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Halting biodiversity loss and protecting nature in business operations emerged as a compelling narrative in 2023. The adoption of the Global Biodiversity Framework at the United Nations Biodiversity Conference (COP15) in December 2022 set the scene, followed by new nature-based frameworks entering the stage in 2023: the Science Based Targets for Nature (SBTN) and the Taskforce on Nature-related Financial Disclosures (TNFD). The biggest reporting development for companies in 2023, encompassing the entire spectrum of environmental, social and governance (ESG) topics was the Corporate Sustainability Reporting Directive (CSRD).
All celebrated as pivotal moments for nature and all sending strong signals to the private sector to incorporate nature, biodiversity and broader sustainability considerations into their business strategies and operations. In this article we will delve into the CSRD, zoom in on the environmental reporting dimension (the ‘E’ in ESG), and explore the complexities of reporting on topics such as biodiversity and ecosystems, and water and marine resources. We’ll discuss key practicalities, main obstacles, and provide guidance for businesses in gearing up for nature and biodiversity reporting.
The CSRD is an EU directive that requires companies to disclose detailed information on their environmental and social impacts, governance, and sustainability practices. Born from the European Green Deal, it marks a significant evolution from its predecessor, the Non-Financial Reporting Directive (NFRD). With its broader scope, the CSRD impacts approximately 50,000 companies and is not just a European affair; its ripples are felt across the global business pond, either directly or through company supply chains.
The directive mandates comprehensive reporting on a wide range of sustainability topics such as climate change, nature and biodiversity, and human rights, alongside updates on corporate sustainability policies, risks, and management approaches. The CSRD seeks to improve and standardize the quality of corporate sustainability disclosures, fostering transparency and accountability. By elevating sustainability reporting to a similar level of importance as financial reporting, the CSRD is anticipated to have a significant impact on the way companies approach and manage their ESG impacts.
According to a recent study by PwC, the CSRD is already having an effect. Many businesses that participated in the survey (from Germany, Austria, Switzerland, and the Netherlands) have started to adopt the new reporting guidelines – confirming that sustainability is becoming increasingly embedded in corporate strategies.
At the heart of the CSRD are the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). The ESRS are a set of guidelines developed to standardize sustainability reporting across the European Union, enabling companies to provide comprehensive and comparable data on their ESG impacts. The ESRS comprise the following standards:
When it comes to the topical standards, companies are only required to report on those that are material. Materiality is about determining the significance of information that should be disclosed to stakeholders, and identifying which aspects of a company’s operations, strategies, risks, and opportunities are important enough to influence decisions of investors, shareholders, and other stakeholders. In other words, businesses need to identify the sustainability information – whether it be standards, disclosure requirements, or specific data points – that is relevant to their operations based on a materiality assessment.
The ESRS focus on the concept of double materiality, which encompasses two perspectives: how sustainability issues affect the company and how the company and its operations impact sustainability issues. Broadly, double materiality includes:
The double materiality approach aims to provide a comprehensive view of a company’s overall sustainability performance, offering insights into its societal and environmental impact as well as its exposure to sustainability-related risks and opportunities.
There is a growing recognition of the critical role that environmental elements play in sustaining life, supporting economies, and ensuring the well-being of our planet. Nature underpins our global economy, with over half of the world’s GDP moderately or highly dependent on nature. The CSRD supports comprehensive environmental disclosures through the ESRS topical standards E1-E5. These standards are groundbreaking in their detailed requirements for reporting on topics such as climate change, pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy. They demand a level of transparency and action previously unseen in corporate reporting.
E1 requires companies to report their climate impact, actions to mitigate climate change, and adaptation strategies. It seeks to enable transparent and comparable disclosure on corporate greenhouse gas emissions, energy consumption, and climate resilience, supporting stakeholders in assessing a company’s environmental commitment and risk management.
E2 aims to ensure companies disclose their pollution output, including air, water, and soil pollution, and the measures they are taking to reduce these. This standard promotes transparency about pollutants released and waste management practices, helping stakeholders understand a company’s environmental impact and efforts towards pollution control.
E3 requires companies to report on their use and impact on water bodies and marine ecosystems. It focuses on sustainable water use, impact on aquatic ecosystems, and water management strategies, enabling stakeholders to gauge a company’s water stewardship and conservation efforts.
E4 mandates companies to detail their impact on biodiversity and ecosystems, including habitat preservation and restoration efforts. This standard highlights a company’s role in protecting and enhancing biodiversity, offering insights into its environmental responsibility and ecosystem impact management.
E5 centers on how companies manage resource consumption and embrace circular economy principles. It covers resource efficiency, waste reduction, and recycling initiatives, reflecting a company’s commitment to sustainable resource use and minimizing environmental footprint through circular practices.
The ESRS E3 standard is a set of guidelines that helps companies report their impacts and dependence on freshwater and marine resources. Here’s a breakdown of what this means.
ESRS E3 offers a comprehensive look at how companies interact with various water bodies, including rivers, lakes, and underground water sources. For example, companies must disclose details about how much water they use, where they take water from, and how they treat and dispose of wastewater. However, it’s not just about how much water is used. Businesses are required to evaluate and report on the management of Impact, Risks, and Opportunities (IROs) associated with their water use. This involves a thorough analysis of how water-related risks and opportunities can influence both the company’s operations and the surrounding environment.
The E3 standard includes five environmental disclosure requirements (E3-1 to E3-5) as well as one ESRS 2 requirement (ESRS 2 IRO-1):
In essence, the ESRS E3 standard is all about making sure companies are not just responsible users of water but are actively contributing to the health and sustainability of water and marine resources, especially in high-risk areas. It’s a call to action for businesses to be more transparent and engaged in preserving these vital resources.
The ESRS E4 standard focuses on how businesses interact with biodiversity and ecosystems. It emphasizes the importance of transparency regarding a company’s positive and negative impacts on and relationships with various environments, including land, freshwater, and marine ecosystems, as well as the plants and animals that inhabit them. This standard is all about understanding the variety of life in all its forms, from the diversity within species to the ecosystems they inhabit, and how businesses affect this biodiversity. It also considers the company’s interactions with indigenous and other affected communities.
The E4 standard includes six environmental disclosure requirements (E4-1 to E4-6) as well as two from ESRS 2 (ESRS 2 SBM-3; IRO-1):
The ESRS E4 highlights the interconnectedness of environmental issues, showing how biodiversity and ecosystems are linked to other areas like pollution, water resources, and circular economy practices. It stresses the importance of companies being responsible stewards of nature, ensuring their operations do not harm, but rather contribute positively to the environment and restoration.
Here we explore some of the key challenges facing the private sector in its implementation of the CSRD, focusing on the hurdles of ESRS E3-E4 in particular, and highlighting relevant recent developments.
The PwC survey highlighted four main challenges for companies when implementing the CSRD: the complexity of the technical implementation, lack of resources, high time pressure, and lack of expertise. This shows the variety of obstacles that companies are facing and highlights the need for them to tackle several issues at once.
The challenge of technical complexity stems from two main drivers: the requirement to consider the entire value chain when assessing impacts, and the collection and consolidation of quantitative data. For most industries, the bulk of environmental impact doesn’t come from a company’s direct operations, but rather from its value chain. Collecting and consolidating data from across the supply chain is complex. It is often scattered and not collected in a consistent way. In some cases, businesses may not have even started collecting any data yet. This means they will need to engage with their suppliers and service providers to get the information and data points they require, which can take considerable effort, especially if they have a large supplier base and vast amounts of data. Ensuring data accuracy, completeness, and consistency from supply chain data requires transparency and traceability across the supply chain.
Besides the obstacles mentioned above, implementing the ESRS E3 and E4 standards pose additional challenges for companies, largely due to the comprehensive scope of these standards demanding detailed reporting on complex and interrelated topics. Furthermore, ESRS E3 and E4 introduce terminology and concepts that are likely to be new for many companies.
From Metabolic’s own engagement with companies to understand the challenges they face regarding the ESRS, we have identified the following obstacles when tackling the E3 and E4 standards:
Overall, the comprehensive requirements stated in ESRS E3-E4 present significant challenges for businesses in terms of understanding nature and biodiversity, environmental footprint analysis, data collection, stakeholder engagement, and strategic adaptation.
Sustainability departments are typically the drivers of CSRD implementation. However, accounting and finance teams are also deeply involved, and partially taking the lead at times, according to the PwC report. Whereas these two departments often have little interaction, the CSRD is shaping a new trend of multidisciplinary teams. This shows how the directive is changing the way companies organize themselves and continue to operate, as financial reporting and sustainability reporting increasingly align.
It’s also worth mentioning that 52% of the companies surveyed by PwC intend to use software for CSRD reporting. There is currently a wide range of solutions available with differences spanning the user friendliness to the depth of detail with which the technical topics can be mapped. As reporting requirements change and best practices in this space continue to evolve, companies need to remain informed and a suitable software solution can accompany and facilitate this process.
To conclude, implementing the CSRD poses many new challenges for the private sector. It involves establishing new business processes, collecting new types of data, adopting new software solutions, and, if needed, making changes to the organization. Ultimately, at its core, the CSRD represents a data management challenge. To truly tackle the nature and biodiversity crisis, the key is to make this management process easier and more user-friendly for companies. Simplifying it comes down to having access to the right tools and data sets to enable accurate, informative and effective reporting on nature and biodiversity.
There is a long way to go for companies, both to grasp the holistic approach of the ESRS framework, and to get organized around data collection and management. Adjusting to the new requirements may not be easy but there are many added benefits of implementing robust nature and biodiversity reporting practices. Companies can achieve greater operational efficiencies, develop new sustainable innovations, enhance their corporate reputation and attract new investors. By focusing on the most material issues, organizations can start allocating resources more effectively, mitigate risks, and capitalize on opportunities to improve their sustainability performance and shift towards a nature-positive future.
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Link, by Metabolic Software is a science-based platform for nature and biodiversity assessments. It helps companies locate and evaluate their nature-related impacts and risks, and quickly pinpoint biodiversity hotspots in their supply chains.
