Following on from our last Podcasts where we dived into the Environmental and the Social parts of ESG and specific to CSRD reporting requirements, in this podcast we discuss what the 'G' (Governance) in ESG means in relation to the New EU Corporate Sustainability Reporting Directive. Governance is the foundation for how organizations effectively manage and oversee their sustainability programs, and it involves key activities ranging from leadership, to setting strategy, policies, processes, and controls to drive sustainable practices and create long-term value for all stakeholders.
Job title of speakers:
To gain additional insights about this subject, be sure to explore the other episodes of the CSRD series available on the Assurance in Action Podcast network.
Follow us on- Intertek's Assurance In Action || Twitter || LinkedIn.
Following on from our last Podcasts where we dived into the Environmental and the Social parts of ESG and specific to CSRD reporting requirements, in this podcast we discuss what the 'G' (Governance) in ESG means in relation to the New EU Corporate Sustainability Reporting Directive. Governance is the foundation for how organizations effectively manage and oversee their sustainability programs, and it involves key activities ranging from leadership, to setting strategy, policies, processes, and controls to drive sustainable practices and create long-term value for all stakeholders.
Job title of speakers:
To gain additional insights about this subject, be sure to explore the other episodes of the CSRD series available on the Assurance in Action Podcast network.
Follow us on- Intertek's Assurance In Action || Twitter || LinkedIn.
Simona Romanoschi Intertek 0:11
Hello and welcome to the 7th in our series of podcasts dedicated to the EU Corporate Sustainability Reporting Directive, CSRD.
I’m Simona Romanoschi VP of Innovation at Intertek Business Assurance and I am joined by Mark Thomas, Executive Vice President for Sustainability and Assurance at Intertek. He is responsible for how Intertek looks at Sustainability internally and how we support our clients with Sustainability solutions.
Mark has spent 20 years as a corporate lawyer and has been the general counsel and head of corporate governance of some of the UK's largest listed multinational companies. Until recently, he was general counsel at Intertek.
Mark is going to dive into what the G in ESG means in relation to CSRD.
Hi Mark and thanks for joining me today. I was keen to get your take on Governance given the previous role you have had here at Intertek and get your reflections on the challenges and opportunities you see companies facing when addressing the CSRD reporting. So this is the final podcast on explaining the requirements, focusing on G in ESG. Can you please start us off with an overview in general on what is usually encompassed under Governance when reporting on sustainability matters?
Mark Thomas Intertek 1:30
Thank you, Simona, for the introduction. Governance, in the context of reporting on sustainability matters, refers to the structure, processes, and practices that organizations have in place to manage and oversee their sustainability initiatives. It encompasses a range of activities and elements that are essential for effectively addressing environmental, social, and governance (ESG) issues within an organization. There is a huge amount that is typically encompassed under governance when reporting on sustainability matters but let me summarize a few of the key ones.
The first is Board Oversight. Governance starts at the highest level, with the board of directors. The board is responsible for setting the overall strategy and direction for sustainability, ensuring that it aligns with the organization’s mission and values.
From there you set out the organization’s Sustainability Policies and Strategies that outline their commitment to ESG goals. These documents provide a framework for how the organization will address various sustainability issues.
To create this strategy though you will have to consider and conduct a number of other activities. Risk Management is key as it involves identifying and managing sustainability-related risks, including environmental and social risks, that could impact the organization’s operations, reputation, and financial performance. Linked to risk management is ensuring that the organization understands the compliance and regulation requirements that impact upon it while continuing to monitor any changes in regulations and their possible impact.
As mentioned, there are so many areas so let me tie a few together. Let’s take internal controls, reporting and auditing/assurance. Governance systems establish internal controls to track and measure sustainability performance metrics. This includes data collection, verification, and reporting processes. From that, organizations can then report on their sustainability performance through various channels, such as sustainability reports, annual reports, and websites. Often this will involve external audits and assurance services to verify the accuracy of sustainability data and reports. This enhances credibility and transparency. Then you want to be regularly monitoring and reporting on sustainability key performance indicators (KPIs) for tracking progress toward sustainability goals.
I’ll also touch on Internal and External culture around sustainability commitment. I know we touched upon this in the Social Podcast, but governance fosters a culture of ethical behavior and social responsibility within the organization, emphasizing the importance of sustainability in decision-making. Governance also encompasses efforts to promote diversity and inclusion at all levels of the organization, ensuring equitable opportunities for all employees. Externally this culture extends to the management of supply chains, including supplier sustainability assessments and audits.
Today we typically see organizations tie executive compensation to sustainability performance as a way to incentivize leadership to achieve sustainability goals – and interestingly this is one of the KPIs in CSRD.
I could go on, but you get the point that Governance is ultimately the foundation for how you build your sustainability strategy, and how you effectively manage and deliver it. That involves leadership, policies, risk management, transparency, and stakeholder engagement to drive sustainable practices and create long-term value for all stakeholders.
Simona Romanoschi Intertek 5:34
Thank you, Mark. So because Governance is across all elements, we can't really look at it as a standalone pillar. With that in mind, can you perhaps explain what governance means as it relates to the CSRD requirements?
Mark Thomas Intertek 5:51
Of course, the compared to the social and environment sections, they're actually a few parts on governance in the CSRD KPI. So let me break it down further.
The reporting requirement KPIs start off with the General Requirements section ESRS 1 (which stands for European Sustainability Reporting Standards). Then under ESRS 2 there are 10 topic-specific ESRS’s under E, S & G. Within those KPIs there are cross cutting questions related to Governance; Strategy; Impact, risk and opportunity management and finally Metrics and targets. Therefore, each topic-specific sub section will have a set of governance questions. Then for Governance as a standalone ESG pillar you have 8 KPIs under Business Conduct.
Let’s first look at the General Requirements section and how Governance factors in. As I just mentioned, it needs to start with the Board/ senior leadership in the organisation. Not only does CSRD look at how the SLT management is informed and involved in the sustainability management, it even looks at the composition and diversity of the SLT, their roles and responsibilities to manage material impacts, risks and opportunities, and their access to expertise on sustainability matters. I’ve already mentioned that it also looks at incentivisation around achieving sustainability goals. Finally, in the general requirements section, it looks at due diligence on sustainability statements and risk and internal controls around reporting.
Simona Romanoschi Intertek 7:31
Mark, sorry to interrupt, but just on that point around explaining the managements made up and their sustainability knowledge, surely that seems very demanding and even subjective request for companies to report on?
Mark Thomas Intertek 7:48
I think I need to remind of the intent of the CSRD regulation to help answer this. CSRD is aiming to align, strengthen and bring consistency to sustainability reporting and show the progress being made. So, this is one of those KPIs where it is setting an expected standard and therefore pushing companies to make sure they are getting the right level of sustainability advice. With regards to the composition and diversity of the Board or SLT, this is very common practice now to see this being reported, when we consider like you did under the Social podcast, the drive for more diversity and inclusion.
Simona Romanoschi Intertek 8:24
Yeah, that makes sense. Thank you. Mark, please continue.
Mark Thomas Intertek 8:29
Sure, so if we now look at the Governance cross cutting questions in the Environmental and Social sections. There is a variety of governance questions related to policy management, senior leadership incentives, material impacts, risks and opportunities and their interaction with strategy and business models. Each section starts with trying to understand the way the organisation is looking at SLT involvement, and how material impacts have been assessed. It also looks into how those risks and opportunities are decided and whether or not they are embedded into the overall sustainability specific topic. I think it is important to call this out, because again it is showing that governance is so key in making decisions around policies, targets and risk mitigation.
Finally, I’ll move on to the Governance pillar and look at the KPIs under Business Conduct. Again, a big focus on the senior management and the role they play in helping with the corporate culture and business conduct policies. The focus here is also to understand how they are mitigating any negative impacts and maximising positive impacts related to business conduct.
It also looks at the management of relationships with suppliers, specifically asking about fair behaviour with suppliers. It moves on to the prevention and detection of corruption or bribery, and asking to report on confirmed incidents of corruption or bribery. This is focused both on how employees are trained on this matter and how they communicate with suppliers. Finally, linked to suppliers, is a KPI on Payment practices particularly in relation to SMEs. Again, the intent here is to make sure that organisations are behaving sustainably to all. I would say that these are quite standard, certainly for larger organisations. Even for smaller ones, this will not be new though could be something that they will need to strengthen.
The last KPI is requesting transparency on political influence and lobbying activities within the financial year. Again, standard practice for most organisations.
Simona Romanoschi Intertek 10:41
Thanks, Mark. Do you think companies will find the Governance sections of the reporting easier, as they should in theory, have this already in place if they are managing sustainability today?
Mark Thomas Intertek 10:54
In theory you would think yes perhaps. But a number of these KPIs are, in my opinion, challenging for many companies, especially smaller companies. So, is management involved? Usually yes, but it is more about how you have the right management systems in place, that you are assessing their effectiveness, that you are proactively assessing risk impact, adjust accordingly, all while getting the right sustainability expertise to inform those decisions. So, groundings for this section should be clear, but how organised and ready to report a large number of companies will be, especially smaller ones, is the challenge I foresee. Now is definitely the time to act, especially SMEs so they can gap assess where they stand today and make the necessary changes.
Simona Romanoschi Intertek 11:41
Thanks, this is very insightful. Any final comments?
Mark Thomas Intertek 11:46
Umm. Just to remind organizations this to great opportunities, I see it to take advantage of this reporting guidance to use it to strengthen your sustainability, governance policies and practices.
Simona Romanoschi Intertek 11:58
Thank you very much, Mark, for that summary around governance as it relates to the CSRD reporting requirements.
As a reminder on how Intertek can help on CSRD. So there are 4 ways:
1. To understand your current CSRD readiness, we can help you to undertake a gap analysis to ensure you have a clear view of your organisation’s current readiness and will work with you to define clear action plans to address any gaps to prepare you for your first submission.
2. Through training to ensure everyone understands what’s required to prepare for your submission. This can be delivered to a range of different teams and functions across your organisation, and will be bespoke to best fit your requirements.
3. We can also provide auditing solutions - In some markets we will also be able to act as the auditor of your CSR Directive reports, as one single provider supporting you from your early preparations through to audit of submission.
4. And finally, we have also partnered with ESG Playbook - a leading SaaS reporting and solution provider bringing in one tool all required data collection, aggregation, and tracking and reporting for ESG.
For more information visit www.intertek.com/assurance/eu-csrd
So this concludes today’s podcast. Thank you for listening, watch out for further CSRD episodes to help with your journey to compliance.