Navigating Mandatory Sustainability Reporting: BASF's Journey and Challenges with European Reporting Standards

If 2023 was the year of standard setting, then 2024 will be the year of implementation.

In an exclusive interview with BASF, one of Europe’s leading chemical companies, we delve into their preparations for the upcoming European Sustainability Reporting Standards (ESRS) – for which most CDP-disclosing companies are already well placed – and the associated opportunities and challenges.

Tanja Castor, BASF’s Head of Sustainability Reporting & Controlling Committee, sheds light on the complexities facing large, listed companies, the first required to start reporting under the ESRS already this year, while emphasizing the organization’s support for standardized sustainability reporting and highlighting the importance of providing stakeholders with meaningful and decision-relevant information.

1. How is BASF preparing for the European Sustainability Reporting Standards (ESRS) disclosures, applicable already from next year?

BASF started its preparation for ESRS implementation with a first gap analysis in December 2022 – based on the first published drafts of the ESRS. This gap analysis was the starting point for in-depth topic-specific workshops with the respective specialist units. For each topic-specific standard, we have identified so-called “topic leads”, who are responsible for further coordination to meet the topic-specific specifications. To be able to meet the General Disclosure requirements, a working group consisting of colleagues from Strategy, Finance and Sustainability is examining how the identified gaps can be closed.

Currently, monthly pulse check meetings are held with the topic leads to discuss emerging questions and ambiguities, and to determine the next steps.

At the same time, we are in early contact with our new auditors to align our interpretation and understanding of the emerging requirements with the understanding of our external auditors.

2. What outcomes or benefits do you expect to come from this reporting?

We strongly support the goal of standardized and comprehensive sustainability reporting.

This is the only way for stakeholders and shareholders to holistically assess a company’s performance, short- and long-term risks, and opportunities. The advantages for companies should therefore be that the primary target group – such as capital market participants or experts from civil society – receives meaningful and decision-relevant information on all material sustainability topics. Ideally, this information should be able to be used for comparison with peers.

However, comparability is certainly difficult to achieve in the first years of ESRS application due to different interpretations and will therefore have to develop gradually in the first few years.

3. What challenges are you facing?

Even for a company with over 20 years of experience in ESG reporting and 15 years of experience in integrated reporting, the upcoming ESRS requirements in combination with other transparency requirements such as the Corporate Sustainability Due Diligence Directive (CSDDD) are proving challenging to implement.

There are several reasons for this:

• The sheer volume of quantitative and qualitative requirements in the ESRS;
• The highly complex double materiality requirements that companies need to apply to identify the scope of their reporting requirements. This calls, for example, for far-reaching quantitative impact assessments along the entire value chain, for which there are currently no suitable, comparable methods. A halfway comparable valuation of financial and impact materiality can only be expected in a few years;
• Lack of clarity on how mandatory cross-references can be implemented within a concrete report – either between individual topic-specific standards or between the general disclosure requirements and topic-specific standards;
• Lack of clarity on how these extensive ESG requirements can be presented in an integrated report, in a digestible and comprehensible way, to provide decision-useful information to the target group – this is where CDP already comes in;
• Finally, there are still uncertainties among auditors as the definitions and concepts used in ESRS differ from previously acknowledged frameworks.

4. Has the ESRS helped as a tool for BASF to use as a guideline for environmental reporting and action, and if so, how? (Not just as a compliance exercise but more broadly for the organisation)

Due to our own environmental standards and targets, BASF has already established quite comprehensive environmental management and reporting structures and data-gathering processes.

The ESRS requirements often go beyond our current scope in terms of granularity – for example, when information is expected to be published at the site or county level. In future reporting, we will have to carefully weigh the competitive disadvantages resulting from too granular environmental reporting. For example, the publication of certain emissions/pollutants or quantities of substances used at a specific site can be used to draw conclusions about plant utilization or quantities produced.

Relatively new reporting requirements, such as on biodiversity, were used by the respective units to challenge our current management and reporting systems and to further develop our approach.

5. Can you tell us more about BASF’s experience with environmental reporting outside of the ESRS?

We strive to always anticipate external ESG reporting developments to meet the increasing expectations of stakeholders and shareholders. We have therefore been proactively involved in reporting networks and initiatives for decades to help shape future standards. CDP is an influential player in the ESG reporting landscape: for many years, CDP questionnaires have focused on ESG-related risks and respective governance mechanisms, to mitigate these risks and foster the resilience of companies. This is why investors have a particular interest in our CDP performance. Our long history in responding to CDP will definitely help us to better deal with the upcoming European Sustainability Reporting Standards as well as with the published ISSB standards.

Our own requirements and targets for the internal management of relevant environmental aspects go hand in hand with robust internal reporting and control systems. As we have defined CO2 emissions as the most important indicator for our corporate steering, we have established appropriate internal control and reporting mechanisms that are comparable to those of our financial reporting.

For emerging environmental topics in reporting, such as biodiversity, we are engaged in topic-specific disclosure networks such as the Taskforce on Nature-related Financial Disclosures (TNFD). We see this initiative dealing with such a complex topic as an opportunity to develop meaningful reporting requirements together with other stakeholders from civil society and business.

At best, these topic-specific reporting requirements help companies further develop their internal management systems on this important topic and to better understand the positive and negative impacts of their business activities. Here, meaningful reporting requirements are a catalyst for reviewing one's current status and developing it further if necessary.

6. What do you expect to see change in the market after the first year of ESRS reporting?

Due to the expanded scope of companies that have to report under ESRS, the number of reports on the market will initially increase dramatically. This will not necessarily result in comparability. My personal hope would be that companies manage to avoid seeing ESRS as a mere compliance exercise - even if this is often difficult to imagine in the current implementation phase.

At the moment, many are feeling overwhelmed and human resources are dedicating a significant amount of their time to reporting rather than focusing on the crucial task of developing and implementing sustainability measures and projects.

7. What is your advice for other organizations that are getting started with ESRS reporting?

Implementing the ESRS requires a lot of awareness raising across the whole organization. Therefore, it is not only about implementing further disclosure requirements but often about change management.

I’d recommend joining forces between the sustainability department and the financial department. Financial departments have long-standing experience in establishing robust data-gathering systems as well as in setting up internal control mechanisms – having both is an important pre-requisite for a successful ESRS implementation.