Positive impact or license to operate?

As companies have been preparing sustainability reports in accordance with the CSRD, a key question arises: When is an impact truly positive? The line between a genuinely positive impact and an unsubstantiated green claim (greenwashing) can be difficult to define. This uncertainty makes it challenging for companies to accurately report and document their positive contributions to the sustainable transition.

Following the publication of the first annual reports including CSRD-compliant sustainability disclosures, we at NORD advise conducted an in-depth analysis of all CSRD reports from companies listed in the OMX Large Cap index. Financial institutions and companies with non-calendar fiscal year were excluded. The analysis compares a range of relevant aspects across the reports.

One of the key focus areas in the analysis is how companies have approached positive and negative impacts. Impacts are defined as:

“the company’s actual or potential effects on people or the environment in connection with its operations, products or services across its own activities, and throughout the upstream and downstream value chain.”

Impacts therefore indicate how a company contributes, positively or negatively, to the green transition. In general, the analysis shows a predominance of negative impacts, which was also expected.

In the 28 reports, the ratio of negative to positive impacts is 80 to 20. One reason for the high share of negative impacts is that it can be difficult for companies to credibly document a genuinely positive impact. Even after a thorough reading of the ESRS standards and accompanying guidance, a clear definition of what constitutes a positive impact is not immediately available.

Our analysis revealed significant variation in how companies interpreted what qualifies as a positive impact. Several companies identified zero positive impacts, while one company reported that 83 percent of their impacts were positive. This wide variation, in our view, shows a high level of uncertainty in this area.

In the same way, there is significant variation in how companies have linked positive impacts to the different ESRS standards. However, several patterns appear: Companies primarily associate positive impacts with their own workforce (S1), while areas such as workers in the value chain (S2), affected communities (S3), and environmental topics (E1 through E5) are less often associated with positive impacts.

Marketing or misleading?

The uncertainty around positive impacts is without doubt linked to green marketing, as positive impacts are an obvious tool for companies looking to highlight their sustainability efforts. Although it may be tempting to promote these impacts, companies must follow specific guidelines. In particular, the Danish Consumer Ombudsman provides guidance on the use of green marketing, including environmental and ethical claims in advertising. The guidance emphasizes, among other things, that:

“Claims about products or activities must generally be assessed in relation to comparable products on the market. Consumers must be able to rely on the fact that there is, for example, an actual reduction in environmental impact compared to related products, if a business markets its product as environmentally friendly. Such a claim should ideally be supported by an explanation of what makes the product environmentally friendly or less harmful to the environment.” (Danish Consumer Ombudsman, 2011)

Companies may only claim that a product or service is “environmentally friendly” if it has a lower environmental impact than comparable alternatives, and this is documented. If this reasoning is applied to sustainability reporting, a positive impact should show that the positive impact is more positive than comparable impacts identified by e.g. other companies, competitors etc.

However, in our analysis we see a tendency that companies highlight a range of positive aspects related to their own workforce. Most of these are elements that are considered standard practice in Danish companies. These positive impacts are therefore unlikely to meet the requirements outlined in the guidance from the Consumer Ombudsman, and for that reason, may come across as misleading and one-sided.

Examples of positive impacts

In our analysis, we examined concrete examples of positive impacts as assessed by the companies. Two examples of positive impacts reported under S1 Own Workforce include:

• Safety in our facilities – Safety training and ongoing education in our laboratories
• Equal treatment and opportunities for all – Providing employees with opportunities to discuss their career.

When evaluating these examples, considering the guidance from the Consumer Ombudsman, it is our assessment that they are not more positive than equivalent impacts among other companies. At NORD advise, we consider these types of impacts to be more like a “license to operate” – in other words, baseline conditions that companies are expected to meet to attract and retain employees. Furthermore, we consider safety and training in this context to be a basic requirement when operating laboratories, rather than a distinguishable positive contribution.

Another example of a positive impact is:

• Reducing mining footprint – Our products enable customers to improve yields from existing mines, which reduces the negative impacts on biodiversity per unit of output.

This example is interesting because it combines a negative and a positive impact. In this case, the company is trying to offset a negative impact with a positive one. This approach is not allowed under the ESRS standards, as mitigating actions cannot be included when assessing negative impacts. EFRAG’s guidance on double materiality analysis (EFRAG IG 1 materiality assessment) emphasizes that mitigating actions should be included as part of the company’s policies, actions, and objectives.

While the analysis revealed several less convincing examples of positive impacts, some companies have identified genuinely positive impacts, such as the following:

• Products are designed in a way that allows them to last longer and are easy to disassemble for recycling.

Here, the company is making an active effort to ensure that the resources used in the product do not go to waste at the end of the product’s lifecycle.

Highlight positive actions when disclosing actions during the year

Our analysis shows that companies face a significant challenge in identifying and assessing positive impacts. The multiple positive impacts assessed can be considered as a license to operate, meaning they are necessary for conducting business. However, we believe these impacts will not necessarily differentiate the company positively in the market.

To ensure more credible reporting of positive impacts, companies should focus on how they best describe their sustainability efforts. Instead of highlighting a list of factors that may only meet market expectations, companies should focus on describing specific actions and activities related to the identified impacts. This provides a more nuanced and transparent picture of the company’s actual contribution to the green transition and reduces the risk of communication being perceived as greenwashing.