The landscape for sustainability reporting is changing rapidly, with different standards and taxonomies emerging internationally that companies need to consider. This is acute for financial services firms which must consider reporting and disclosure requirements from regulators, standard setters, voluntary reporting initiatives and, where applicable, local government. Depending on the geographical footprint and corporate structure of a firm, this can get complex quickly.
At a corporate level, the UK government has committed to adopting the International Sustainability Standards Board's (ISSB) IFRS sustainability disclosure standards. The ISSB aims to create a baseline for investor-focused sustainability reporting that local jurisdictions can build on and which will be compatible/interoperable with other sustainability reporting requirements. The Financial Conduct Authority (FCA) plans to consult towards the end of 2023 on incorporating ISSB standards into the UK listing rules. Subject to feedback, final requirements should be in place by H1 2024.
ISSB's standards are focused on general disclosure requirements and climate. They are closely aligned to the requirements under the Taskforce on Climate-Related Financial Disclosures (TCFD) across the pillars of governance, strategy, risk management, and metrics and targets.
This means that companies that already report in line with existing frameworks such as the TCFD and have the processes in place to produce similar sustainability-related information are likely to find reporting under the final ISSB standards easier.
Clarity on the U.S. Securities and Exchange Commission's climate disclosure proposals is expected this year. So, a further consideration at a corporate level is the extent to which the U.S. requirements overlap with the ISSB's climate-related disclosures.
Further still, the EU's Corporate Sustainability Reporting Directive (CSRD) is set to mandate disclosures based on 12 European sustainability reporting standards, including approximately 100 non-financial key performance indicators and additional qualitative disclosures across ESG topics from 2024.
The impact of the CSRD is far-reaching as it goes beyond climate, it mandates assurance (eventually, to the same reasonable assurance level as financial reporting) and it can bring a non-EU ultimate parent entity into scope if certain criteria are met.
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Reporting requirements
Reporting requirements for a financial services firm do not stop at the annual report and accounts. Firms must meet regulatory reporting requirements too. Disclosure of information on sustainability risks is vital to enable stakeholders, including regulators, to make-well informed decisions about institutions' sustainability exposures, risks and strategies.
This could take the form of private reporting via regulatory returns or public reporting. In Europe, the EBA published binding Pillar 3 disclosure technical standards for ESG risks last year and we are seeing the first wave of reporting in 2023.
At an investment level, firms may already need to comply with the EU's Sustainability Finance Disclosure Regulation (SFDR) and the linked EU Taxonomy for product level and entity level disclosures. Again, they will need to consider the extent of overlap with other emerging regulations.
In the UK, the Sustainable Disclosure Regulation (SDR) is taking shape, with new anti-greenwashing rules applying from June 2023 for all FCA-regulated firms and product level and entity level disclosures expected for asset managers from June 2024. A new UK green taxonomy, likely to be modelled to some extent on its EU counterpart, is under discussion and once established will be incorporated into reporting requirements.
The intersections between corporate, product and entity level disclosures for regulatory or other purposes, and the need to consider potentially differing sustainability taxonomies, present a significant challenge to financial services firms today and will continue to do so. Complying with each of the standards may be tactical at first due to the sheer volume of requirements.
But the aspiration should be to get ahead and weave the requirements together adopting a sustainability reporting strategy that ensures optimal and efficient implementation to drive both transparency and consistency. Effective reporting will depend on embracing the complexities and having a proactive and strategic approach.
Persisting with a tactical approach comes with inherent risks, including the risk of greenwashing, that could compromise the credibility of firms' reporting and their broader reputation.
Develop a prioritised sustainability reporting strategy
To be properly prepared, firms need to develop a prioritised sustainability reporting strategy. Firms should first identify each of the reporting standards, regulations and other requirements that apply to them across their corporate structure and geographies, the timeframe in which these requirements will apply, and the data needed for meeting these reporting requirements. To future-proof this assessment, firms should perform regular horizon scanning given the rapid pace of reporting developments.
For example, the topic of nature and biodiversity is looming large given the finalisation of the Taskforce on Nature-related Financial Disclosures (TNFD) requirements and the specific topic included in the European sustainability reporting standards. The key for firms will be identifying the extent to which requirements overlap and can be served by the same underlying data.
Firms should then conduct a materiality assessment. This assessment will consider compliance requirements but also other reasons to report sustainability metrics. For example, any metrics linked to the firms' funding or to executive remuneration may be considered material and therefore included in a strategy voluntarily.
The next step is a review of reporting readiness by comparing current reporting against a firm's desired reporting. An assessment of readiness will consider necessary uplifts in controls, technology and data.
The strategy can inform resourcing needs or, alternatively, resource constraints could shape the reporting strategy. There would need to be an appropriate operating model to deliver this strategy, to facilitate planning, controls, reporting and monitoring at a level that we often associate with financial reporting and audited to a level of reasonable assurance.
Seize the moment
Here in the UK, and worldwide, financial services firms have a vital part to play as primary stewards of capital. Net Zero, the Just Transition and other global aspirations will rely heavily on actions taken by these firms. Transparent reporting by the sector, as well as across all companies more broadly, will help drive towards these aspirations and keep firms honest in what they say and do.
The UK has an opportunity to build a world class reputation for sustainability reporting and external assurance on this topic. This can further strengthen our internationally renowned capital markets, our position as a leading business destination and reinforce our commitment to sustainability more broadly. It is critical that the UK seize this moment.
Originally published by Thomson Reuters © Thomson Reuters
