An important area of board focus and oversight will be management’s efforts to prepare for dramatically increased climate and ESG disclosure requirements for companies in the coming years.
Companies doing business in Europe are assessing the potential effects of, and preparing to apply, the European Sustainability Reporting Standards (ESRSs) issued under the Corporate Sustainability Reporting Directive (CSRD) in the EU, and IFRS Sustainability Disclosure Standards issued by the ISSB. The standards – which are based in part on the Task Force on Climate-Related Financial Disclosures (TCFD) Framework and the Greenhouse Gas Protocol – are highly prescriptive and expansive. The CSRD also includes a requirement for large non-EU companies that operate in the EU to provide limited assurance over their sustainability reporting.
For those companies operating in the UK: While certain companies have been required to provide climate related financial disclosures in their 2023 Strategic Reports, boards should also be aware of the UK Sustainability Disclosure Standards (UK SDS) that will form the basis of any future requirements in UK legislation for companies to report on governance, strategy, risks and opportunities and metrics relating to sustainability matters, including risks and opportunities arising from climate change. The UK SDS will be based on the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB), and the UK endorsed standards will divert from the global baseline only if necessary for UK specific matters.
Additionally, for those companies operating in the US: Under the SEC’s proposed climate disclosure rule, companies, including foreign registrants, will need to provide an account of their greenhouse gas (GHG) emissions, the environmental risks they face, and the measures they’re taking in response. Crucially, according to the proposed rule, issuers will be subject to mandatory limited assurance initially, with mandatory reasonable assurance being phased in for accelerated and large accelerated filers. In addition, some information will need to be disclosed in the notes to the financial statements.
Companies will need to keep abreast of ongoing developments and determine which standards apply, and the level of interoperability of the applicable standards. For example, there are different materiality thresholds. The US consider financial materiality — in which information is material if investors would consider it important in their decision-making — whereas the UK and EU use the concept of ‘double materiality’, through the lenses of the financial effect on the company and the impact the company has on the wider community and environment.
A key area of board focus will be the state of the company’s preparedness – requiring periodic updates on management’s preparations, including gap analyses, materiality assessments, resources, assurance readiness and any new skills needed to meet regulatory deadlines.
In addition to the compliance challenge, companies must also ensure that disclosures are consistent, and consider the potential for liability posed by detailed disclosures.
This will be a major undertaking, with cross-functional management teams involved, including any management disclosure committee and management’s ESG committee – perhaps led by an ESG controller – with multiple board committees overseeing these efforts. This is a big change and as a result a big opportunity to rethink reporting to make sure it meets stakeholders’ needs while it meets the requirements.
Don’t lose sight of the opportunity to use the new metrics to understand aspects of the business you may not have thought about in this way before – they can uncover changes that need to be made for the long-term success / resilience of the business.
