The main purpose of the European Sustainability Reporting Standards (ESRS) framework is an attempt to standardise sustainability reporting. It enables investors, consumers, cso's and other stakeholders to compare the sustainability performance of companies active in the EU. In its current shape it is not suitable for ESG business transformation.
The ESRS framework serves as a guideline for companies to disclose their sustainability impacts, risks, and opportunities (IRO). It is combined with a PDCA (Plan, Do, Check, Act) setup to structurise data collection in a way to activate incremental change. Companies are expected to report progress towards the target after the first year of reporting.
ESRS: Regulatory change
The ESRS framework is well designed. You can see that many bright people have really thought it through. They have created something that works across sectors, industries and last but not least for the regions and countries of the EU. Another great challenge they tackled is to make ESRS interoperable with global standards, like GRI (Global Reporting Initiative).
Probably the greatest feature of ESRS is the standardisation of the data collection with regard to the three fundamental elements of the economy: materials, energy and people. In the highly geopolitical playing field the EU is trying to regain a competitive edge. Top level insights about European business needs related to material and energy will increase the policy grip on the direction of the European economy.
This reflects the EU's recognition that sustainability is integral to long-term business success and societal well-being.
What CSRD / ESRS sets in motion
Although the EU created a great starting point for regulatory change, a crucial question remains: Does CSRD really make the European economy strong and sustainable?
As stated before, the ESRS framework has many great features. There certainly is a lot of potential in the way the data is collected, structured and activated to enable progress. And today, the ESRS framework is being adopted by various sectors across Europe, providing a clear pathway for companies to report on their environmental, social, and governance (ESG) performance. There is a but.
CSRD is a definition authority. ESRS is therefore providing the definition of sustainable development by the process, structure and questions it designed. ESG in the ESRS framework is set up as three reporting silos.
Although CSRD creates of pot of data gold per company and industry including the roll up to the highest level of European authority, it does not connect the E, S and G in an integral way. While in any business they are deeply connected. ESRS separates what should not be separated. In this way, ESG might become completely irrelevant for the leadership of organisations. And that is competely the opposite of its purpose.
How to overcome the flaws of the ESRS Framework
The potential of the ESRS framework extends far beyond compliance. So let's not throw away the child with the bathwater, but let us utilise the ESRS framework in a way it makes sense for business. There are two thing that can be done without changing the framework itself.
- Create ESG incentives for business leaders upfront
- Extend the framework to go beyond compliance
These two adaptations help to redefine what sustainable development means for business, while preserving the features of ESRS.
1. ESG Board Logic
ESG Board Logic (EBL) reconnects E,S and G in a coherent and natural way. Secondly ESG addresses the steering parameters of the board and enables informed decision making. EBL should be used before the compliance trajectories kick off and puts the force field analysis (stakeholder analysis) and DMA (double materiality assessment) in the perspective of improving the business. This prevents ESRS from being the sole responsibility of the CFO, but uplifts it to an incentive for the entire leadership. (Check out this article on Medium: How to design an ESG strategy that drives boardroom decisions.)
2. FEST: Framework for ESG Strategy and Transformation
FEST extends the ESRS framework and extends the data collection in such a way it directly creates value for the business model, the go-to-market strategy, employment and product and process innovation. Where ESG Board Logic connects the E, S and G upfront, within FEST the data is collected and connected to enable ESG Business Intelligence (BI).
Next: FEST: ESG strategy and transformation and how it preserves and extends ESRS
