INSIGHT by Zaneta Sedilekova, Founding Director and CEO at Planet Law Lab, Jakob Mayr, Program Manager Sustainable Finance, WWF Austria; Philippe Youssef Garduño Diaz, SR TEG at EFRAG.
Hidden in the Appendix of European Sustainability Reporting Standards (ESRS) 1 General Requirements under Application Requirement (AR) 7 “Nature may be considered as a silent stakeholder” in corporate materiality assessments. How so? What does this mean? And what could this new concept be useful for?
The ESRS were published by the European Commission as Delegated Act in July 2023 to implement the requirements of the Corporate Sustainability Reporting Directive (CSRD). The CSRD was developed to ensure corporations disclose reliable, relevant and comparable environmental, social and governance data1.
Starting from 2024, corporations will be 1) obliged to report on both financial and impact materiality 2) unable to pick and choose only the KPIs that make them look good and 3) in need of assurance on a sustainability report that will be integral part of their annual report (i.e. have true legal value). This approach is highly likely to uncover many previously hidden corporate impacts and dependencies, as well as their potential financial repercussions for the disclosing entity.
But the innovation doesn’t end there. Somewhat hidden in ESRS 1 General Requirements under AR 7 “Nature may be considered as a silent stakeholder.” What does this mean? And who could this new concept be useful for?
| Status quo in reporting
Corporate reporting is generally based on financial materiality and it follows an established, almost secular, doctrine. In corporate reporting based on financial materiality the only information that is ‘material’ (worth disclosing) is one that might affect the users of financial reports (analyst, investors etc.). In this established reporting doctrine, the only things that matter (are material) are those that might have an impact on a corporation’s assets or profit and loss statement.
Only recently, and thanks to frameworks such as those developed by the Global Reporting Initiative (GRI), corporations have started to report on their impacts on nature under the umbrella of impact materiality. They mostly do so voluntarily, picking and choosing whatever works best from the GRI data points, and sometimes asking for assurance.
The results are often patchy and transparency on ESG performance incomplete at best, misleading at worst, also because of assurance not going into necessary depths. In the sense this conveys a false sense of ‘credibility’ since all the auditors can do is verify that the specific KPI has been properly compiled while they can’t really argue on omissions.
As a general practice in sustainability reporting to date, firms largely put their faith in conducting more or less thorough stakeholder engagement processes to determine what is material. The heart of this stakeholder engagement process is a survey with a long list of potentially material sustainability matters that is sent to a range of stakeholders. If properly managed, such engagement with affected stakeholders allows the identification of genuinely material matters. And yet someone is generally left out.
| Something fundamentally amiss
According to the German Environment Agency only 1% of 477 sustainability reports from 2018 and 2019 by German business provided some level of transparency on biodiversity.2 According to data released by the CDP (formerly Carbon Disclosure Project), nearly 70% of companies disclosing data through CDP did not assess the impact of their value chain on biodiversity in 2022. And the value chain is where biodiversity-related impacts for most firms really are.3
Taking a look at the planetary boundaries, which indicate the safe space for humanity to operate in, there seems to be something fundamentally amiss. The boundary of the integrity of the biosphere is much more dire than the boundary on climate change. We are far out in overshoot territory.4
We have become accustomed to the disappearance of nature. This is called the shifting baseline syndrome. Livestock now makes up 62% of the world’s mammal biomass; humans account for 34%; and wild mammals are just 4%.5
According to the World Economic Forum (WEF), more than half of global GDP is moderately or highly dependent on nature.6 This is not good news for the economy or the financial sector at large. Besides, half of global GDP is likely a significant underestimate as direct dependencies ignore the close interlinkages between the tightly woven web of the global economy and the economy as a wholly-owned subsidiary of nature. Without natural capital, economic capital simply ceases to exist.
We have become accustomed to the disappearance of nature. This is called the shifting baseline syndrome. Livestock now makes up 62% of the world’s mammal biomass; humans account for 34%; and wild mammals are just 4%.
The crux of the matter is that the materiality assessment as it has been practiced to date is fundamentally flawed and needs overhauling as trees and bees are not as vocal as other stakeholder groups in their responses to surveys. The draft Materiality Assessment Implementation Guidance published on 22 December 2023 to accompany ESRS7 goes some way towards rectifying this mistake. Albeit still half-heartedly, it largely does away with recommending stakeholder engagement that for the most part only yields subjective and useless information.
Instead the focus has shifted towards engaging affected stakeholders on items that are relevant to them. This can be Indigenous Peoples in the Amazonas being impacted by a mine. Or a rare bird species that is pushed near extinction due to clear-cutting of forests. The days of asking random stakeholders random questions are over – at least they should be. Nature can be given a voice through data. Even environmental NGOs working in the space will not be able to cater to the demand by 50,000 firms subject to the new disclosure requirements. Hence, using data to let nature speak on its behalf is the answer.
Nature can be given a voice through data. Even environmental NGOs working in the space will not be able to cater to the demand by 50,000 firms subject to the new disclosure requirements. Hence, using data to let nature speak on its behalf is the answer.
| From subjective to objective
Coining nature as a “silent stakeholder” and engaging with it via scientifically validated data could go a long way in closing the gap between what appears to be material according to, for example, the planetary boundaries, and what reporting entities identify as material.
Some firms already apply the concept, because it is really dead easy. Simply stop asking random stakeholders with little knowledge of biodiversity whether biodiversity and / or sustainability matters listed in ESRS E4, i. e. land-use change and invasive alien species, are material to your business. Instead, open up ENCORE and look at what the likely material impacts and dependencies are for your sector. For manufacture of “auto parts & equipment” ENCORE determines the materiality of water pollutants as high, due to the “use of toxic and persistent materials in the manufacture of electronics, hi-tech materials and weapons”.8 There are other tools emerging that integrate various data layers and apply them at site-specific level. This is the case, for example, with the WWF Riskfilter Suite (free), IBAT ($) or kuyua ($)9. While no tool is perfect – or can be, given the complexity of nature – it is certainly better than asking for subjective opinions from non-experts. And the results are more informed than responses from stakeholders whose knowledge of biodiversity and its relevance to your business may not be up-to-date.
| Big picture
Considering nature as a “silent” stakeholder is a small step in the direction of giving nature rights. Nature as a silent stakeholder only just made it into the ESRS and may be used as a concept to give nature a voice. Nothing mandatory is in sight. Nevertheless, it cements the concept of nature existing in its own right and being able to communicate its preferences via data in EU law.
When we were kids, cartoons allowed us to hear the voices of animals and plants. Biodiversity assessments and transition plans based on conservation data are an attempt to listen to those silent voices, again, as adults this time. Because we cannot go on ignoring them.
Have you already read?
New GRI Biodiversity Standard available for use by companies around the world
2 https://www.umweltbundesamt.de/umweltberichterstattung-forschungsergebnisse
4 https://www.stockholmresilience.org/research/planetary-boundaries.html
5 https://ourworldindata.org/wild-mammals-birds-biomass
8 https://encorenature.org/en/explore?tab=impacts
9 One of the authors supports kuyua as special advisor.
| 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.
