Introduction
After the European Commission made the European Sustainability Reporting Standards (ESRS) the basis for sustainability reports at the end of July 2023, EFRAG, as the author of these standards, published two implementation guides.
These are intended to help companies carry out the first step in the preparation of sustainability reports, the materiality analysis. Based on a process that each company should develop, the materiality of the individual aspects of sustainability is determined. In this way, the company itself determines which information it must publish (the material) and which must be omitted (the immaterial).
Even if the guidelines for companies that already have to report for 2024 appear late, some interesting aspects emerge from them.
It should be noted at this point that the guidelines are currently a draft that EFRAG is discussing publicly. Changes are therefore still possible, but the basic direction is set.
Principle of double materiality
The ESRS requirement provides for the principle of double materiality. This means that both the impact of the company on the environment (impact materiality) and the impact of the environment on the company (financial materiality) must be considered.
If a sustainability aspect is relevant to the company from at least one of these two perspectives, corresponding reports must be published.
Steps for the materiality analysis
To carry out the materiality analysis, the key sustainability aspects must be identified and converted into IROs (impacts, risks and opportunities).
EFRAG recommends the following steps:
- Company context
- Analysis of the business model and strategy, financial reports and investor reports
- Presentation of business activities, products and services as well as geographical classification
- Extraction of potential IROs from this context (e.g. companies in areas with water scarcity)
- Evaluation of potential IROs and determination of materiality
- Determining the report content for the material IROs
Both entire sustainability aspects and individual data points can be omitted from the analysis as immaterial. However, this fact must be pointed out and, in special cases, the immateriality must be justified.
Inclusion of the value stream chain
In addition to the internal processes, the entire value stream chain must also be considered for the sustainability report based on the principle of double materiality. The value stream chain is, on the one hand, the entire supply chain of a company and, on the other hand, the entire chain up to the end user and the disposal or recycling of the product.
In addition, subsidiaries (participation 50% + 1 vote), joint ventures, participations with significant influence (participation 20%-50%), investments (participation <20%) and joint operations (contractual relationships that are not structured as a company) as well as lenders and shareholders are part of a company's value stream chain.
The reporting obligation covers the main IROs and the associated key figures resulting from the value stream chain analysis. It is irrelevant whether the reporting company can exert any influence at this point.
A particular challenge is the collection of data from the value stream chain: the data must be collected outside the company. If direct data collection cannot be achieved with reasonable effort or cost, secondary sources may be used to make extrapolations or estimates, which should be documented accordingly. The company is expected to prioritize data collection so that the best quality data is available where the company has the greatest negative impact on the environment.
As a rule, the reporting obligations are qualitative in relation to the value chain. Exceptions are the metrics relating to ecosystems: Here, emissions according to Scopes 1, 2 and 3, the storage of greenhouse gases from the air and mitigation projects financed by carbon credits, as well as matrices related to biodiversity and changes to ecosystems must be reported.
Conclusion
The significant increase in the amount of data sources compared to previous reporting requirements poses a challenge for many companies. For example, data such as water and energy consumption must be recorded within the company itself. In addition, data from the value stream chain must also be collected and processed. The underlying processes also differ significantly from company to company.
In order to meet these sustainability reporting requirements, companies should consider investing in appropriate technology for data collection and analysis as well as developing appropriate processes and controls for data collection and preparation.
With the Business Technology Platform (in particular the Sustainability Control Tower based on it) and BW/4 HANA, SAP offers two interesting solutions to meet these requirements. While the cloud solutions of the Business Technology Platform tend to follow a low/no-code approach, very complex company structures can be mapped on the basis of BW/4 HANA. Combinations of both technologies will also offer a good solution for some companies.
