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Dear Readers,

Today’s article about the “ESG” will explore the final pillar, “G – Governance”. Previous articles about the CSRD Directive and individual standards are also available on our website.

The third pillar’s definition comes from the English term “business conduct” and encompasses a whole range of activities that are described in detail in Article 29b of the CSRD Directive (here). This Article reads that the obligated undertaking will “specify the information that undertakings are to disclose about the following governance factors:

1. The role of the undertaking’s administrative, management and supervisory bodies with regard to sustainability matters, and their composition, as well as their expertise and skills in relation to fulfilling that role or the access such bodies have to such expertise and skills;
2. The main features of the undertaking’s internal control and risk management systems, in relation to the sustainability reporting and decision-making process;
3. Business ethics and corporate culture, including anti-corruption and anti-bribery, the protection of whistleblowers and animal welfare;
4. Activities and commitments of the undertaking related to exerting its political influence, including its lobbying activities; and
5. The management and quality of relationships with customers, suppliers and communities affected by the activities of the undertaking, including payment practices, especially with regard to late payment to small and medium-sized undertakings”.

In order to simplify the reporting, the EFRAG decided to move the original ESRS G2 to ESRS 1 (General Principles), ESRS 2 (Cross-cutting Disclosure Requirements), and ESRS G1 (Business Conduct With Emphasis on Appendix A and B). A general overview of requirements of the ESRS G sector standards is as follows:

1. ESRS G1-1: Corporate Culture and Business Conduct Policies;
2. ESRS G1-2: Management of Relationships with Suppliers;
3. ESRS G1-3: Prevention and Detection of Corruption and Bribery;
4. ESRS G1-4: Confirmed Incidents of Corruption or Bribery;
5. ESRS G1-5: Political Influence and Lobbying Activities;
6. ESRS G1-6: Payment Practices.

In this part, it is important to primarily describe strategies and mechanisms aimed at maintaining undertakings’ good practices in business conduct. What also needs to be mentioned are areas of an undertaking’s weaknesses, areas where opportunities and risks were identified, and areas with a missing specific strategy. One of the globally recommended tools frequently employed by firms in relation to the “G” aspect is the United Nations’ Convention against Corruption (here) that has been incorporated by undertakings into their codes of conduct.

Typical KPIs related to governance include expenses and fines for filing an action, expenses for litigations related to anti-competitive conduct, antimonopoly practices, trainings for employees and managers in adequate disciplines, reserves for preventive measures to prevent distortion of competition, and contributions for political parties.

The EU Taxonomy for governance is not being, or likely to ever be, planned. Even though the ESG reporting results in corporations’ increased administrative burden, firms currently reporting under the GRI standards should be able to also report under the ESRS, and vice versa, with reference to the particular GRI section. This is what the EFRAG and the GRI mention in their joint statement where these two institutions highlight their efforts to provide for the two standards’ interoperability, and promise to publish taxonomy that will harmonise those two standards. (here).

This article finalises the series of texts aimed at introducing the ESG phenomenon in general terms. We will keep you informed about new developments and obligations from the ESG world. Please feel free to contact us with any questions.

Jiří Vidiečan
vidiecan@edmutilitas.cz