Apostolos Thomadakis / Dec 2022
As businesses across the world focus more intensely on incorporating sustainability onto their strategies and expanding their sustainability footprint, having in place common reporting standards that provide much-needed transparency and standardisation on a global scale, is very important. However, the current divergence and multiplicity of different sustainability reporting standards across the world, as well as the level of complexity, the amount of information and the quality of data that needs to be reported, have raised concerns. Europe and the world have a unique opportunity to drive forward and incentivise change in sustainability reporting, however, the risk of rising barriers and obstacles remains high.
The International Sustainability Standards Board (ISSB), which was announced at COP26 in 2021, aims to building a global baseline language for sustainability reporting that will allow investors to have high quality and comparable information on a company’s exposure to sustainability risks and opportunities. In particular, the ISSB will publish early next year two sets of standards. Under the general requirements for disclosure of sustainability-related financial information (IFRS S1) companies will need to provide (on a voluntary basis) information on all of their significant sustainability related risks and opportunities (and not just climate). On the other hand, the climate-related disclosure (IFRS S2), which builds on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), covers physical risks, transition risks, and climate-related opportunities.
On the European side, currently, the European Financial Reporting Advisory Group (ERAG) is finalising a set of European Sustainability Reporting Standards (ESRS) that will allow Europe to meet the ambitious targets put in place on the Green Deal. These standards, which will become mandatory under the Corporate Sustainability Reporting Directive (CSRD), will have a significant impact on companies doing business in the EU.
Having said that, interoperability is key. Aligning disclosure requirements between international standards and regimes that have been either developed or are about to be established – such as the ISSB, the ESRB, the Global Reporting Initiative (GRI) standard, the new climate risk reporting rules proposed by the US Securities and Exchange Commission (SEC), or other jurisdictional rules – is a rather challenging task. Comparability is fundamentally important to creating a system that maximises impact and achieves efficiency and harmonisation. Differences in definitions (e.g. materiality), methodologies, as well as metrics used between the different reporting standards, present the risk that companies will spend time and resources developing separate disclosures concerning the same topics but for different jurisdictions. It would also make the use of standards more difficult for the readers and above all the investors.
Comparable disclosures require ambitious, specific, and prescriptive reporting standards. But, there is need to ensure that the level of detail and specificity required does not go beyond standard reporting practices. In order for companies to be able to comply with them, they need to have in place the right processes and tools, good quality of data, as well as suppliers that understand what is required to report. For example, although direct emissions (i.e. Scope 1) and emissions arising from the generation of purchased energy (i.e. Scope 2) may be easier to disclosure, those that result from sources that are neither owned nor controlled by the company (i.e. Scope 3), will be a real challenge to disclosure. Thus, it is important that compliance will not overshadow the most decision-useful information, divert resources away from sustainability performance improvement, or increase the cost of compliance, complexity and paperwork in a way that hinders the benefits of it.
From a company’s perspective, implementing a sustainable strategy can be highly rewarding. Companies that are fully dedicated to sustainability and set up a business that is completely green, they benefit a lot and have a competitive advantage compared to those that do not. And this is because the size of the market for sustainable investments is far higher than the amount of sustainable investments available. Moreover, fully green companies usually outperform the market significantly. However, the issue is with those companies that are in non-sustainable industries and try to transition into green. In fact, it may be more beneficial to split the company in two parts, a fully green and a less green part.