must align with the EU taxonomy and the Sustainable Finance Disclosure Regulation (SFDR).
• Sustainability reports must be integrated into the annual report and stored in the centralized EU database ESAP (European Single Access Point).

Risk and Return in ESG

• ESG is a Risk Management Tool for companies and investors to identify and manage ESG risks for long-term profitability.
• ESG factors impact a company's creditworthiness and ability to attract investments.
• Examples of ESG Risks include environmental scandals leading to costly lawsuits and poor working conditions.
• Poor working conditions can lead to negative press and boycotts.
• Weak corporate governance can lead to corruption scandals.
• Companies that do not report ESG data increase their business risks and may struggle to attract capital.

Sustainability Reporting as a Process

• Strategy and Values: Integrate sustainability into business operations.
• Stakeholder Analysis: Identify the actors affected by the company's sustainability efforts.
• Double Materiality Analysis: Identify essential ESG issues.
• Organizational Structure: Assign responsibilities for sustainability reporting.
• Goals and Investments: Establish measurable sustainability goals.
• Data Collection and Measurement: Quantify ESG impacts.
• Reporting and Board Approval: The board must approve the report.
• External Audit: Conduct an independent review of ESG data.
• Public Disclosure and Stakeholder Feedback: Communication and evaluation.

Third-Party Assurance and Responsibilities

• External audit is mandatory from 2025.
• A Certified Sustainability Auditor (KRT) must have financial auditing certification (KHT).
• The board is responsible for appointing the auditor.
• The board has personal responsibility for ensuring ESG data accuracy.
• The audit committee oversees the process.
• Internal controls and training are required to ensure compliance.

General Summary

• CSRD increases sustainability reporting requirements and applies to more companies than before.
• ESRS ensures that reporting is comparable and consistent.
• Double Materiality requires companies to report both their impact on society and how ESG risks affect them.
• Risk management and business strategy go hand in hand.
• ESG can be a competitive advantage.
• Mandatory third-party auditing from 2025 increases transparency requirements.
• The most prominent section in sustainability reports is often environmental performance.
• According to ESRS E1, companies must report quantitative emissions data (e.g., Scope 1, 2, and 3 GHG emissions).
• Total energy consumption or energy intensity is commonly used to report energy consumption.
• If a firm complies with ESRS and CSRD requirements, they must set clear, measurable sustainability targets.
• Climate Change Mitigation is often the most emphasized in sustainability reports.
• Companies usually engage with stakeholders through public reports, disclosures, and feedback surveys.
• ESGRS often contain data for emissions, water consumption, and waste.
• Other international reporting frameworks are the Global Reporting Initiative (GRI), or the Task Force on Climate-related Financial Disclosures (TCFD).

Lecture 2 Summary (PWC)

• Sustainability requirements are increasing and evolving rapidly.
• Companies are expected to take greater responsibility for reducing their climate impact and to report this openly.
• Investors and other stakeholders demand credible, quantifiable, and comparable ESG information.
• 20 times more climate action is required to keep the global economy on track toward the Net Zero goal.
• The EU's green transition means stricter regulations for companies and a greater focus on sustainability reporting.
• Companies that are ahead in their sustainability strategy gain competitive advantages and lower financial risks.
• CSRD makes sustainability reporting mandatory for large companies in the EU.
• ESRS sets specific requirements for what and how companies must report.

Key Requirements in CSRD

• Double Materiality requires companies to report both how sustainability issues impact them and how their operations impact the environment and society.
• Strategic Alignment Requirement requires companies to show how their business model aligns with climate goals.
• ESRS reporting is based on existing international standards such as GRI and TCFD.
• The triple bottom line areas to report on in ESRS are Environment, Social conditions, Governance.
• ESG impacts capital and reputational gain for companies.
• Effective risk management that openly manages ESG can give companies financial stability.
• CEO's see ESG as a long term investment with short-term returns for investors.
• Sectors requiring the most investment include: Renewable energy/electrification of the transport sector, hydrogen production/carbon capture, adn energy efficiency.
• Business strategy for companies adapting to CSRD and ESRS: Integrate, improve data collection/reporting, collaborate with banks/investors/regulators

Sustainable Finance and EU Regulations

• Sustainable finance refers to financial decisions and investments that take ESG factors into account.
• The EU promotes this through regulations such as CSRD and the EU Taxonomy.
• The EU has introduced several new regulations to ensure investments are directed toward sustainable purposes.
• The Corporate Sustainability Reporting Directive (CSRD) imposes stricter reporting requirements for sustainability information.
• The EU Taxonomy defines “green activity”, steering capital toward investments that support EU climate and environmental goals.
• Six Environmental Objectives in the Taxonomy: Climate change mitigation, climate change adaptation, the sustainable use of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
• The SFDR must disclose how institutional investors and asset managers handle sustainability risks in investments.
• Dark Green (Article 9) funds invest only in sustainable projects.
• Light Green (Article 8) includes ESG factors but is not 100% sustainable.
• Other Funds (Article 6) funds have no direct sustainability goals but may consider ESG risks.
• The EU Green Deal (2018) aims to achieve net-zero greenhouse gas emissions by 2050, decouple economic growth from resource consumption, and ensure a just transition.

Taxonomy Classification and its Affect

• The EU Taxonomy classifies economic activities in two levels.
• Activities must fully align with the taxonomy criteria report percentages of revenue, investments (CapEx), and operating expenses (OpEx) that are taxonomy-aligned.
• Increased reporting requirements, impacts cost of capital, increased board responsibility, and external auditing are what the regulations increased.
• If companies with high climate impact do not align with the EU Taxonomy, they may face higher loan interest rates.
• New EU directives (Energy Efficiency Directive, Corporate Sustainability Due Diligence Directive) will further increase requirements by 2026-2027
• The EU Energy Efficiency Directive (2026) requires energy efficiency improvements in companies.
• The EU Green Claims Directive (2027) prevents greenwashing (false sustainability claims in marketing).
• The EU Forced Labour Regulation (2027) bans products from supply chains linked to forced labor.

Key Takeaways

• Sustainable finance links investments to sustainability.
• CSRD and the EU Taxonomy increase transparency and The taxonomy affects financing and strategy.
• The EU is driving a major sustainability transition, which creates both risks and opportunities for companies.
• ESG reporting is a requirement that affects the entire economy.
• A Double Materiality Assessment (DMA) is central part of CSRD and ESRS

Double Materiality Assessment

• Impact Materiality is how the company affects the environment and society.
• Financial Materiality is how ESG risks and opportunities impact the company's financial performance.
• Companies must understand both risks and opportunities related to sustainability issues.
• Regulations such as CSRD require companies to conduct a Double Materiality Assessment before reporting under ESRS.
• Companies must avoid significant harm to the environment and society
• Prioritize key ESRS themes: climate change, pollution, water and marine, biodiversity, responsibility to employees, and corporate governance.

DMA Identifies ESG issues Analysis:

• Impact Materiality explains how the company affects the environment; biodiversity through land exploitation.
• Financial materiality impacts sustainability factors: example, climate change drives risks an costs up.
• Prioritize the most important ESG issues, ensure compliance and strengthen risk management and business strategies.
• Conduct a step by step method

Process for Conducting a Double Materiality Assessment

• Step 1: Training/Preparing for analysis of values/responsibilities and goals of the organization.
• Step 2: Context/Impact Analysis by analyzing value change and listing all relevent components.
• Step 3: Risk Assesment and opportunities through financial risks and business ops.
• Step 4: Stakeholder Engagement through interviews and surveys
• Step 5: Combing steps 2-4 to determine relevance for reporting.
• Step 6: Management team workshop to asses impact of ESG to stakeholder and report accordingly.
• Outcomes: identifying risk, engagement from stakeholders, and corporate recommendation for sustainability.

Environmental Responsibility: Priorities per ESG

• Differ depending on operations, and their energy and labor factors.
• Ex: Nokia focuses data ethics, neste on fuels, and fortum focuses on climate goals.
• A legal requirement and must meet CSRD and DMA standards
• Risk management must identify all internal and external values as an incentive of business.
• Investors must retain confident by increasing investor acces to capital and transparency for all data.

Sustainability Assurance

• Sustainability Assurance is the independent verification of sustainabililty reporting by the CSRD's levels of financial reporting.
• Main components entail trusting, providing reliable views, and compliance to the EU taxonomy.
• Example: An auditor reviews a company's climate emissions and confirms that the data complies with ESRS requirements.
• CSRD is a Key legal requirement that must audited.
• The company's Annual general meeting appoints sustainability auditors.
• Assurance reports and credibility are determined once report is audited.

Limited and Reasonable Assurance

• Limited Assurance is a basic review that ensures little to no errors are present.
• Reasonable Assurance is a possible future standard that offers a more in depth review for stability.
• Testing is required to meet higher credibility and requires and accounts for higher reports.
• Lessons From the Netherlands: the report has doubled since 2023, with increasing reports due to difficulties.
• Concluding for better transparency between standards.
• Standard ISAE used internationally on sustainability assurance to auditors.

Transparency: Guidelines for ISAE and Credibility of Accountability

• Used often in Finland until a standards released for sustainability audits.
• In 2026 the EU will release its own set of standards for transparency.
• Consequence: negative opinions can increase issues (reduced confidence and higher capital costs).
• Upcoming EU is a package for transparency and goals.
• Reduced Transparency and a greater capital of 450+ per employees in revenue.
• Non Eu countries must follow CSRD's to exceed in EU revenue.
• The EU aims for credibility for transparency for all stake holders including shareholders.

Key factors for Sustainability and the ESSR Reporting Structure:

• Sustainabilty assurance is now mandatory.
• Auditors can used EU's taxonomy of 2026 until the end.
• A negative opinion can affect companies reporting and investments.

What are ESRS and ESSR:

• ESRS 1 = structure of the sustainabilty goals.
• ESSR 2 = Specific Info that must be reported.

Key Principles for ESRS:

• Double Materiality in terms of affecting internal values for company and society.
• Comparative data for accurate and assessable reports within companies.
• Linking values that show business is integrated with ethical sustainability
• Boundaires and structures that define what is covered from business chain value to company

Example - ESSR 1 Structure:

• Companies must use values to indicate the value chain is standard among stakeholders
• Data in digital fromet by ESAP's EU Database.

ESSR 2 Structure of transparency:

• Governanace of the company from board to employees.
• Strategy (risk) of business models.
• Metrics that target and follow ethical behavior with KPI'S.
• Requirements of transparency and value chains.