Preparing a non-financial (ESG) report

Double materiality analysis

The starting point of ESG reporting, based on ESRS standards, is the processing of the so-called double materiality analysis (DMA). This is a process aimed at clearly identifying topics that are relevant for the reporting entity, i.e. material, and specific data and information that the company will have to include in the corporate sustainability report (i.e. annual report).

In this case, materiality is assessed from two perspectives, which is new approach for reporting entities. The company assesses the impacts of its business activities and supply chain on people, surrounding communities and the environment, which is so-called impact materiality. Next to this is so-called financial materiality. As part of this step, the company considers how sustainable factors affect its financial stability. If negatively, then we are talking about risks or positively, when it comes to opportunities.

You should not miss the practical guide to materiality (EFRAG IG 1 Materiality Assessment), which was published by the European accounting group EFRAG at the end of May this year, and which describes in detail the concept of double materiality, its specifics and answers the most frequently asked questions of reporting entities.

The process also includes mapping the value chain and stakeholder engagement.

You can read more about the double materiality process in ESG Newsletter 10/2024 – ESG Legislation: Double Materiality Assessment.

GAP analysis of ESRS standards

After the double materiality assessment is processed, the company is aware of what its significant impacts, risks and opportunities are, and therefore which topics and subtopics of the ESRS standards are relevant for its reporting. At this stage, it compares the requirements of individual indicators and disclosure requirements with its current reporting practices in order to verify whether the company is able to meet these requirements in the structure of the standards defined, or whether it will have to make changes to its reporting. It will undoubtedly reveal data that has not yet been included in the current reporting practices and will need to be monitored for the first time.

At the end of the GAP analysis, the company gets an overview of the percentage of requirements that have already been met and what will need to be finalized. It is necessary to take into account that the company does not only compare quantitative indicators, but also textual and qualitative ones, which are significantly more prevalent in the the ESRS standards. The company should also take into account the ESRS 2 standard, which is entirely mandatory, and also those topics that are specific only to the company itself or the industry in which it operates.

Data collection

Nowadays, there are numerous solutions for ESG reporting available on the market, making it even more difficult to choose the right one. If you decide on such a solution, the automation of data collection and time savings can be a great advantage, but there is usually a significant financial cost associated with the purchase. As a rule, this is not a one-time purchase, but maintaining a license on an annual basis. It is also necessary to ensure that the tool truly reflects all current legislative requirements, is able to flexibly respond to new ones and implement them early on.

In addition, an internal solution in the form of tracking and monitoring data in commonly available office tools is also an option, however, it is associated with more pitfalls than advantages. In such a case, the risk may be the error rate during manual processing, limited possibilities for updating data in real time or collaborating on data in teams. The seemingly low costs of using these tools attract companies, but they can change when the selected solution fails and a more reliable solution needs to be found.

EU Taxonomy report

EU Regulation 2020/852 entered into force in July 2020 and is part of the obligations arising for entities that are required to prepare an ESG report under the CSRD Directive. The scope of the entities affected therefore goes hand in hand with the scope set for the CSRD.

For better understanding, the EU Taxonomy can be imagined as a classification system with which we can identify sustainable activities of a company and thus clearly distinguish sustainable from unsustainable ones. The regulation aims to direct private investments into activities that are necessary to achieve climate neutrality and a positive impact on the environment not only in the European Union. The ambition is clearly also to prevent greenwashing practices, thanks to a clear definition of sustainability.

Currently, there is only environmental taxonomy, but in the future it is planned to adopt social and Governance Taxonomy as well.

In order for a company's activity to become sustainable and therefore aligned with the EU Taxonomy, it must simultaneously meet four basic conditions:

1. It significantly contributes to one of the six environmental objectives
2. It does not cause significant harm to any of the other five objectives (the "do no significant harm" principle, DNSH)
3. It meets the technical screening criteria
4. It meets the minimum social safeguards

Environmental objectives defined by EU Taxonomy

The final output of the EU Taxonomy is the % share of eligible and compliant activities and reporting of the following KPIs:

• KPI Turnover from sustainable activities
• KPI CapEx from sustainable activities
• KPI OpEx from sustainable activities

Currently, the following sectors are included in the EU Taxonomy:

1. Forestry
2. Environmental protection and restoration activities
3. Manufacturing
4. Energy
5. Water supply, sewerage, waste management and remediation
6. Transport
7. Construction and real estate activities
8. Information and communication activities
9. Professional, scientific and technical activities
10. Financial and insurance activities
11. Education
12. Health and social work activities
13. Creative, artistic and entertainment activities
14. Disaster risk management
15. Services
16. Accommodation activities

More detailed information on the European Taxonomy Regulation, its requirements and detailed information on publication requirements, please refer to the EU Taxonomy Guide.

Preparation of the Sustainability Report

The final output of the entire process described above is the preparation of the Sustainability Report in the structure and scope set out in applicable legislation. The Sustainability Report is a separate section of the Annual Report and is subject to audit together with the Annual Report.

Report Assurance

In addition to financial indicators, auditors will now also verify the Sustainability Report. It is assumed that until 2028 only in the scope of verification with limited assurance and after the mentioned year or later a transition to verification with reasonable assurance is expected. Auditors will comment on four parts of the report:

• Compliance of published information with reporting standards (ESRS)
• Procedure for determining information reported according to ESRS standards (“double materiality assessment”)
• Compliance with the requirement for tagging information – postponed for now
• Compliance with the requirements of the EU Taxonomy Regulation

Authors:

Zuzana Rozsívalová, ESG Manager, Forvis Mazars in the Czech Republic

Tereza Sedlmajerová, ESG Senior Consultant, Forvis Mazars in the Czech Republic