Unpacking the “S” in ESG reporting

Jasmin Danzeisen
Senior Manager, People and Organisation, PwC Switzerland

Sebastian Klotz
Manager, ESG and Digital Technology, PwC Switzerland

CSRD, EFRAG, IFRS, ISSB, and NFDR – Are you ready to report on your E’s, S’s, and G’s? If you are still unsure about it (and/or if you are wondering what these acronyms are all about), start with reading this article and learning about upcoming sustainability reporting requirements – with a special focus on the S’s.

Environment (E), Social (S), and Governance (G) topics are becoming an increasingly integral part of business strategy and operations. The 2023 edition of our Global ESG Survey finds that around 80% of companies have clearly defined long-term targets for emissions and around 60% have social and governance targets in place. While sustainability reporting used to be a nice-to-have, it will become a must-have much sooner than you may expect. Most likely, it will also be much more complex and far-reaching than you may think.

In Switzerland, regulations requiring disclosure on social matters have started to formally enter into force – the indirect counterproposal to the Responsible Business Initiative is one prominent example. Public interest companies of a certain size are mandated to issue a non-financial report on sustainability. Companies trading conflict minerals or offering goods/services where there is a reasonable suspicion of child labour need to perform additional due diligence.

These sustainability initiatives reflect a bigger trend on the European continent. The European Green Deal, for instance, aims to make Europe climate neutral by 2050. Regardless of where you are based in the world, if you do business in the European Union (EU) you will likely be affected by the upcoming sustainability reporting requirements.

Starting in 2024, the Corporate Sustainability Reporting Directive (CSRD) will replace the Non-Financial Reporting Directive (NFDR). This means that around 50,000 companies need to get ready to meet some 80 disclosure requirements and report hundreds of data points. The draft standards upon which the CSRD reporting will be based have been developed by the European Financial Reporting Advisory Group (EFRAG) and are currently under review by the European Commission. These will be approved by June 2023.

Sustainability reporting standards

The draft European Sustainability Reporting Standards (ESRS) developed by EFRAG include 11 general disclosure requirements, 32 environment disclosure requirements, 32 social disclosure requirements, and six governance disclosure requirements. Regardless of any materiality assessment, all companies that fall under the CSRD will be required to report on general disclosures, climate change, and their own workforce.

A key takeaway for companies is that reporting on the ‘S’ in ESG is becoming as stringent as on the ‘E’. Ensuring sustainability is part of your employee journey and an equally complex challenge which companies must start thinking about now.

«Today, information on a company’s impact on the environment, human rights and work ethics is patchy, unreliable and easily abused. Some companies do not report. Others report on what they want. Investors, consumers and shareholders are at loss. From now on, having a clean human rights record will be just as important as having a clean balance sheet.»

Pascal DurandEuropean Parliament Rapporteur for CSRD

Sustainability in the own workforce

CSRD will require companies of certain sizes to report on the sustainability of their own workforce, irrespectively of their double materiality assessment outcomes. Quantitatively, the relevant disclosure requirements account for the largest share of the ‘S’ pillar. Importantly, ensuring sustainability in the own workforce will only be the starting point. Many companies will be required to go far beyond their own workforce and take responsibility for sustainability of their value chain, their relationships with consumers and clients, and the impact on communities in which they operate.

The scope and detail of disclosure requirements vary between categories but also within. For example, companies will be required to disclose whether all workers in their own workforce are paid an adequate wage as well as any countries where this is not the case. Companies will also need to disclose how this may differ between employees and contractors, and potentially in different stages of their value chain. This new requirement has captured the attention of many companies, particularly in view of current inflation rates with living wage considerations being increasingly integrated in pay equity assessments.

Challenges and opportunities

Social reporting under CSRD will present companies with a number of challenges but also allow them to reap significant benefits. Our recent Global Workforce Hopes and Fears Survey confirms that the workforce is the number one risk to growth and that employees can be a force multiplier or detractor to growth-driven strategies. A more sustainable workforce is likely to lead to higher job satisfaction, increased productivity, and improved public reputation. In a time of fierce competition for the best brains and minds, a clear focus on the social aspect of sustainability may help to win the race for talent. The 2023 edition of our CEO Survey indicates that Swiss CEOs have already understood this. 71% of surveyed CEOs reject staff reductions as ways of meeting the economic challenges of the next twelve months. A respective 60% and 83% also reject hiring freezes and wage cuts in this regard.

Of course, such benefits come at a cost. A key challenge is to identify, collect, and process the data to be disclosed. For certain companies, the starting point may even be to ensure there are underlying activities upon which they can report.

Next steps

There is a clear global movement towards a more systematic and comparable sustainability reporting. The disclosure requirements briefly outlined in this article are put forward by the EU but will ultimately affect EU and non-EU based companies. Similar initiatives are also under way in other parts of the world. The International Sustainability Standards Board (ISSB), closely linked to the International Financial Reporting Standards (IFRS) Foundation, is currently also developing sustainability-related disclosure standards (also to be published in June 2023). To what extent CSRD and ISSB standards will overlap or even be considered as equivalent is not yet clear.

Regardless of the sustainability standard on which you will be reporting, it is time to take a close look at the ‘S’ in ESG, to develop a strategic roadmap, and to apply the same rigorous processes as for environmental sustainability reporting. Your people are the key to a sustainable business transformation – and a great starting point.

We are happy to support you on your journey towards a sustainable business transformation that puts your people at the center.

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