Europe’s sustainability reporting is based on three pillars: E, S & G. For many companies, that third pillar – Governance – is the least familiar; it usually receives less attention than the Environmental and Social themes. Yet, well-functioning corporate and governance structures & processes are crucial to successfully embedding sustainability within the company. Read on for everything you need to know about the governance standard.
Generally speaking, governance encompasses both the process of policy implementation and the supervision of that implementation. It also includes the division of powers and an organisation’s rules of conduct and principles. Often, companies already have many (written and unwritten) policies concerning governance, such as a code of conduct or an anti-corruption policy. Through the European Sustainability Reporting Standards (ESRS), Europe now delineates where the usual business practices end and where sustainable policies begin. At the same time, Europe requires companies to explicitly describe their policies in their sustainability report, and also make reference to where those documents are publicly available.
It is important to note that ‘governance’ is both its own pillar within the ESG triad and also a topic in the overarching ESRS 2 standard. In these general reporting requirements, ESRS 2 specifies how to report on the composition of the management and the board of directors. It also details how to describe their expertise. What role does the management play where material ESG risks and opportunities are concerned? What policies does it then put in place? How is risk management handled? If you still have questions about these general governance principles, we would like to refer you to this article, or alternatively you can contact us at mail@pantarein.be. Below, we will zoom-in on the ESRS G1 governance standard
The governance pillar is all about business conduct. You should report on business conduct if your materiality analysis shows that this topic is material, which will almost always be the case.
Through the governance standard, Europe aims to provide transparency on how your company handles business conduct; that is to say, on its ethics and policies. In short, the governance standard focuses on three themes:
To give readers a deeper insight into your corporate culture, you should describe your policies on anti-corruption and anti-bribery. Consider how your company deals with whistleblowers, and whether training is given on the topics. Remarkably, the governance standard also pays attention to animal welfare: if your company is part of the agribusiness sector, for example, be sure to take that into account.
Additionally, the governance standard requires you to explain your procurement process. Do you take into account social and environmental criteria when selecting your suppliers? Does your procurement team receive training on supplier screening? Do you make site visits to your suppliers? With these topics, ESRS G1 provides a clear link to the Corporate Sustainability Due Diligence Directive (CS3D), which aims to address negative impacts on human rights and the environment in the value chain.
Finally, you should also be transparent about your political influence, including lobbying activities related to topics in your materiality analysis. This includes the positions you have taken as a company, as well as the monetary value of any contributions. While some companies intuitively believe that their political influence and lobbying are non-existent or non-material, in practice they occur regularly. An example: you are a company in the alcohol industry and one of your material topics is ‘responsible drinking’. If you then simultaneously lobby for a lowering of the age limit for alcohol, you have to report this.
Besides describing your policies and actions, you should also report metrics and targets related to business conduct in your sustainability report. An indicator could be the number of confirmed incidents of corruption; a target could be that you want to shorten payment terms to your suppliers.
The overview given above shows that the roles and expertise of the administrative, managerial and supervisory bodies are key to structurally embed sustainability in your organisation. They take the lead in shaping a policy on business behaviour in line with CSRD requirements (e.g. anti-corruption, supplier management). Moreover, being role models, they influence company culture.
Ready to tackle sustainable governance in your organization? Pantarein will help you get started! Feel free to contact us at mail@pantarein.be
