Why should sustainability reporting be the boardroom's top priority in our islands?

The world is in flux. Business leaders are facing a myriad of crises and challenges – from rising interest rates, discounts to NAV, market volatility and inflation pressures at a corporate and customer level.

You might argue that now is not the time to be adding to the growing to-do list for CEOs and other corporate decision makers, but the reality is that there’s no going back on sustainability – this is clear fromCOP28, which has resulted in a landmark global deal to transition away from fossil fuels.

In recent months, political leaders and organisations have ramped up their response to sustainability. Years of dialogue are finally shifting toward action – in a matter of months, the first tranche of mandatory corporate ESG reporting regulations will come into force in the EU and will even impact many companies not headquartered there. Building on the EU’s ESG reporting rules for funds and financial markets participants, henceforth, if your business has significant revenue, employees or markets its services in the EU then you could be caught by sustainability disclosure requirements. For boardrooms in our islands, this is often not clear and requires greater clarity on what’s expected and should be a wake-up call for any leaders who doubt change is on the horizon.

The big shift toward greater global regulation began with the publication of the first of the International Sustainability Standards Board (ISSB) Standards. The ISSB was founded with a clear goal of creating a global baseline of sustainability disclosures – to address the fragmentation of frameworks globally and to drive greater consistency and comparability. On the regulatory side, IOSCO – the international body of securities’ regulators – has endorsed the ISSB Standards and countries are considering how to incorporate them into their regulatory frameworks. In particular, the UK have backed the ISSB Standards and are expected to release their guidance on who will need to comply in due course. Thus,the time for assessing the impact is now.

For those in Financial Services and in or exposed to the UK regulatory net, the FCA has  published its policy statement with final rules and guidance for Sustainability Disclosure Requirements (SDR) and investment labels in November 2023. The package also includes a consultation on guidance on the new anti-greenwashing rule and a webpage for consumers. Having been delayed twice as the FCA considered an unprecedented quantity of industry feedback, performed consumer testing and undertook supervisory work, several adjustments have been made to deliver a more flexible regime and to address certain criticisms. However, the volume and complexity of the requirements will still have a fundamental impact on UK fund managers and their products, and the resources and time needed for implementation will be significant.

In parallel, the European Commission has also made substantial progress – developing the Corporate Sustainability Reporting Directive (CSRD) and most recently adopting the European Sustainability Reporting Standards (ESRSs) for any companies falling within the CSRD’s scope beginning from 2024 onwards and including a clear assurance obligation. Hot on the heels of their European and international counterparts, the Securities and Exchange Commission in the US is finalising its climate rule.

The world’s northern hemisphere has just witnessed a summer of wildfires and storms – reflecting the growing battle we’re facing against a climate crisis. For businesses, it’s more important than ever to play a key role in delivering a more sustainable, equitable future – one that works for us all, and respects the planet that provides us with the resources that enable us to flourish.

For CEOs and CFOs, the raft of regulatory change can be daunting, but it’s important to reflect on why this is happening. Although there will inevitably be some divergence and bureaucratic challenges ahead, the goal is to create a more streamlined, consistent approach to how companies report on ESG. In KPMG’s 2022 CEO Outlook survey, nearly 70 percent of leaders told us they were facing rising public, investor and stakeholder pressure for increased ESG reporting and transparency. Meanwhile, changing regulations and global economic uncertainty were viewed as the greatest barriers to tackling ESG.

The data clearly reflects a growing commitment to ESG, but one that’s matched with a fear that reporting could become increasingly complex and contradict the ultimate goal of consistency in reporting. That’s why, with multiple incoming frameworks, standard setters and other stakeholders are keen to maximise the overlap in the requirements and hence their interoperability.

If you’re a business leader and you’re wondering what steps to take, our advice is clear. Companies need to take action now to ensure they’re ready for the changes ahead. The first steps should be assessing which new requirements impact your operations and determining what is material. These should be followed by a relentless focus on data collection – ensuring you’re monitoring all material aspects of your business and turning that data into insights which can assist with reporting.

Companies can then use this data to develop a strategic roadmap, plotting a more sustainable, transparent route ahead that factors in any potential risks or opportunities for growth. In addition, it is not just a matter of setting up a new ESG reporting process, but also about preparing for assurance on ESG reporting under the new requirements.

Sustainability reporting is complex and, for an already overwhelmed boardroom, there is a danger it could slip down the growing list of urgent priorities. For leaders, seek advice from experts, convene and plan. The crises driving the need for changes to sustainability reporting show no sign of abating any time soon, so further mandatory regulation is inevitable. It’s an opportunity for the business community to take a leading role in driving positive change.

A version of this article previously appeared on kpmg.com.