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Mandatory ESG Reporting on Engineering Businesses

The impending mandatory ESG reporting requirements are indeed poised to significantly reshape the landscape for engineering businesses. Here’s a breakdown of the key points:

  1. ESG Reporting Standards: With the introduction of internationally comparable accounting standards starting in 2024, companies worldwide will be evaluated based on their ESG performance. This includes reporting on environmental impact, social responsibility, and governance practices. These standards will provide a framework for assessing sustainability efforts.
  2. EU Regulations: Mandatory ESG reporting has been implemented for large companies in the EU from 2024, with plans to extend these rules to non-EU enterprises operating within the EU. This means that even companies outside the EU will need to comply with EU ESG standards if they conduct business within the region.
  3. Supply Chain Obligations: Companies will face increased legal obligations to manage supply chain ESG performance, particularly concerning Scope 3 greenhouse gas emissions. This requires companies to assess and address emissions throughout their entire value chain, from suppliers to end-users.
  4. Global Disclosure Standards: The International Sustainability Standards Board (ISSB) has introduced international disclosure standards effective from January 2024. These standards include requirements for reporting on sustainability-related financial information and climate-related disclosures, such as Scope 3 greenhouse gas emissions.
  5. Corporate Sustainability Reporting Directive (CSRD): The CSRD expands mandatory ESG reporting to a broader group of companies within the EU and non-EU companies doing business in the EU. This directive introduces new European Sustainability Reporting Standards (ESRS) that include reporting on Scope 3 value chain emissions.
  6. Corporate Sustainability Due Diligence Directive (CSDDD): The CSDDD mandates large companies to identify and prevent adverse human rights and environmental impacts across their operations and supply chains. Failure to comply can result in penalties and termination of supplier relationships.
  7. Business Requirement: ESG policies and strategies will become essential for business operations. Companies failing to prioritize ESG may lose customers and miss out on new opportunities, as larger companies will increasingly demand evidence of climate action and ESG performance from their value chain partners.
  8. Access to Finance: ESG performance will impact access to finance, as lenders, investors, and other stakeholders increasingly prioritize compliance with ESG standards. Companies will need to demonstrate their commitment to sustainability to secure funding and support.
  9. Management Systems: Implementing robust governance procedures and management systems will be crucial for measuring and managing ESG issues effectively. Many engineering companies are already familiar with management system approaches, such as ISO 14001 and ISO 45001, which can facilitate compliance with ESG requirements.
  10. Due Diligence in Transactions: There will be a growing demand for ESG assessments in M&A transactions, with ESG considerations becoming integral to due diligence processes and legal documentation.
  11. ESG Real Estate Strategy: Companies will need to consider sustainability throughout the lifecycle of their real estate assets, from design to disposal. This includes demand for environmentally friendly buildings and collaboration between landlords and tenants to address sustainability issues.
  12. Scrutiny on ESG Pledges: With agreed-upon ESG metrics and disclosure standards, ESG reports will face greater scrutiny, and companies will be judged on their ability to deliver on ESG commitments rather than just making pledges for corporate reputation.

Overall, engineering businesses must adapt to these evolving ESG requirements to remain competitive, maintain access to finance, and meet the expectations of stakeholders.

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