Larry Bradley, Leadership | 22 December 2022
The environmental, social and governance (ESG) agenda has gained prominence in a short period of time. A wide array of stakeholders, from regulators and businesses, to investors, governments, and the public, have a strong interest in it. It matters economically, politically, and indeed emotionally to humankind.
Standard setting on fast forward
Things are certainly moving fast. It’s a dynamic picture, with developments on the global, US and EU levels. The International Sustainability Standards Board (ISSB) – which was only formed around a year ago in November 2021 – has already issued two exposure drafts, one on climate reporting and one on more general ESG-related disclosures and is currently working through the vast number of comments received. The ISSB aims to finalize the standards and publish them early in 2023.
In the EU meanwhile, the European Financial Reporting Advisory Group (EFRAG) has been given the mandate to set standards for sustainability reporting – and issued 13 exposure drafts. The EU Council confirmed final approval of the Corporate Sustainability Reporting Directive (CSRD), marking a key milestone in the development of corporate sustainability reporting in the EU. The reporting rules apply starting 2024 for large public-interest companies with over 500 employees. These cover not only climate-related issues but broader social and governance areas too.
There’s a similarly active initiative in the US, where the SEC issued proposals for mandatory climate-related reporting earlier this year. As with the ISSB, a massive volume of comments were received, and the SEC is now working on finalizing its proposals.
Making requirements comparable – and aligned
This is all highly encouraging, but two essential watchwords I would call out are comparability and alignment. First, companies’ ESG disclosures should be easy to compare with other businesses so that investors and other stakeholders can make true comparisons.
Second, it is critically important that the standards produced around the world align. This is key to comparability for the benefit of users. But it also matters to preparers, especially those with global footprints. Take a US public company with operations in the EU and also another jurisdiction, and entities that have dual listings – one should not underestimate the complexity of having to report under three different sets of requirements due to the significant efforts that already will be necessary to meet disclosure requirements in the form of systems, processes, controls and governance.
No one wants to see divergence between the standards and it’s fair to say that regulators are very focused on achieving alignment, with interoperability becoming the new buzz word between standard setters. In this regard, I am pleased with the efforts in this area and am cautiously optimistic.
Preparers need to get moving on the journey
While standard setters may have a full agenda, there’s an enormous amount of work for businesses themselves to do. ESG related disclosures will likely, in time, be subject to the same kind of scrutiny and rigor as financial statements, and potentially independent assurance. This means that systems will need to be developed, processes created, controls implemented and governance to be applied in order to ensure high quality disclosures.
Organizations need to get started on their ESG journey as soon as possible if they haven’t done so already. They should focus both on the reporting itself and on how that reporting will be assured. Robust assurance can be critical to trust, providing greater reliability to ESG disclosures. That is why at KPMG we are investing significant time and resources into scaling up assurance capabilities. Our objective is to ensure that we are serving the public interest. KPMG firms can also help businesses ascertain whether they meet the preconditions for assurance through our recently launched Ready for Assurance service.
Collaborative effort
With so much happening at such pace, these are demanding and exciting times. It’s new territory for everyone involved in the financial reporting ecosystem. Having greater collaboration amongst all parties will be key as we go through this journey together.
We are working to common goals, after all – so rather than look at things individually, we should be helping each other for the collective good in order to make ESG reporting truly robust, reliable and useful to stakeholders.
