ESG is a topic that’s become embedded in corporate conversations. Boardrooms from Paris to Washington are deliberating how they can be more proactive on their environmental and societal impact, conscious they have a profound role to play in creating a more sustainable planet.
For senior executives, the debate has moved on from ‘if’ to ‘how’. We’ve finally reached a point in time where it’s widely acknowledged that ESG has moved from corporate social responsibility initiatives to the heart of company strategies and growth plans.
While it can be reassuring that many CEOs and their wider stakeholder groups are now on board with ESG, there is a common theme and concern across multiple industries. How does a business measure and demonstrate what it is doing to tackle such a wide variety of issues – from social inequality to the climate crisis? Political leaders are facing the same dilemma and they’re now finally edging towards regulation and enforcement.
The International Sustainability Standards Board (ISSB) was formed to create the IFRS® Sustainability Disclosure Standards – a global baseline of sustainability standards that would give investors the information they need to make effective decisions, supporting efficient and effective capital markets. At the same time, the European Union is preparing to introduce its own requirements, known as the Corporate Sustainability Reporting Directive (CSRD).
Brussels may be the birthplace of CSRD, but the directive will have far-reaching consequences internationally, potentially affecting approximately 50,000 businesses operating in the EU, including EU subsidiaries of non-EU parents, who will have to meet the final European Sustainability Reporting Standards (ESRS), which set out the details of what must be reported as part of the CSRD.
These are not the only new developments. For example, the US Securities and Exchange Commission’s proposed climate rule is also pending, and multiple other jurisdictions are also introducing new requirements.
The new reporting requirements are expected to be a step change in volume and breadth. Impacted companies will need to assess the materiality of the various requirements and build and execute a plan to gather and report relevant data — or potentially face significant consequences.
KPMG assessed the CSRD readiness of 200 companies across the world – and, in most cases, areas were identified where businesses fell well short of the incoming requirements. Given the scale of change ahead, it’s completely understandable that many companies are not ready. Understanding and adapting to reporting under the ESRS is a major task. Under the CSRD, based on a double materiality assessment, in-scope companies will disclose a large amount of mandatory qualitative and quantitative information.
This includes reporting on the whole value chain, as well as across environmental and social topics. Even those companies that have previously been commended for their sustainability reporting may find their current disclosure practices fall well short of the new requirements.
For many companies, current environmental reporting only covers climate-related aspects but soon companies need to report on a wide range of environmental topics – including pollution, water and marine resources, biodiversity and resource use, and the circular economy – if analysis shows these to be material.
Similarly, under both frameworks, companies will need to expand their reporting on relevant social topics – for example, their own workforce, workers in the value chain, affected communities and consumers, and end-users. And for governance, companies are obliged to disclose more material information about their business conduct practices. Few organisations are set up to manage and track these additional requirements across their entire enterprise.
The new reporting requirements are set to be rolled out over the coming months and years, with larger organisations expected to adhere first. What is clear is that senior executives should act now to help ensure they’re in a position to analyse and report the correct data in a timely fashion and be prepared to obtain assurance. And now the ISSB’s timelines are aligned with the EU, companies may choose to voluntarily adopt IFRS Sustainability Disclosure Standards regardless of local requirements.
For those reporting under multiple frameworks, such dual compliance would certainly make sense because the ISSB is setting the global baseline, ready for jurisdictions to layer on their local requirements.
The first steps should involve a pre-assessment, taking a high-level status quo overview of where the company reporting stands in relation to incoming requirements to help understand what the future reporting journey will look like. This should be followed by an impact and readiness assessment to gain a more detailed understanding – at a disclosure requirement level – of reporting performance. Finally, a full-fledged readiness project plan should be created exploring the company’s assessments and ambition level.
It should come as no surprise that political leaders and bodies are now acting to help ensure the business world sticks to its promises to play a leading role in driving a more sustainable planet. The world may be facing multiple challenges, including the conflict in Ukraine and a sluggish post-pandemic economic recovery, but ESG is expected to remain a key area of focus for decision makers and civic leaders. Now, more than ever, senior executives should take a proactive, strategic approach to help ensure their efforts are recognised.
A version of this article previously appeared in ESG Clarity.
© 2023 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.