In the last two articles, we have looked at the environmental impacts of “ESRS standards – E in ESG” link here and the social factors of “ESRS standards – S in ESG”, which can be found in the link here.In this article, we will focus on the third and final area. The letter G or governance is often not given much attention, even though this factor ultimately determines how businesses, and indeed our entire society, operate.
“G” for corporate governance
Governance deals with corporate governance and transparency about shareholders and other parties such as business partners, investors, and employees. This area is concerned with developing and implementing processes, policies, and principles that promote ethical behaviour, integrity, and transparency in corporate governance. This includes, for example:
- Governance structure – ensuring that governance structures in the company are transparent and meet the needs of not only shareholders but also other stakeholders;
- Remuneration – establishing fair and transparent remuneration systems for management and employees that reflect not only financial performance but also ESG indicators.
- Ethical Standards and Policies – the creation and implementation of ethical codes of conduct that define expected standards for all employees and management.
- Diversity and inclusiveness – ensuring diversity in leadership and various decision-making bodies can help bring diverse perspectives into the decision-making process.
- Financial and business transparency – disclosing relevant information about a company’s financial health and business practices, enabling investors and stakeholders to properly assess a company’s risks and performance.
- Risk management – identifying, assessing, and managing risks associated with ESG factors, which may include environmental risks, legal compliance, and social impacts.
Effective ESG corporate governance not only delivers financial value to the company but also helps build stakeholder trust and reduce the risks associated with poor governance. The objective of this standard is to be fully integrated with other ESG requirements and to properly meet the disclosure requirements that enable users of a company’s sustainability statement to understand the company’s strategy and approach, its processes and practices, and its performance in this area.
The ESRS divides corporate governance factors into one sub-area, ESRS G1 – corporate behaviour, and then develops this into several sub-areas, which we present below.
The disclosure requirements are as follows:
- ESRS G1 – 1 – Corporate culture and business conduct policies: the enterprise shall disclose its policies on corporate behaviour issues and how it promotes its corporate culture.
The objective of this requirement is to provide information on how administrative, management, and supervisory bodies are involved in shaping, promoting, and evaluating corporate culture. This includes information on mechanisms for identifying, reporting, and investigating concerns about wrongful conduct, the company’s safeguards for whistleblowing, including whistleblower protection, and whether the company has a business conduct training strategy in place.
- ESRS G1 – 2 – Management of relationships with suppliers: an enterprise’s approach to its supplier relationships that considers the risks to the enterprise associated with its supply chain and the implications for sustainability issues.
To meet these standards, a company must provide: how it conducts its procurement process, including fair dealing with suppliers, and whether and how it takes social and environmental considerations into account when selecting its suppliers.
- ESRS G1 – 3 – Prevention and detection of corruption or bribery: description of procedures for preventing, detecting, and dealing with cases involving corruption and bribery.
Information relating to the prevention and detection of corruption and bribery must include an overview of the procedures in place to prevent, detect, and deal with allegations or cases of corruption and bribery, whether investigators are separated from the chain of command involved in the matter, and the process for reporting results to administrative, management and supervisory bodies.
- ESRS G1 – 4 – Confirmed incidents of corruption or bribery: the enterprise shall disclose information on the number of confirmed cases of bribery or corruption during the reporting period.
The disclosure will include information on the total number and nature of confirmed cases of corruption or bribery, details of lawsuits brought against the company and its employees during the reporting period and the results of these proceedings, and more.
- ESRS G1 – 5 – Political influence and lobbying activities: providing information on activities and commitments related to the exercise of political influence, including lobbying activities related to its significant impacts, risks, and opportunities.
The report will have to include: the designation of the representative responsible in the administrative, management, and supervisory bodies for overseeing these activities; the total value of financial and in-kind political contributions made directly and indirectly by the undertaking; and the main topics covered by its lobbying activities and the undertaking’s main positions on these topics.
- ESRS G1 – 6 – Payment practices: the enterprise shall provide information regarding its payment practices, regarding late payments to SMEs.
These will include, for example, a description of the firm’s standard payment terms, the number of legal proceedings during the reporting period for late payment, and other additional information necessary to provide sufficient context.
More detailed information can be found on the European Financial Reporting Advisory Group (EFRAG) website here.
Conclusion
Governance often occupies a marginal position within ESG-related topics. Nevertheless, their interpretation and application raise many practical issues that many companies will have to face soon.
As mentioned above, the ESRS (European Sustainability Reporting Standards) are both comprehensive and detailed. Effective corporate governance under ESG not only delivers financial value to the company but also helps build stakeholder trust and reduce the risks associated with poor management and governance and is, therefore, an integral third component that needs to be emphasised as much as the previous two.
Our three articles in this series are based on the wording of the draft standards that were submitted to the European Commission in November 2022. It is important to stress that the final form and content of these standards may still change as part of the approval process. We will follow their development in detail for you.
If you have any questions about non-financial reporting or the ESRS-G context, please do not hesitate to contact us, our PEYTON legal team is at your disposal.
Rachel Kouklíková, Legal Assistant – kouklikova@plegal.cz
Tereza Hrudková, Legal Assistant – hrudkova@plegal.cz
Mgr. Jakub Málek, managing partner – malek@plegal.cz
6. 3. 2024