ESRS Governance: Business conduct & culture, supplier relations, anti-corruption & co.

published on 16 august 2023 I reading time approx. 4 minutes

Up to now, corporate governance has been the focus of attention, especially for large, listed companies. In the future, companies affected by the CSRD will have to follow suit in terms of governance and create corresponding structures. The main objective of ESRS G1 is to provide companies with clearly defined disclosure requirements in relation to business conduct. These are intended to enable users of sustainability reports to better understand a company's policies, practices, processes, and procedures, particularly in relation to business practices and their impacts. This article provides an overview of the most important contents of the governance standard.

STRUCTURE OF THE GOVERNANCE STANDARD

Fundamentally, the term “governance” as used in the ESRS refers to the way companies monitor, manage, and oversee sustainability-related impacts, risks, and opportunities. Governance is the process by which a company defines the procedures, controls, and operations by which it operates and makes decisions. Specifically, this includes the allocation of responsibilities, the creation of clear communication channels, compliance with laws and regulations, and ensuring integrity and accountability at all levels of the organization. Key components of good governance structures are, for example, the risk and compliance management system and the internal control system (ICS). Furthermore, due diligence processes, incentive systems and the roles and responsibilities of the administrative, management and supervisory bodies are generally assigned to the umbrella term “governance”. These fundamental aspects are dealt with in the cross-cutting standard ESRS 2, which contains a total of five governance-related disclosure requirements (ESRS 2 GOV-1 to ESRS 2 GOV-5).

This is to be distinguished from the separate governance standard G1, which is examined in this article. This standard contains a total of eight disclosure requirements and is explicitly aimed at business conduct issues. The chart shows which specific topics are addressed in the comparatively lean standard on business conduct.

THE MOST IMPORTANT CONTENT AT A GLANCE

As with all environmental standards, supplementary topic-specific information on the materiality assessment process (ESRS 2 IRO-1) is required as part of reporting on business conduct. The company must disclose which relevant criteria – for example, location, sector, or activity – were taken into account when identifying and assessing the material impacts, risks and opportunities in connection with the business conduct. It should be noted that this information must be included in the sustainability statement, irrespective of whether the governance standard G1 emerged as material during the assessment.

Compared to the other topical standards from the fields of environment and social, the governance standard on business conduct does not contain any explicit references to the minimum disclosure requirements (MDRs) of ESRS 2 and, accordingly, no concrete disclosure requirements on governance-related measures and objectives. Instead, data points required in this regard were integrated directly into topical disclosure requirements and thus differ from the other topical standards in terms of structural embedding and reporting level. Only strategies that also have to be reported across all standards, in this case in relation to business conduct and corporate culture, are addressed in a separate disclosure requirement (G1-1). At this point, however, with the corporate culture, the establishment and communication of internal whistleblowing systems, any existing animal welfare strategies, and training in relation to corporate policy, a comparatively high range of different topics is covered within a single disclosure requirement. In contrast, supplier relationships (G1-2) and political influence and lobbying activities (G1-4) are separate disclosure requirements but are rather narrow in terms of the qualitative data points required in each case.

A central objective of the governance standard is transparent reporting on the prevention and detection of corruption and bribery and on how to deal with such incidents. For example, corresponding procedures, processes for reporting to the company's administrative, management and supervisory bodies, and preventive training programs must be described in detail. In addition to a large amount of qualitative information, the two disclosure requirements relating to the set of topics corruption and bribery also require the disclosure of two quantitative data points, namely the number of convictions for violations of anti-corruption and anti-bribery laws and the number of fines for these violations. In principle, however, the number of quantitative indicators to be reported in the standard on corporate policy is limited. In addition to the data points already mentioned, only a few metrics on political influence and lobbying activities (G1-5) and payment practices (G1-6) must be disclosed. These include, for example, the total monetary value of the company's direct and indirect financial contributions and in-kind contributions to politics, or the average time in days that the company takes to settle an invoice. Compared to the environmental and social standards, the data collection effort is therefore considered to be low, especially since the required information is likely to be available at a central level in most cases.

OUTLOOK

Compared to the environmental and social standards of the ESRS, the disclosure requirements of the governance standard can probably be integrated more quickly and efficiently into sustainability reporting for most companies. In addition to the relatively small number of disclosure requirements and data points, this is mainly due to the fact that for many of the topics addressed, for example corruption and bribery, corresponding approaches or even mature processes are often already in place even in medium-sized companies. In addition, most of the required quantitative data points are available centrally and do not have to be collected from individual companies. Nevertheless, companies should take a timely and intensive look at their governance structures, processes, procedures, and responsibilities, especially with regard to the general governance-related disclosure requirements of ESRS 2. It can help to first analyze the specific requirements and contents of the standard and to filter out those data points for which no or only incomplete information is available. In addition, the results of the materiality analysis, which involves an implementation effort that should not be underestimated, must be included in the disclosure. In this way, impacts, risks, and opportunities in connection with corporate policy as well as missing procedures and processes can be identified at an early stage and corresponding measures can be initiated.

Generally, good corporate governance is the key element for the successful and effective implementation of sustainability and sustainability reporting processes. At a time when the complexity of organizations and institutions is constantly growing, effective governance is crucial to ensure clear structures, responsibilities, and transparency. The implementation of mature governance enables organizations to successfully address the challenges of the modern world and create a solid foundation for sustainable growth and development.