Sustainability Reporting…A Shift from Voluntary to Mandatory Requirements

Sustainability or ESG reporting is often referred to as the new kid on the block. As we focus on the net zero 2050 climate goal, it directly or indirectly affects companies across the globe.

We have over the past two decades seen many voluntary initiatives (often referred to as the alphabet soup of frameworks) on sustainability reporting. Though the listed and large companies may already be reporting based on these voluntary frameworks, there have been questions around completeness of reporting i.e., do companies comply with all the applicable requirements of the framework, and assurance i.e., is the information verifiable and reliable?  

What is the solution to this issue?

In the past 3-4 years, we have seen the emergence of International Sustainability Standards Board’s (ISSB) IFRS Sustainability Disclosure Standards and the EU’s European Sustainability Reporting Standards (ESRS). The ISSB Standards are a global baseline of investor-focused sustainability disclosures, providing a common language for companies to report on sustainability-related risks and opportunities. These Standards build upon initiatives such as the SASB Standards, TCFD and the Integrated Reporting Framework.

Whilst the ISSB cannot mandate the application of its Standards by companies, the jurisdictions or regulators in countries will mandate it for the listed and other large companies. We have reports on voluntary adoption of IFRS S1 and S2 by some companies, whilst many regulators are making it mandatory for companies to adopt in their respective jurisdictions by the end of this decade. 

In the EU, we have seen the adoption of European Sustainability Reporting Standards (ESRS). These Standards are comprehensive and cover five environmental and four social topics. A key difference to ISSB Standards is that ESRSs are based on the concept of double materiality, covering both financial and impact materiality. 

Another popular framework is the Global Reporting Initiative (GRI) which also has a multiple stakeholder double materiality focus. 

What are the challenges in applying the global baseline of standards on sustainability reporting?

The five key challenges in applying the sustainability reporting standards are as follows:

·        Data challenge: Surveys have shown that about 80% of the respondents find availability and quality of data to be a big challenge. Data required is not restricted only to the reporting company, we also need to collect data from the value chain to meet the reporting requirements e.g., Scope 3 emissions. 

·        Judgements and estimates: Sustainability reporting standards require use of judgements and estimates e.g., use of data based on industry average if actual data is not directly available. Like accounting standards, we need to identify and disclose areas of measurement uncertainty and sources used to obtain relevant data.  

·        Technology: Technology is fundamental to successfully implement sustainability reporting. Companies need to automate data collection, processing and outputs in order to implement that standards. A strong collaboration between data and technology teams is required.

·        Time: Do not underestimate the time required to implement the sustainability reporting standards. A solid roadmap is required with a cross-sectional team to meet the deadlines. Early planning, preparation and building the expertise are key.

·        Regulatory: There are requirements in the Standards which are subject to interpretation e.g., which climate scenarios should be considered for a highly diversified business. Interpretations can lead to inconsistencies in reporting and potential regulatory risks.

From our experience of training clients globally, we have, in the past two years seen a growing interest in understanding the requirements of the ISSB Standards (IFRS S1 and S2). Even if companies are in jurisdictions where these standards are not yet mandatory, a basic understanding of the requirements helps key personnel engage in meaningful discussions with stakeholders within and outside the company. It will also help them consider challenges that they may face in implementing the standards.