New standards and frameworks for ESG reporting continue to emerge. We provide a brief summary of key developments in the past year. Find out if they apply to you and how you will need to prepare.
It’s over 12 months since our insurance audit team last gave an update on environmental, social and governance (ESG) reporting, and a lot has happened since then. Reporting on climate change is becoming more and more embedded, with regularly-produced analysis as to ‘what good looks like’. The Financial Reporting Council’s recent CRR Thematic review of climate-related metrics and targets is an example.
ISSB landmark standards
The launch of the International Sustainability Standards Board (ISSB)’s first sustainability disclosure standards is widely viewed as a game changer for sustainability reporting across the globe.
The inaugural standards are comprised of S1 and S2. IFRS S1 aims to facilitate disclosures from entities about sustainability risks and opportunities as part of their general‑purpose financial reports. IFRS S2 encourages companies to disclose information about how they manage the potential negative effects of climate change, including physical risks such as extreme weather events and transition risks like government policy changes.
The ISSB recognises that sustainability reporting is at very different stages of maturity in different jurisdictions. Its approach is therefore proportionate and flexible. For example, to help identify relevant matters for disclosure, companies should use reasonable and verifiable information that is available without undue cost or effort. The emphasis is on ‘decision-useful’ information, rather than a prescriptive set of disclosure requirements.
The key question for most preparers is ‘who will need to apply these standards?’. ISSB standards are designed to be ‘GAAP agnostic’. This means the scope of companies that may need to adopt them is not dependent on whether they use IFRS or UK GAAP.
In its Green Finance Strategy in March, the UK Government reconfirmed its commitment to assess, and decide whether to endorse, the standards. The Business and Trade Secretary will be responsible for making the decision to create the first two UK Sustainability Disclosure Standards (UK SDS) and the department aims to do this by July 2024.
Climate transition plans
The Transition Plan Taskforce (TPT) Disclosure Framework gives UK companies comprehensive guidance for producing climate transition plans. Its aim is to support companies in developing and implementing plans to achieve their net zero ambitions.
In October the TPT published its finalised Disclosure Framework and supporting guidance. Consistent with its November 2022 consultation, the framework is based around five key pillars:
- Foundations
- Implementation strategy
- Engagement strategy
- Metrics & targets
- Governance
We believe climate transition plans will become mandatory for UK-listed issuers. The Government has also made it clear that it expects transition plan requirements to be embedded across the financial services sector.
The FCA has already said it will consult on proposals for mandatory sustainability disclosure requirements, based on the ISSB’s Sustainability Disclosure Standards once they are endorsed for use in the UK. These may include climate transition plan disclosures based on the TPT’s framework. The new requirements are likely to be in force for accounting periods beginning on or after 1 January 2025 and reporting should begin in 2026.
CSRD raises the bar
The Corporate Sustainability Reporting Directive (CSRD) is new EU legislation that requires all large companies and listed SMEs to publish regular reports on their environmental and social impact activities. The directive was effective from 5 January 2023 and builds on previous corporate sustainability reporting under the 2014 Non-Financial Reporting Directive (NFRD).
The CSRD will impact more companies than any other piece of sustainability regulation to date, raising the bar on disclosures across the ‘E’, ‘S’ and ‘G’. All companies that fulfil two of the three criteria below must comply with the directive:
- Net turnover over €40 million
- Balance sheet assets over €20 million
- More than 250 employees
Approximately 50,000 companies worldwide will be required to disclose, track and measure their sustainability performance. CSRD will apply to all:
- companies listed on regulated markets in the EU (apart from listed micro-enterprises), and large companies (as defined by the criteria above). These companies will also have to take into account information at subsidiary level.
- listed SMEs, although there will be a transitional period when they can opt out until 2028. There are big benefits for SMEs that comply with the reporting.
- non-EU companies with a net turnover of €150 million in the EU, and with at least one subsidiary or branch in the Union.
Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The standards were developed by EFRAG, previously known as the European Financial Reporting Advisory Group, an independent body bringing together different stakeholders. The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives.
For those companies in scope, the requirements are onerous. Firstly, they must collate over 1,000 data points, including metrics and qualitative data. This can be phased in over three years, but organisations must report not only on topics that are material to them, but also on data gathered from their value chain. In addition, there is ‘limited assurance’ required in the first year of reporting, followed by ‘reasonable assurance’ in subsequent years.
So sustainability reporting standards are increasing in their scope and in the context of external reporting. Although many UK entities are still unsure as to how these new requirements will apply to them, it’s inevitable that reporting will only become more onerous.
All this means that staying abreast of the requirements is vital. But what is paramount is making sure that ESG considerations form part of your organisation’s governance and decision making. Only then can you be ready to tell your story when new regulations come into force.
For more information about the issues raised in this article, please contact Martin Watson.
