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How to define ESG-Targets under the CSRD

The European Sustainability Reporting Standards (ESRS) provide a comprehensive framework for companies within the scope of the Corporate Sustainability Reporting Directive (CSRD) to report on a wide array of sustainability-related topics, including environmental, social, and governance (ESG) matters. These standards aim to make sustainability reporting as robust and reliable as financial reporting by offering detailed and standardized disclosure requirements. A company has to be transparent about policies, action plans, and ESG-targets across all material topics. A company has to show the undertaking’s performance, including the targets it has set and progress towards meeting them.

Minimum Disclosure Requirement – Targets MDR-T – Tracking effectiveness of policies and actions through targets

The undertaking shall apply the requirements for the content of disclosures in this provision when it discloses information about the targets it has set with regard to each material sustainability matter.

The objective of this Minimum Disclosure Requirement is to provide for each material sustainability matter an understanding of:

  1. whether and how the undertaking tracks the effectiveness of its actions to address material impacts, risks and opportunities, including the metrics it uses to do so;
  2. measurable time-bound outcome-oriented targets set by the undertaking to meet the policy’s objectives, defined in terms of expected results for people, the environment or the undertaking regarding material impacts, risks and opportunities;
  3. the overall progress towards the adopted targets over time;
  4. in the case that the undertaking has not set measurable time-bound outcome-oriented targets, whether and how it nevertheless tracks the effectiveness of its actions to address material impacts, risks and opportunities and measures the progress in achieving its policy objectives; and
  5. whether and how stakeholders have been involved in target setting for each material sustainability matter.

The undertaking shall disclose the measurable, outcome-oriented and time-bound targets on material sustainability matters it has set to assess progress. For each target, the disclosure shall include the following information:

  1. a description of the relationship of the target to the policy objectives;
    1. the defined target level to be achieved, including, where applicable, whether the target is absolute or relative and in which unit it is measured;
    1. the scope of the target, including the undertaking’s activities and/or its upstream and/or downstream value chain where applicable and geographical boundaries;
    1. the baseline value and base year from which progress is measured;
    1. the period to which the target applies and if applicable, any milestones or interim targets;
    1. the methodologies and significant assumptions used to define targets, including where applicable, the selected scenario, data sources, alignment with national, EU or international policy goals and how the targets consider the wider context of sustainable development and/or local situation in which impacts take place;
    1. whether the undertaking’s targets related to environmental matters are based on conclusive scientific evidence;
    1. whether and how stakeholders have been involved in target setting for each material sustainability matter;
    1. any changes in targets and corresponding metrics or underlying measurement methodologies, significant assumptions, limitations, sources and processes to collect data adopted within the defined time horizon. This includes an explanation of the rationale for those changes and their effect on comparability (see Disclosure Requirement BP-2 Disclosures in relation to specific circumstances of this Standard); and
    1. the performance against its disclosed targets, including information on how the target is monitored and reviewed and the metrics used, whether the progress is in line with what had been initially planned, and an analysis of trends or significant changes in the performance of the undertaking towards achieving the target.

If the undertaking has not set any measurable outcome-oriented ESG-targets:

  1. it may disclose whether such targets will be set and the timeframe for setting them, or the reasons why the undertaking does not plan to set such targets;
    1. it shall disclose whether it nevertheless tracks the effectiveness of its policies and actions in relation to the material sustainability-related impact, risk and opportunity, and if so:
      1. any processes through which it does so;
      1. the defined level of ambition to be achieved and any qualitative or quantitative indicators it uses to evaluate progress, including the base period from which progress is measured.

Example of Targetsetting according to CSRD

Setting ESG-targets within the framework of the European Sustainability Reporting Standards (ESRS) is a structured process that aligns an organization’s sustainability initiatives with regulatory requirements and strategic goals. Here’s a step-by-step breakdown of the target setting process you’ve outlined, incorporating best practices and compliance considerations:

  1. Materiality Analysis to Define Relevant Topics:

Conduct a materiality analysis to identify sustainability topics that are significant to your business and stakeholders. This involves considering both the financial impact of these topics on your organization and their impact on the environment and society. The goal is to prioritize issues that are most material for detailed reporting and target setting.

  • Consultation of ESRS for Target Setting Requirements:

Review the specific European Sustainability Reporting Standard(s) relevant to your identified material topics. The ESRS will outline whether targets need to be set and reported for these topics. Each standard contains detailed requirements for disclosure, including any expectations around targets.

  • Ensuring ESG-Targets Meet Minimum Disclosure Requirements:

The targets you set must align with the ESRS’s minimum disclosure requirements, which could include specific metrics, timeframes, and reporting practices. This ensures that your sustainability reporting is compliant with the standards and provides stakeholders with transparent, comparable, and reliable information.

  • Defining Targets with Operational Units:

Collaborate with operational units within your organization to define specific, measurable, achievable, relevant, and time-bound (SMART) targets. This step involves translating high-level sustainability goals into actionable targets that can be implemented and monitored at the departmental or unit level.

  • Management Team Approval:

Present the proposed targets to your organization’s management team for approval. This step ensures that there is a strategic alignment and that the necessary resources and commitment are in place to achieve the targets. Management’s endorsement is crucial for integrating sustainability goals into the overall business strategy.

  • Implementing PLAN/ACTUAL Reporting and Deviation Analysis:

Once targets are set and approved, initiate a reporting mechanism to track progress against these targets (PLAN vs. ACTUAL). This should involve regular monitoring and reporting on achievements and any deviations from planned targets. Analyzing deviations helps in understanding the reasons behind underperformance or overachievement.

  • Setting Corrective Actions if Necessary:

If deviations are identified, it’s important to set corrective actions to address any gaps. This could involve revisiting strategies, adjusting targets, or implementing new initiatives to ensure that sustainability goals are met. Continuous improvement is a key aspect of effective sustainability management and reporting.

Conclusion

Throughout this process, it’s essential to maintain open communication with stakeholders, including employees, investors, and regulators. Transparency about your ESG-target-setting methodology, progress, and challenges not only supports compliance with the ESRS but also enhances your organization’s sustainability credentials and stakeholder trust.

Remember, the ESRS and the broader Corporate Sustainability Reporting Directive (CSRD) framework are designed to standardize and elevate sustainability reporting across the EU. Aligning your ESG-target-setting process with these requirements is not just about compliance; it’s also an opportunity to integrate sustainability deeply into your business operations and value chain. Contact us to set your ESG-Targets.

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Comments

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Georg Tichy

Georg Tichy

Georg Tichy is a management consultant in Europe, focusing on top-management consultancy, projectmanagement, corporate reporting and fundingsupport. Dr. Georg Tichy is also trainer, lecturer at university and advisor on current economic issues. Contact me or Book a MeetingView Author posts