Banks, Insurers and Asset Managers have been reporting Environmental, Social and Governance (ESG) metrics for several years, whether Task Force on Climate-Related Financial Disclosures (TCFD) under listing rules, voluntarily under frameworks such as Global Reporting Initiative (GRI), the standards published by the Sustainability Accounting Standards Board (SASB) or EU disclosure requirements like Sustainable Finance Disclosure Regulation (SFDR). Three major things have happened recently which mean the requirements are shifting and becoming mandatory:
- The US SEC released its consultation in March 2022 on proposed requirements for all filers (including private foreign filers) to report scope 1 and 2 emissions, and possibly scope 3 depending on materiality. Additional disclosures such as financial impact metrics and disaggregation of expenditure metrics means that there are enhanced disclosures, controls statements and mandatory assurance. It takes materiality considerations down a slightly different track to the rest of the world so for those with dual listings in a group this will become challenging. It will potentially require new sets of data, processes and controls to produce the required footnotes. See more details here.
- For financial years starting after 6 April 2022, TCFD based reporting will be mandated for more than 1,300 of the largest UK-registered companies and financial institutions. These include many of the UK’s largest traded companies, banks and insurers, with large private companies caught by new rules as well (Turning the dial on climate disclosures for private companies). Additional detail, such as assets under management shown at product level, is also required from 1 Jan 2022. Similar to the requirements of the US SEC, additional data sourcing and improvements will continue to be a challenge for TCFD reporting. As a result, many companies are transitioning their ESG data and reporting teams into Finance so that the same rigour can be applied to these metrics as to the reporting of financial information and disclosures.
- The International Sustainability Standards Board (ISSB) released its exposure drafts on 31 March 2022 with comments to be received by 29 July 2022. The draft standards set out the requirements for disclosures over climate and general ESG reporting and are expected to be adopted under UK law by 2024 or 2025. A key requirement of the exposure drafts is for the sustainability reporting to be connected to and complement the financial statements. This not only represents a material uplift from current reporting but also reinforces the rationale for ESG reporting transitioning to Finance, as it is at many Financial Services companies.
On top of this there is an increased focus and rigour around transition planning, driven by the Financial Conduct Authority (FCA), and a closer interest from investors, leading to an ever-increasing array of data requests from ratings agencies.
With Finance increasingly take a lead in ESG because of the reporting impetus, Finance teams should consider:
- Strategy - Is there a strategy to manage the changes coming down the line in the next 3 years? Thinking ahead and understanding the regulatory horizon, the corporate strategy for transition and broader ESG objectives will be key.
- Carbon pricing - Is Finance equipped to embed carbon pricing through Internal Carbon Pricing in cost allocations and by really challenging valuation and modelling assumptions? Are the right skills, tools and methodologies in place to achieve this?
- Frameworks - Do we have the right set of frameworks and policies in place to govern ESG reporting in the same way as financial reporting?
- Data - Do we have the right data catalogue and data model that supports ESG reporting and is there a single version of the truth for each metric? Is the underlying data reliable and are there data gaps?
- Controls - Do we have robust processes and controls to produce and report this information? Will they meet the expectations of an auditor and (if relevant) the SEC?
- Technology stack - Is our technology underlying these processes fit for purpose and does it support regular, repeatable and efficient reporting?
- Operating model - Do we have the right operating model in place to support the production, analysis and reporting of required metrics?
- People – Does finance have the required skills and experience in the team to deliver this change? Is training required and if so of what nature?
- Awareness - Does everyone upstream understand how their data is being used and if not what training is needed? Do we have the required skills and experience in Finance to deliver?
- Stakeholders’ expectations - What do the audit committee, investors, customers and employees expect of the company in terms of content, timing and level of assurance over this data? Are we getting the right level of external assurance?
If you need help in determining where to start reach out to us today.
