What are the ESRS reporting boundaries for sustainability reporting & why are they so difficult to understand?  | Q&A with Donal Daly


Q&A by Gabriella Lovas with Donal Daly, the founder and CEO of Future Planet

| What are the ESRS reporting boundaries for sustainability reporting why are they so difficult to understand? Few people understand that they must think about boundaries before anything else.Boundary refers to the entities and assets that are included or excluded from the reporting and which legal entities, subsidiaries, operations, activities, and value chain partners are consolidated and reported by the organisation, such as subsidiaries, suppliers, or customers.The purpose of boundaries is to help people understand what are all the entities within their business that they should consider when they’re doing their materiality assessment. This sits alongside the scope. Scope refers to the types and sources of sustainability matters that are included or excluded from the reporting, in other words, which ESG topics and indicators are relevant and material for the organisation and its stakeholders, such as climate change, human rights, or anti-corruption.The boundaries would be the who and the where and the scope would be the what. Thinking about those together is important so that we can figure out how to prioritize the assessments of topics that might be material, to make sure everything is covered.Think about the direct and the value chain operations, think about double materiality inside out and outside in. Align sustainability reporting with financial reporting – this alignment is becoming increasingly important. Then you have the right kind of framework to engage stakeholders so that you can identify, assess, and manage the sustainability impacts, risks and opportunities. All of this is just pulling together the whole picture so that you know what data you need and make the right decisions, or have a framework for decision-making. Thus, everything is consistent, comparable and transparent. As with many things in CSRD, there are rules. There is a prescribed way of setting boundaries. There are two types of boundaries: organisational boundaries and operational boundaries. Organisational boundary determines which entities or operations are consolidated and reported by the organisation. There are three options you can apply here; equity ownership,  financial control, and operational control. Out of these three, you have to pick one approach to set your organizational boundary. Your approach needs to be aligned with how you think about your financial reporting. That creates all sorts of challenges for anyone I’ve spoken with. If I speak to a CFO in a company and I ask, so how do you think about the remit of what you do financial reporting on? Most companies, even large public ones, say they don’t know. My experience is in most cases it’s operational control. Whenever a company’s business practices are focused on investments or shareholdings, then it changes a bit.It gets confusing when you get to the operational boundary. The operational boundary applies within the organisational boundary to include or exclude sources and/or activities that generate impacts or risks related to sustainability. There might be things within my boundary that are negligible, that are accounted for somewhere else, or that are things that even though I thought I had control, I don’t. These things might be excluded from an operational boundary. People tend to use organizational boundaries to set the big picture and operational boundaries to identify exclusions. As an example, they say they don’t need to report something in the case of a  joint venture with another company because the other company actually reports on the resource usage or the emissions or whatever that is. They may have some employee commuting in their business, but it’s negligible in comparison to what they do. Or they have no control over something because it’s controlled completely by legislation and they can’t impact it one way or the other. After doing that, you should be able to say at the end of the day, here are all the legal entities and affiliates and joint ventures and subsidiaries you need to consider.At that point, you are then ready to think about your scope and create a long list of topics that you should care about. Most organizations engage a consultant. However, the consultant will look at other companies in the market that look like you and see what they do. And then two or three weeks later, they go back to you with, let’s say, 30 topics that your competitors are looking at. There’s not a lot of value in that, in my opinion, because if it is what everyone else does, then there must be a record of it somewhere and you should be able to pull that together, without paying someone else to do that for you. Data and AI can help. Now you have the topics you can discuss with your stakeholders. It helps you frame up who you speak to and to understand what’s important.

| How helpful is the ESRS for boundaries? I think they are really hard for people to understand. It is actually not hard once you figure it out. But I found figuring it out really hard. I read the rules back and forth and I interpreted them, and I spent days on trying to figure out a process that we now have. All of a sudden we ended up being the experts in the room on how to do boundaries. Let me give you an example. Let’s say I have no financial interest in the business, but I am a non-executive director on a company’s board. In its governance, the board requires unanimous decisions on certain things. By definition, I have control since I can veto. Typically I can veto things like changes to the capital structure, shareholder rights or senior executive compensations. So if I am on a board, I don’t have to have ownership to have control. What I have found to be useful is taking examples like that in each case. If someone needs to double the commissions of the CEO of the company, do you have a say? If someone needs to decide that the business wants to deviate from its normal course of business, so they make rubber tires and all of a sudden they want to start building buildings, is there a governance process in place that you can control?  Control happens in different ways. If an organisation can say, I don’t own anything and I’m not liable if anything goes wrong, then typically they don’t have control. So it’s not within the boundary. After looking at a lot of examples, I developed my own approach to boundaries since the rules don’t specify what you should do.Furthermore, the labels are confusing. One of the three ways to do your organizational boundary is operational control, and then the other boundary type is called operational boundary. That’s craziness, right? Using the same word for different things twice. I would really like them not to call operational boundary “operational boundary” when they have operational control under organizational boundary. Because even when you say that sentence to someone, their head explodes.

| What would you call it?

Sources of activity.

| How should companies start thinking about boundaries then?They should start thinking about it when they are creating their internal financial reports, the management reports, and see what they include under entities. If you include an entity in your financial report, then you’re getting benefit. If you’re getting benefits, you have some responsibility. If you have responsibility, then it goes beyond just financial into the world of environmental and social responsibility. Ask yourself if you control or direct a business activity or source either through equity ownership, where you have voting rights, through operational control, where you set a business plan with the management team or through financial control. If one of those three applies, then you probably need to include that in your boundary.



| People are typically looking for ways to exclude things. I have done boundaries recently with a big client. They have a small division, let’s say in Budapest. But there are only two partners there and they don’t actually want to report that. Because if they do, they have to handle all the Hungarian issues, which they do not want to. They want exclusions since that division is negligible in the overall scheme of things and the governance and administration efforts would be too much. As there are no guidelines as to what negligible means, there is kind of a reasonableness check. They can do that as long as they record their thinking. In this case, we help them record the discussions that we have as the thought process needs to be recorded for assurance later. CSRD rules say you need assurance and evidence for every decision you have made. If you decide not to include the Hungarian subsidiary, you need to show the decision-making process. If I was king for a day, I’d say if it’s in your financials, include it. As a simple rule, don’t include it if it’s not.  It seems much more efficient to me. That’s what I would do, but that’s not what the rules say.


More Q&As by Gabriella Lovas?

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Understanding the ESRS Thresholds | Q&A with Mike Jennings


| brief bio

Donal Daly is the founder and CEO of Future Planet, a sustainability software company that helps businesses manage ESG and climate change initiatives, carbon accounting and compliance obligations. Donal is a serial entrepreneur, having previously founded five successful global software companies. He is the author of four Amazon bestsellers on business transformation, technology and Artificial Intelligence.

Gabriella Lovas

Gabriella Lovas is a GRI Certified Sustainability Professional with a CFA Certificate in ESG Investing and a Masters in Economics. She specialises in ESG and corporate sustainability reporting.

As a financial journalist and business writer, she has worked with international news agencies, such as Bloomberg, Big 4 consulting firms and start-ups. The purpose of her content is to educate and inform readers about sustainability in a clear, compelling way. She researches, writes, and edits articles, blog posts, and educational materials, using SEO tools and techniques to optimize them for online visibility.

Her passion is to support the transition to a more sustainable and inclusive economy.


All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.