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Sustainability reporting: 2023 round-up
The acceleration of ESG reporting requirements in 2022 carried over into 2023, another transformative year in which international standard setters continued to deliver on previous commitments to deliver a global benchmark for sustainability disclosure reporting. This article provides a round-up on the key developments during the year, and what may be expected in 2024.
Evolving stakeholder and disclosure reporting requirements
Advancements around sustainability reporting should be viewed in the context of expanding stakeholder/investor expectation for greater transparency, accountability and genuine tracking of climate targets. It will give stakeholders comfort that feedback published in PwC’s recent Global Investor Survey 2023, confirmed that the majority of companies view sustainability and ESG reporting metrics as an integral aspect of their long-term strategy.
The IFRS Foundation used the recent COP28 meeting of global leaders to highlight the accomplishment of its previous mission statement made at COP26 in 2021, to deliver clarity around sustainability reporting requirements for the capital markets. One aspect of which was to publish the first two prototypes, on general requirements disclosures and climate related disclosures, which is where we start below.
ISSB issued its inaugural standards
On 26 June 2023, the IFRS Foundation’s International Sustainability Standards Board (“ISSB”), published its first two sustainability focussed standards, namely:
· IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information, and
· IFRS S2: Climate related disclosures
The structure of these standards will be familiar to preparers already following the Task Force on Climate-Related Financial Disclosures (“TCFD”) framework, which had already been adopted for a number of years. The IFRS standards used the TCFD as its starting point with the intention of it eventually being succeeded by IFRS sustainability disclosure requirements, as is now the case.
The new standards do contain some transitional provisions and the extent of disclosure is aimed to be proportionate to the size of the entity and the relative environmental impact of the entity itself and others in its value chain. Evidence gathered and reported on must be reasonable and supportable and take into account materiality such that stakeholders understand the specifics of the company, rather than being exhaustive or making unsubstantiated claims, commonly known as “greenwashing”.
Corporate Sustainability Reporting Directive (“CSRD”)
In December 2022, the EU published its landmark sustainability reporting directive, the CSRD. On 5 January 2023 the CSRD came into affect with EU member states having 18 months to adopt its requirements, which include comprehensive and granular disclosures covering the entire spectrum of sustainability topics (e.g. climate change, biodiversity and ecosystems, working conditions, human rights, business ethics). The scope of the CSRD covers all companies with securities listed on an EU regulated market and large unlisted EU companies. However it will also have an indirect impact companies that don’t have direct reporting obligations but, for example are in the value chain of those who do, or because they are non-EU subsidiaries of companies subject to the requirements.
European Sustainability Reporting Standards (“ESRS”)
On 31 July 2023, the European Commission adopted supplementary sector-agnostic reporting standards, the ESRS. ESRS seek to ensure proportionality and facilitate correct implementation of the CRSD. The ESRS are structured based on the pillars of the TCFD framework. As a result, some elements of the standards mirror the IFRS Sustainability Disclosure Standards.
Taskforce on Nature-Related Financial Disclosures (“TNFD”) framework
In September 2023 the TNFD was launched as a voluntary (for now) framework, adding three new disclosures to the existing 11 TCFD disclosures. As the title suggests, these additional disclosures focus on impacts, risks and dependencies relating to nature and biodiversity risks across the entire value chain.
Carbon Border Mechanism Adjustment (“CBAM”)
Transitional requirements relating to the EU’s CBAM regulation were introduced in October 2023. This requires all UK businesses exporting to the EU to disclose carbon and GHG emissions embedded in their exports to assign a price for carbon entering the EU. A period of consultation was also announced in 2023 to address the impact of the regulation on importers, which is expected to be effective from 2027.
What to expect in 2024?
IFRS S1 and IFRS S2 are effective (not mandatory) for periods beginning on or after January 1, 2024. It is up to individual jurisdictions to determine if application of the IFRS Sustainability Disclosure Standards is required or permitted as a basis for sustainability reporting. The UK has announced its support of the ISSB standards, with endorsement, and publication of UK Sustainability Disclosure Standards expected by July 2024. The IFRS Foundation have committed to working closely with other international standard setters, such as the Global Reporting Initiative to align requirements as much as possible.
EU member states must transpose the CRSD into national law by July 2023 and companies in scope will be required to apply the CRSD in 2025 (on 2024 financial year information). The European Commission is scheduled to adopt a second set of ESRS in June 2024 (though the European Commission has proposed a delay until 2026). The 12 ESRS (already published) do not require separate transposition into law by member states and will become apply once written into law by the EU.
Challenge for Companies
The initial challenge for companies will be understanding the scope and impact of the various requirements, or unravelling the “alphabet soup” as it has been described. It would be fair to assume that the larger and more complex the company or group structure is, the greater the lead time required to complete this assessment. Following on from that assessment companies will need to have a clear understanding of the end disclosures needed in order to reverse engineer systems and processes accordingly to ensure the relevant data is recorded and measured accurately. This will come at an additional cost and resourcing requirement which companies need to start to plan for in order to meet investor expectation and support ambitious geo-political “net-zero emissions” targets.
– David Campbell, our Director of Technical Accounting and Quality