In this video, CBS Associate Professor Kristjan Jespersen and Senior Director and Co-founder at Position Green Simon Taylor speak on the current state and future of ESG reporting. This interview was recorded at the CBS Executive Education event 'The end of ESG? Navigating the turbulent landscape' in March 2024.
Corporate ESG Reporting Standards – “Danish Companies Emerge as the Least Prepared”
Simon Taylor, Senior Director and Co-Founder of Position Green, discusses the evolving ESG landscape, emphasising the critical need for reliable corporate data. The article highlights regulatory shifts, integrating double materiality frameworks, and findings from a study on Scandinavian companies' readiness for the European Sustainability Reporting Standards.
By CBS Executive Education"Over the next 10 years, ESG will be in everything"
ESG has become a focal point of debate and is entangled in broader cultural conflicts. Current global sustainability efforts are insufficient to meet the climate objectives outlined in the Paris Agreement, a reality brought into awareness during the COP28 meeting, and there needs to be a significant redirection of financial resources towards sustainable efforts to decarbonise economies. Investors play a pivotal role in driving the transition and in doing so, they require access to robust data sets, Taylor says, “Amidst these discussions, one consistent theme emerges: the critical need for reliable and comprehensive data from corporations.”
Specifically, within the EU, initiatives like the Corporate Sustainability Reporting Directive and the European Sustainability Reporting Standards have been put into effect. Additionally, the reform of the Corporate Sustainability Due Diligence Directive represents a crucial phase in the ESG landscape.
“The Sustainability Diligence Directive reform was diluted, but even so, it was a milestone for companies because there are standards on materiality now in place. We're now seeing what I would say is the end of the beginning of ESG.”
While the EU has introduced various mandatory requirements, the U.S. Securities and Exchange Commission has adopted new rules aimed at improving and standardising the disclosure of climate-related information and The International Sustainability Standards Board (ISSB) has introduced two standards gaining traction in countries such as New Zealand and Australia, both of which prioritise materiality.
Simon Taylor is a Senior Director and Co-Founder of Position Green, a company dedicated to helping organisations build resilient and sustainable operations. Position Green achieves this through a blend of ESG software, deep sector knowledge, and advisory expertise. With a background in politics, Simon has consulted in Singapore and Hong Kong, as well as held roles in large banks.
The European Sustainability Reporting Standards (ESRS) was introduced in July of 2023 and it’s changing the rules for how companies report on sustainability. In the report are about 1,100 different aspects of sustainability, which cover a wide range of issues. In 2025, the first annual reports following ESRS standards will be out. So, companies have needed to comply (collect ESG data) as of January 1, 2024. To determine what to report on, companies must assess what's important both financially and in terms of broader impacts on society and the environment.
Integrating this double materiality framework into corporate reporting poses challenges for many companies.
“It's the piece of the regulation that our clients find hardest to do. We see companies that struggle with the idea of positive impacts.”
To gain insights into the readiness of Danish companies for the ESRS, Position Green conducted a study last year – which extended beyond Danish boundaries to include Swedish and Norwegian companies, focusing on the top 100 listed firms in each respective market.
“Our approach was not centered on evaluating ESG performance, such as emission reduction efforts, but rather on assessing the adequacy of reporting in alignment with ESRS requirements.”
Data utilised in the study were sourced from publicly available reports, with 68 disclosures outlined in the ESRS framework and an additional 85 disclosures incorporating ESRS criteria alongside best practice sustainability reporting standards assessed. The methodology underwent quality assurance procedures, and to ensure impartiality, independent verification was conducted by a Swedish firm. The study focused on several key standards within the ESRS, including ESRS 2 (General Information), Climate Change, Biodiversity, S1 (Owned Workforce), and Business Conduct.
ESRS Preparedness
The investigation into the ESRS preparedness of Danish companies revealed interesting findings, “Danish companies emerged as the least prepared, on average, for compliance with ESRS requirements - with only 45% of the tested disclosures being addressed, compared to 63% and 65% in Norway and Sweden, respectively.”
Despite widespread commitments to net zero targets, few companies have robust strategies in place. The efficacy of current reporting frameworks, spotlight the discrepancies in emissions reporting across Scandinavian nations, "Danish companies tend to report less in terms of emissions than their Norwegian or Swedish counterparts. "
69% of Scandinavia-wide companies report on scope three emissions versus 50% of Danish companies.
Non-compliance with the EU taxonomy is high in Denmark, for example only 35% of non-financial companies meet the reporting requirements.
“It’s a worry because the taxonomy is not a simple thing to understand, but the ESRS is much more complex. So that has ramifications for what we believe is going to be noncompliance with ESRS itself.”
Biodiversity, Norwegian Transparency Act, Pay
Biodiversity focus is lacking, with only 30% of Danish companies having a nature-based policy.
Social disclosures highlight the impacts of regulations like the Norwegian Transparency Act on reporting, especially concerning human rights.
"When we looked across all companies, 36% have some sort of pay linked to ESG, which is higher than what we saw in 2022 - having executive pay that's linked to an ESG or an emissions target says that you've got a proper plan in place, because they're actually going to be incentivised to deliver on it.”
The challenge still exists among smaller enterprises, only 8% of the smallest 50 are linking executive remuneration to ESG targets. Interestingly, Denmark excels in disclosing the CEO pay ratio but perform the worst in of reporting on gender pay gap.
Supply Chain
When it comes to governance, the ESRS makes reporting more comprehensive by including the entire value chain, which brings challenges in understanding its impacts. The analysis shows that many companies overlook this aspect, with only 44% integrating sustainability into procurement policies and supply chain audits.
“Danish companies are the least prepared on average, but part of that is because the results are skewed towards the 50 smallest companies. Companies often don't disclose their involvement within the value chain, but this is likely to change with the introduction of ESRS and CSDD (Corporate Sustainability Due Diligence) regulations.”
Danish Pension Funds
Denmark stands out for its leadership in responsible tax commitments, driven by Danish pension funds and governance regulations implemented around 2020. The influence of institutional investors, such as pension funds and asset managers, is evident in driving corporate behavior change. For instance, a Danish company in Position Green’s consultancy portfolio was spurred to action on emissions reduction and sustainability reporting by inquiries from its pension fund.
Overall – Denmark is Lagging
The analysis, ranking companies from A to F based on preparedness for ESRS, indicates that Danish companies are predominantly rated E's and F's, contrasting with Norwegian companies, which leaned towards A's and B's, likely due to the the prevalence of oil and gas companies on the Norwegian Stock Exchange. Taylor says, “Oil and gas companies disclose because they've had that pressure to disclose. They might not perform, but they disclose.”
As regulatory pressures mount and investor expectations evolve, the need for transparent and comprehensive data will become increasingly important. Taylor predicts that within the next 5-10 years, ESG will be integrated with businesses mirroring the pervasiveness of AI.
“ESG regulations are going to normalise ESG reporting in every business, it will just become the way we do business.”
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