ESG reporting in practice – examples and new aspects

In the article “What is ESG and how do we comply with ESG reporting regulations in time?” we share details on the European regulations related to introducing mandatory non-financial reporting for many companies. The material describes the timeframes, reporting specifics, and applicable standards.

In this article we will not talk about regulations and terminology. Instead, we will present the practical and familiar aspects of ESG and its direct relationship to non-financial reporting.

We will also mention the less familiar aspects that are an essential to report, but first, we will focus on what is already available in most companies.

What is known about sustainability reporting? 

Non-financial reporting, or ESG reporting, involves reporting on sustainability matters. Different industries and businesses understand sustainability differently.

Each company, even if it has not formulated its definition of sustainability, being successful, and having a good reputation, has the following elements that are common to any sustainable business:

1. Responsibility towards resources and the environment in which the company operates – the Environment (E) aspect;

2. Care and commitment to its employees – social aspect (Social – S);

3. Good governance practices that ensure legal compliance, long-term beneficial partnerships, and satisfied customers – Corporate Governance (Governance – G).

Read more: What is ESG and how do you comply with sustainability reporting regulations in a timely manner?

Examples from practice

Some examples of information that companies already have related to the first element – Environment (E) are:

– A production company that is granted an integrated permit[1] will be able to transfer some of the data from its annual performance report related to this permit to its sustainability report, such as water and energy consumption, emissions, amount of waste by type and disposal method, quantities of raw materials, etc.

– A company that performs services that do not require the use of large amounts of natural resources will probably have to report only its energy consumption, water consumption, and volume of household waste.

Example of the second element – social aspect (S):

– Almost every company will need to report information related to employees. One of the most significant topics for any business is managing its own workforce, which requires disclosing information. Such sample data to report are the number of employees, annual turnover, gender distribution, distribution across several age groups, health and safety indicators – number of workplace accidents and persons affected, days absent due to workplace accidents, the percentage pay gap between its female and male employees, etc. A description of training and development policies, health and safety policies, procedures for interacting with employees regarding actual and potential significant impacts on the company’s employees, and other contextual information about how the company generally manages its human resources-related processes is shared.

Example for the Corporate Governance (G) element:

– In this case, companies share mainly narrative-type information on how they manage relationships with their suppliers, whether they take environmental and social criteria into account when selecting suppliers, what efforts make to prevent corruption and bribery, whether there are violations in this area, how many there are, what their status is and what measures have been taken, information on contractual payment terms, especially those with small and medium-sized enterprises, what the company’s values are and how often they are discussed by management, and more.

Another type of information subject to ESG reporting is described in detail in the European standards. Before giving examples, it is important to note the following features regarding:

• Not everything that is described in the standards must be reported. Only information that related to matters assessed as material to the enterprise.
• The materiality assessment should follow a methodology that reflects the double materiality principle. The principle is required by the European sustainability reporting standards. How it is applied must be clearly described in the report, and the result will be subject to audit.
• Once the material matters for the enterprises are identified, they are associated with the related reporting standards to determine what type of information should be reported – quantitative indicators and qualitative information (narrative type).
• The result of this assessment often shows similar ESG reporting matters and topics for each individual industry, but there are always different nuances unique to the particular enterprise and the conditions in which it operates.
  Example: A company that operates an agricultural business in a region at risk of drought would report on this risk and what measures it would take. Another agribusiness of similar size operating in a different region where no such risk exists would not report such information.
• One of the biggest challenges of this type of reporting is that it addresses impacts, risks, and opportunities from the company’s direct operations and those arising from the actors in its value chain (partners, suppliers, customers, end-users, regulators and others).

What is NOT so familiar about ESG reporting?

According to European reporting standards, what information is less known, or companies are not prepared to present it in a systematic and auditable format?

We will explain that through examples, which are not trying to achieve comprehensiveness due to the large volume of European standards but aim to guide companies on the approach they would choose in the data collection organization.

The information related to the topic ‘Climate’ is associated with the requirement to provide inventory data on greenhouse gases resulting from the direct and indirect activities of the enterprise. Data from integrated permits annual reports would rarely work in this case because European standards require the application of a specific methodology under an approved protocol (the GHG protocol), which usually is not used for integrated permits annual reports.

Other climate-related information results from an assessment of climate risks for the facility, the extent of the impact of the facility’s direct and indirect activities on climate change, mitigation targets, plans, measures and investments related to these targets, etc.

The topic is also very important for the agricultural sector because of climate change and the risks it brings to business development – droughts, heavy rains, floods.

The first is that large IT companies have a negative impact because of the amount of energy required to power high-power data centres and cool them, which imposes the use of the high-emitting GHG freon.

Another perspective is that some IT companies can positively impact the climate by creating technology solutions for their customers to measure, analyze, and manage negative climate impacts.

The next topic that requires significant additional effort and can be compared with Climate change is “Biodiversity and ecosystems”. Again, reporting efforts are necessary in the case that the topic is assessed as material for the enterprise.

Sourcing and structuring the information required for reporting on the Climate and other topics, is often challenging for businesses. For this reason, the standards for certain issues allow for “phase-in” reporting (the opportunity to postpone for up to a maximum of 3 years, depending on the type of information and the size of the business). However, the company must disclose what efforts it will put in place to provide the necessary data for the coming reporting periods.

Examples from practice

Example 1: A Bulgarian company that produces chocolate procures the raw material cocoa. This raw material is not grown and produced in Bulgaria but mainly in South America. “How does the company select sustainably sourced cocoa?” is one of the essential questions for reporting in this sector since the materiality assessment must examine the value chain, too.

In this case, the company will need to provide information about the supplier selection policies and whether selection criteria related to the main risks for this region – deforestation, unfair working conditions, child labour, lack of decent living conditions for local communities, etc. – are included.

Example 2: A company that uses water as a key resource in its production activities will need to report information under ESRS 3, ‘Water and Marine Resources’.

In addition to data on the amount of water consumed, the company will need to report whether there are other impacts from wastewater discharge (similar to the information from the integrated permit annual report), what risks it identifies for the area in which it operates (e.g. risk of drought or risk of high consumption and complaints from local communities and control authorities that there is not enough left for domestic use), what measures it is taking to reduce the amount of water consumed, whether it has plans to implement the measures in the long term, how it will monitor the implementation of the plan and what KPIs will measure, planned investments, etc. This is a good example of a link between the sustainability report and the financial report, where this information can also be found concerning planned investments.

Example 3: A large enterprise operating in a region with high unemployment and low living standards, recognized as a significant employer for its area, will report under ESRS 3 ‘Affected Communities’ requirements.

Stakeholders can expect this enterprise to bring about positive economic and social impacts on the region. To demonstrate these results and its commitment to implementing positive impact measures, the enterprise should provide the following sample information according to this standard:          

An explanation of the enterprise’s general approach to identifying and managing all of its impacts on affected communities, which concern communities’ economic, social, cultural, civil, and political rights  and the specific rights of indigenous peoples. Alternatively, suppose there are adverse interactions with indigenous communities, it should report on how this may cause disruption to the entity’s operations or damage its reputation and what measures the entity will take to reduce or remedy these effects.

Read more: Quality management – how important is it and how do we do it at Balkan Services?

What else is reported?

It is essential to mention that, besides the available standards, companies may report other information typical for the sector and conditions in which they operate.

Example for a material topic for the pharma sector: A pharmaceutical company that does not have production activities, but mainly representative ones, sales or distribution, has a significant impact on access to life-saving medicines for the society. This topic would not concern the financial sector, for example. And there are no standards developed about it. However, there is the possibility of positive impacts on society that supports one of the UN’s global Sustainable Development Goals ‘Good Health and Wellbeing’ so it is a topic of interest for different stakeholders and readers of the report.

The information that will provide transparency on the company’s efforts regarding sustainability in access to medicines is an explanation of the following issues:

– What measures does it implement to prevent this type of risk?

– How does it measure its positive impact on access to medicines?

– What policies and procedures does it implement due to crisis?

– How does it ensure equal access to expensive medicines for different social groups?

– Which stakeholders (government bodies, hospitals, patient organizations) does it collaborate with on these issues?

Read more: Why post-project development and expert support are key to business software effectiveness

Briefly on ESG reporting

To summarize the conclusions from the examples listed, we highlight the following:

• Reporting on sustainability is complex (especially when it happens for the first time). Still, familiar business practices and data are available, which is a sound basis for an organization to start collecting data.
• Not everything described in the standards must be reported, but mainly information about matters determined to be material following a materiality assessment process.
• Material issues vary from industry to industry. There are common issues across sectors, but distinct differences between companies in the same industry often appear.
• Material issues relate to applicable topical standards.
• In some cases, if a company does not have the information required by a standard, it should explain why and what efforts it will make to obtain it according to the timeframe specified in the standard.

The information to be reported cannot be “copied from a peer company” in the same sector, just as we cannot copy financial statements, asset values, and approaches to cash flow management. It is possible to borrow valuation and engagement practices and find analogies in policies and key performance indicators. Still, the report should reflect individual specifics of the company, and each element is subject to audit.

No business nowadays can grow and be competitive without the use of IT systems. Choosing the right software solution and implementing it is a complex, difficult but critically important decision.

At Balkan Services we have expert knowledge of business, technology and legislation, and we speak all three languages. We will listen carefully and advise you on choosing the right business system for your needs.

Balkan Services has been supporting businesses on their digital transformation journey since 2006. We have already helped more than 390 companies to digitalize their business by deploying established software re

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[1] Big production companies in Bulgaria that operate installations and facilities for industrial activities are required to apply for integrated permits as per the Bulgarian Environmental Protection Act. https://www.moew.government.bg/en/environmental-protection-act-7628/