For HR practitioners interested in driving strategic change within their organisations and cementing HR’s role as a strategic business partner, an understanding of the potential impact of the Corporate Sustainability Reporting Directive (“CSRD”), the EU’s regime for reporting sustainability information, is essential.
In this article in our ESG series, we summarise the “need to know” aspects of the CSRD from a people perspective and what you can be doing to prepare within your business.
What is the CSRD?
The CSRD is an EU Directive that requires all businesses in scope (typically large companies with EU operations) to collect, report on and audit certain ESG data. This means that all in-scope companies are now required to include a dedicated section in their annual report on sustainability information. To ensure that the reporting is meaningful, it needs to be carried out in line with agreed standards (the European Sustainability Reporting Standards, or “the Reporting Standards”).
For more detail about the background on CSRD, including what businesses are impacted, please feel free to visit our dedicated CSRD page.
Why does it matter to HR?
CSRD provides that specific disclosures will be required in respect of employee related information from within a company’s own workforce and within their supply chain. This information needs to be collected, stored, audited and reported upon. Our teams have identified approximately 270 disclosure / data points that are relevant to HR teams.
HR can play a crucial role in:
- ensuring that the relevant structures for gathering the necessary data are in place;
- supporting the business in understanding how the double materiality assessment applies in the HR context;
- assessing and managing the impact of making certain disclosures on wider strategy; and
- planning workforce metrics to the company’s broader ESG goals.
As many of our clients are preparing to report for FY 2024, this means that now is the time to get involved in the process.
Who is impacted?
Typically, the CSRD impacts most large European business. Many companies are advanced in their CSRD reporting plans, but may have not necessarily engaged with the HR function of the business. If you work in a listed EU entity, an entity which has securities listed on EU-regulated markets or an entity with over 250 employees and significant net revenue / net assets, your business could be in scope to report. For more information on the relevant thresholds, please visit our recent ESG article here.
What needs to be reported? – Materiality Threshold
The Reporting Standards are in place to make sure that ESG reporting is standardised so that the information provided is meaningful and comparable. The ESRS set out specific disclosure requirements, and HR’s involvement is particularly important for the some of these requirements – we have identified approximately 270 data points / disclosures that are of relevance to HR practitioners.
These include disclosures in relation to adequate wages, coverage by social protection programmes, work life balance metrics, and remuneration metrics. HR involvement in reviewing these disclosures is critical, as managing how this type of information is published is critical for businesses – those HR practitioners who are experienced in the gender pay gap reporting regime will be familiar with the importance of HR input in such publications.
A company doesn’t have to report everything – the requirement is to focus on things that are most relevant for assessing a sustainability strategy. The application of a “double materiality assessment” to some data points means that companies are required to publish only the matters that are deemed “material” within the meaning of this assessment.
The assessment considers matters that are financially relevant, but also issues that impact wider stakeholders (internally and externally). As an important stakeholder, HR leaders have a unique understanding of the people impacts of the business that can feed into this assessment.
Employee engagement
Under CSRD and Irish Transposing Regulations, employee consultation is required. In-scope Irish companies must ‘provide information to, and consult with’ employees’ representatives at the appropriate level’ in relation to:
- the sustainability information to be reported; and
- the means of obtaining and verifying such information.
While the Irish implementing regulations refer to consultation occurring with representatives appointed under certain legislative instruments, the reality is that due to the voluntarist nature of the Irish industrial relations regime, many Irish workforces do not have employee representatives in place.
HR practitioners can perform a valuable role in helping design engagement mechanisms that achieve the aims of the provision of the CSRD while also ensuring minimum disruption to employee engagement policies that are also working well. This can sometimes be a complex balance and will require careful thought, tailored to the unique circumstances of each organisation.
“Greenwashing”
Those focussed on talent acquisition and retention will be familiar with the importance of authenticity in presenting the credentials of a business to new hires and current colleagues. If disclosures contained in an annual report undermine the information that a business has been conveying in its external and internal communications (e.g. progress on diversity initiatives, green initiatives etc), this can significantly erode valuable trust and credibility built up over years. HR involvement at an early stage in the CSRD reporting process can ensure that this risk is understood and mitigated.
Environmental Whistleblowing
If a worker is not satisfied that their employer has met certain environmental obligations, they may report the matter and assert that they are protected when doing so under the Protected Disclosures Act. HR practitioners should unsure that they have key policies in place to minimise this risk. When drafted strategically, whistleblowing policies can be a means of encouraging workers to come forward with potential environmental issues at an early stage, before they become material.
Supply chain
One of the unique features of CSRD is the fact that it requires businesses to take some level of responsibility for their suppliers, rather than just their own impact.
Various disclosure requirements under CSRD are grounded in human rights concerns: it is no longer legally permissible for companies to turn a blind eye to suppliers that may operate in an unethical manner. HR practitioners are uniquely within the business to identify potential issues concerning the people aspects of a supplier’s business: becoming familiar with the supply chains within your business as they relate to people can ensure HR’s role in the CSRD reporting process adds value.
AI considerations
There is an obvious benefit in terms of speed and efficiency in using AI as a tool during the data gathering stage to collect and analyse large amounts of external and internal information. However HR practitioners should ensure appropriate human oversight when using automated systems, as it is imperative that the data submitted in the report is accurate and auditable.
Risks of AI in reporting:
- Accuracy of results: The reality is that AI can produce inaccurate results due to technical errors or unreliable algorithms. This could have serious implications for the accuracy of reportable data. We recommend that HR practitioners identify, audit and test the current and proposed uses of AI systems within the business.
- Data Privacy and Security: Employee and company data is extremely sensitive. As the materiality assessment will require collecting a large volume of this data, it is crucial that the data is (i) stored securely to avoid potential cyber attacks; and (ii) shared and processed in line with GDPR. HR practitioners should collaborate with their IT colleagues to ensure that strong technical and organisational security measures are implemented to safeguard against data breaches.
- Emerging legal and regulatory requirements: In-scope companies will have to comply with the newly introduced AI Act. Non-compliance could result in penalties or legal challenges. If AI is used to gather workforce data in the CSRD reporting process, HR practitioners must inform employees and their representatives that they are subject to an AI system under the Act. We strongly encourage HR practitioners to develop policies that govern the ethical use of AI and to ensure that proper training is given to any employees who will be using AI systems to assist with CSRD reporting.
In conclusion, AI is not flawless and human oversight is still required but it can be a valuable tool to start the CSRD journey. For further guidance, please see our recent articles in our AI series “Navigating the Intersection Between AI and Employment Law” here and ‘The EU AI Act: The Download for Employers’ here.
What can you do now to prepare?
We are currently assisting our clients in preparing for CSRD in the following five phases: (i) planning and resourcing; (ii) scoping analysis; (iii) materiality assessment; (iv) gap analysis and establishing reporting systems; and (v) reporting.
HR practitioners can assist in this process by doing the following:
- providing narrative around workforce disclosures;
- collating of data in advance of reporting deadlines and identifying potential gaps in any HR data systems;
- developing a strategy for workforce engagement; and
- identifying potential material sustainability matters relating to workforce topics.
Next steps
HR practitioners should consider who (if anyone) is dealing with the above issues in your organisation, and confirm if you will have sight of the final report before it is reviewed by an auditor. If you are not involved, we strongly recommend that you get involved as soon as possible as HR practitioners can offer unique value throughout this process.
Matheson's Employment, Pensions and Benefits Group is available to guide you through the complexities of navigating the new trends and legal developments in this area.
For more information please contact our Employment, Pensions and Benefits team or your usual contact at Matheson.
This article was co-authored by Employment, Pensions and Benefits partner, Alice Duffy, senior associate, Rachel Barry, and trainee solicitor Cliona Coleman.