Revivo

ESRS G1: Governance

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The European Sustainability Reporting Standards (ESRS) are under revision to simplify reporting and increase the relevance of the information. In this article, we will review the proposed changes for the ESRS G1 standard on business conduct. The goal is to reduce the reporting burden for companies while maintaining the core objectives of the Corporate Sustainability Reporting Directive (CSRD).

Significant Reduction in Data Points for ESRS G1

The revised ESRS G1 standard has seen a marked reduction in the number of data points. The number of mandatory ("shall") data points has been reduced from 42 to 21. All 11 voluntary ("may") data points have been eliminated, consistent with other standards. Overall, this means a reduction of over 50% in data points for ESRS G1, and the word count in the standard has been reduced by 51%.

This simplification is the result of a systematic review where many voluntary data points have been moved to non-binding guidance documents (Non-Mandatory Illustrative Guidance – NMIG) or removed, and the mandatory points are focused on "core information."

Key Changes and Simplifications in Specific DRs in ESRS G1:

  • Simplified PAT Structure (Policies, Actions, Targets): ESRS G1 now uses a more streamlined PAT structure, which is consistent across the thematic standards. The framework for these disclosures is primarily provided by ESRS 2's general disclosure requirements for policies (GDR-P), actions (GDR-A), and targets (GDR-T). Companies are now only required to disclose if they have not adopted policies, actions, or targets for a material topic. This represents a more principle-based approach to narrative reporting.
  • DR G1-4: Incidents of corruption or bribery: Narrative information about corruption and bribery incidents has been replaced with a quantitative metric for confirmed incidents. Companies shall report the nature and number of incidents, without including identifiable characteristics. The definition of confirmed incidents can be found in the glossary. Similarly, the concept of "severe human rights incidents" has been removed from ESRS S1-17, which now only refers to "human rights incidents" with a substantiated filter.
  • DR G1-2: Management of supplier relationships: Scattered data points on training have been consolidated, with specific mention of key target groups such as procurement departments. Guidance on additional elements for training has been moved to NMIG. In general, requirements for managing supplier relationships and assessing social and environmental criteria for supplier selection have been reformulated and integrated into the new PAT architecture, with less detailed requirements for narrative reporting.
  • DR G1-5: Metrics in connection with political influence and lobbying activities: The standard now distinguishes more clearly between lobbying activities and political influence. Companies must report on the main topics of their lobbying activities and their main positions, including how this interacts with the company's material IROs (Impacts, Risks, and Opportunities). Guidance on when companies are legally obligated to be members of a lobbying organization, and how public statements align with lobbying activities, has been moved to NMIG.
  • DR G1-6: Metrics in connection with payment practices: The objective is to provide insight into agreed payment terms and the company's payment performance, especially concerning delayed payments to small and medium-sized enterprises (SMEs). Companies shall report:
    • A description of the company's standard payment terms in number of days per main category of suppliers, including SMEs.
    • The percentage of payments that are in line with these standard terms.
    • Concerns were raised that the reduction in detail was too extensive for reporting on late payments to SMEs. The NMIG provides illustrative examples of reporting in a table format, including for different supplier types and regions.

Important Focus Areas for Demonstrating Good Governance Practices:

With the streamlined standards, it becomes even more important to focus on quality and relevance in reporting, rather than treating the standards as a checklist:

  • Materiality Assessment: Companies must ensure they only report information that is material to their impact on people and the environment, as well as to their financial risks and opportunities. The list of topics in ESRS 1 Appendix A should now be seen as non-binding guidance, not a checklist. A qualitative analysis may be sufficient to conclude on materiality, and quantitative scoring is not always required.
  • Principle-Based Approach and "Fair Presentation": Reporting should be strategic, decision-useful, and focus on principles rather than excessive granularity. "Boilerplate" language should be avoided.
  • Clarity and Consistency: Unnecessary repetitions should be avoided, and the text should be crystal clear. All mandatory guidance (Application Requirements – ARs) is now presented in boxed texts under the relevant Disclosure Requirements (DRs).
  • Effectiveness of Measures (metrics): It is crucial to demonstrate that policies, actions, and targets are effective in managing material impacts, risks, and opportunities. Metrics should be used to track the effectiveness of actions.
  • Quantitative Data: There is a clear prioritization of quantitative data points to provide more objective and comparable information.
  • Contextual Information: Companies should provide sufficient contextual information to understand the data, and clearly explain the connection between different parts of the sustainability report and with financial reporting.
  • Stakeholder Engagement and Grievance Mechanisms: Effective operational grievance mechanisms should be available to stakeholders, managed by the company (alone or in collaboration), and built on principles such as legitimacy, accessibility, predictability, fairness, transparency, and learning. They provide important feedback on the effectiveness of the company's due diligence.
  • "Undue Cost or Effort" Relief: This relief has been extended to apply to all metrics, including those in the company's own operations and value chain, as well as to the materiality assessment, to reduce the burden of data collection.

Conclusion

The revised ESRS G1 standards reflect a desire for more focused and effective sustainability reporting. By reducing complexity and emphasizing material and decision-useful information, EFRAG aims to make reporting more meaningful for both companies and stakeholders. Companies that approach reporting with a strategic and principle-based mindset, focusing on materiality and the demonstrated effectiveness of their business conduct, will be best positioned to meet the requirements and demonstrate good governance practices.