New ESRS Standards: What Your Company Needs to Know And Do

What is the EU CSRD and what are the ESRS?

Ruben: The CSRD - the Corporate Sustainability Reporting Directive - is the EU law that requires companies to report on their material impacts on people and planet, and on sustainability-related risks to the business. The CSRD determines the basics, for example which companies need to comply with the law. The ESRS - the European Sustainability Reporting Standards - are the detailed rulebook that companies need to follow when they prepare their sustainability report. In September, the European Union adopted the revised ESRS. One of the most significant changes is a clearer, more ambitious requirement for reporting on Living Wages for companies' own employees.

The ESRS refer to 'Adequate Wages', 'Minimum Wages' and 'Living Wages'. How are these related?

Ruben: EU countries are required by law to ensure that Minimum Wages are 'adequate', meaning that wages allow for a decent standard of living. Outside the EU, however, the term 'Living Wage' is typically used. Both terms have an almost identical definition. For this reason, the methodology that underpins the ESRS disclosure requirement refers solely to the EU's adequate wage legislation, whilst for employees outside the EU a Living Wage benchmark needs to be consulted.

So a company cannot just report on Minimum Wages.

Ruben: If all of it's employees are based in the EU it can, because workers benefit from the fact that EU law requires Minimum Wages to provide for a decent standard of living. Outside the EU, the company can check whether the Minimum Wage is considered to be at the level of a Living Wage. But as this is not the case in most countries, they will need to actively compare their lowest wage level against a Living Wage benchmark.

How are organisations interpreting the CSRD Adequate Wage definition in practice?

Ruben: Companies will need to compare the lowest wage paid to their employees in a given country with a benchmark. For EU countries the Minimum Wage is accepted as a benchmark because of the EU Adequate Wage Directive. For other countries the lowest wage needs to be compared against a Living Wage benchmark. This data exist and is relatively easy to compare. Any provider of Living Wage data may be used, as long as they comply with the ILO principles on estimating a Living Wage.

What metrics and data points should companies use (inclusive of and beyond the Living Wage gap) to prioritise Adequate Wage assessments for a subset of countries in which they operate?

Ruben: For the purpose of external disclosure, it is only required to disclose the percentage of employees below the Living Wage benchmark. However, companies will want to also understand how big that gap is (the Living Wage deficit). Tools like the Shift Living Wage Accounting Tool will help companies collect these insights.

Naomi: We need to think about the three key metrics - Statutory Minimum Wages, Living Wages and collective agreements. Our clients often look for access to a database for this information to ensure they collect robust, accurate benchmarks that can be relied upon (using WageIndicator to access all of this data). In addition, it's important to overlay technical information from our local colleagues which differs based on local statutory regulations - e.g. for Minimum Wage, we collect and share the local calculation methodologies, differences on what pay/deduction or hours elements must be included and key nuance / risk areas between countries as local regulations can be complex and differ between locations. This is essential when considering and reviewing local compliance to statutory Minimum Wages. Access to a database with both Minimum and Living Wages also helps with nuances, e.g. where Minimum Wage may exceed Living Wage estimates.

What do companies need to report on Living Wages? Is that the same for own employees and workers in the value chain?

Ruben: The reporting requirements for own employees are stricter. In both cases, companies need to disclose narrative information about their policies, the actions they take to address poverty wages, the targets they have set for success and whether and how workers or trade unions were consulted. For a company's own employees there is also a requirement to disclose quantative information if not all employees are paid a Living Wage. In that case, the company needs to report in which countries this is the case, and the percentage of employees concerned. For workers in the value chain companies are allowed, but not required to provide such quantitative information.

Is reporting required for all countries? How do we define the scope?

Ruben: Yes, reporting is required for all countries in which the company has employees. How many employees the company has in a certain country does not matter. The narrative information on policies, actions, targets and worker engagement that companies also need to disclose is more flexible. If the approach to address Living Wage gaps is similar across different countries the company has the ability to explain this in the report at that more aggregated level.

When you are a very small company, is reporting relevant? Why would you recommend it?

Ruben: Companies above 1000 employees and a certain turnover threshold need to comply with the CSRD. This concerns both EU-based companies, and companies based outside the EU that have a sufficiently large economic footprint in the single market. For all other companies, sustainability reporting is voluntary. The Global Reporting Initiative (GRI) that sets a framework for voluntary reporting will also soon launch a standard that calls for more transparency on living wages. Also for smaller companies, their stakeholders such as investors and banks are increasingly interested in understanding how social impacts are addressed. And it is smart business, often sustainability-related risks to the company (such as operational or reputational risks) originate in the failure of companies to tackle adverse social and environmental impacts.

Let's say companies start reporting on Adequate Wages mentioned in the ESRS and they report on their percentages towards Minimum Wages and Living Wages. What happens if there is non-compliance? Are there any remedies for this?

Ruben: The CSRD/ESRS is a reporting framework. It is not an obligation to pay Living Wages. But if the company reports that it has a gap, it may face scrutiny from investors or NGOs. So there is a clear incentive to start addressing it.

You can report about Minimum Wage or Living Wages, and have plans in place on how to close gaps, but do you have a preference on how companies should report?

Fiona: The preference is up to each company itself in their own style of course, but we would highly encourage to be specific in the metrics you've used for your reporting as such that others can check what you have done. This means for example writing down the date/year from which you've used Living Wage estimates, which Minimum Wage you've used, which data provider you have used and to what wages you've compared this too within your company. In addition, anything you can share on how you did the calculation, for example in relation to in-kind benefits is also highly recommended. Basically we would like to compare apples to apples and not apples to bananas.

Is the change in the text of the CSRD reporting disappointing for you?

Ruben: Yes, because many companies are now no longer required to reporting sustainability information. There are still important incentives to do so, but the signal that the EU sends is the wrong one. Also some useful data requirements have been deleted from the ESRS. Luckily, however, the Living Wage reporting requirements have been improved.

Fiona: The Omnibus process itself was quite disapointing because it significantly delayed the roll-out of existing and agreed upon Directives such as CSRD and CSDDD, and also the roll-out power of many companies already investing time and money into preparations for reporting. Nevertheless, within that context of unclarity, the best outcome now is that we now have clarity on a text and a scope of CSRD which means it's time for action.

Is it clear for companies what they need to report about? CSRD, CSDDD, ESRS. You might drown in abbrevations. How do you explain the meaning of the CSRD, ESRS and CSDDD to your clients, and how do you advise them on how to prepare?

Naomi: There's still a lot of complexity for clients in this area, with the evolving frameworks and competing priorities to manage. (E.g. many Reward teams are also working through complex pay reporting requirements with EU Pay Transparency at the same time).

As mentioned by Ruben and Fiona, the latest text does bring further clarity which means many clients are working through what this means for their reporting. Clients still find many aspects complex, particularly in how to report on adequate wages in practice and to consolidate the data required to report on such a global scale. There's still a need to demystify what this means in practice and how there can be simplicity and efficiency in their reporting wherever possible, while still providing the level of detail the requirements demand. Some examples of the areas where we support our clients as they prepare include:

• Mapping global territories to understand which benchmark will apply in each location for CSRD/ESRS
• Understanding the external datapoints and technicalities required - the volume and complexity of data can be significant.
• Accessing a database for Living Wage and statutory Minimum Wages (e.g. the latter can differ by region/industry with different calculation aspects and technicalities to consider)
• Accessing and collating internal data - this can take time, e.g. where payroll and HR systems differ across countries, so it's worth preparing early. Given the different regulations, there can be value in collating a global pay dataset internally which is comprehensive but adaptable enough to provide the data to meet different pay reporting requirements.

"We have operations in 80 countries and 113,000 employees." What advice would you give to companies of a similar size on how to respond to disclosure requirements around adequate wages, in a way that is as straightforward as possible?

Naomi: The first step is to understand and group the countries (i.e. to determine whether MW / LW / CBAs need to be considered for each). Then, understanding what data is available internally (e.g. payroll / HR / working hours, whether data is held centrally/decentralised, and the scale of data review/transformation required to enable the analysis). This then informs the action plan.
It's helpful to bring the required stakeholders together to form a working group early (i.e. may require input from global and local Reward, Sustainability, Payroll, HR, Legal teams) to agree to an action plan together and gather the data required.
Examples with clients of a similar size may include phasing the review to reduce the burden (e.g. they start by testing using base pay and required deductions only, or assessing the lowest pay scales in each territory to initially assess whether gaps may exist, before expanding the review to include eligible pay elements that can be included).

What happens when an Indian company wants to work on Living Wages?

Ruben: The CSRD/ESRS are also applicable to companies based outside the EU when they have a sufficiently large economic footprint in the European Union. This means that if this Indian company is in scope, it will also need to report on living wages.