Time to deliver on the ambition of global alignment

In the spring, three sets of proposed requirements were published that will shape the future of sustainability reporting. The US Securities and Exchange Commission (SEC), the EU’s European Financial Reporting Advisory Group (EFRAG) and the International Sustainability Standards Board (ISSB) have now completed their public consultations and aim to publish final rules or standards in the coming months.

It’s good news that this has all taken place, and so quickly. The momentum for change is clearly building and demand is growing, with many of the responses to all three consultations calling for greater global alignment as these new requirements develop.

Facilitating change without overburdening preparers

This should be the time, then, that we look at the scale of our ambitions on sustainability reporting and consider how we might realise the potential of alignment – building on consensus to deliver requirements that facilitate change without overburdening preparers.

Take for example what we learned from the recent consultation on the 13 European Sustainability Reporting Standards (ESRSs). These standards, to be effected by the EU’s Corporate Sustainability Reporting Directive (CSRD), are due to be finalised in mid-November. As with the SEC and ISSB consultations, a range of responses was gathered – demonstrating a strong collective interest in shaping these momentous changes.

EFRAG’s consultation revealed uncertainty across companies. Large companies are mapping the ESRS proposals to those they currently follow, to assess what they would need to change. At the same time, they are looking beyond their home markets to their international investor bases, and asking whether global alignment could or would be achieved. 

Addressing the challenges companies are facing

There are three high-level themes coming to the fore in the conversations we are having about the EU’s proposals that need to be addressed.

Firstly, companies are calling for a rationalisation and prioritisation of metrics, specifically key performance indicators. The standards will have a role in helping the EU to meet its wider policy aims on matters such as climate and human rights: companies think scaling back to focus on a limited number of KPIs on each topic that would be mandatory and that would help the EU to make progress against its policy initiatives would help to achieve this. When everything is a priority, nothing is a priority, so the ESRSs could be refined to prioritise only the most important KPIs for initial reporting.

Secondly, many companies are hoping for a phasing in of certain standards. If they are all effective for the same reporting period (currently 2024), companies are likely to strain to accommodate them. Although market demand is clear, and time is short, the practicality of implementing this amount of change all at once was a cause for concern for many, particularly since the CSRD will apply to approximately 50,000 companies in the EU.

And last, but not least, stakeholders are echoing the call made by ISSBTM chairman Emmanuel Faber at the European Parliament in September: taking more time means a greater likelihood that the ongoing discussions between standard setters will bring us closer to that global baseline of sustainability reporting. The overall objective should be that by applying the European standards, companies could be confident that they are simultaneously complying with IFRS® Sustainability Disclosure Standards issued by the ISSB.

Driving strategy rather than simply compliance

Stakeholders are clear about what they want – for them, the collection of KPIs must not become a compliance exercise but instead an exercise in generating meaningful, actionable information that a company can integrate into its strategy and mission. This, after all, is the kind of change that the EU is aiming to bring about.

Moreover, if companies consider sustainability reporting to be little more than a compliance exercise, and do not engage with the standards in earnest, it would be a missed opportunity to put ESG right at the heart of companies’ strategies. And ultimately, to measure the progress of the EU as a whole against the objectives of its Green Deal.

Above all, global companies with operations in multiple jurisdictions and dual listings will find it very difficult to cope with multiple sets of requirements. The burden of compliance, whether requirements are fully aligned or not, will generally fall on the shoulders of CFOs and their financial reporting departments as sustainability reporting will form part of the main financial filing. Systems, processes, controls and governance will need to be developed in order to comply. One should not under-estimate the time and effort needed in this regard.

What gets measured gets managed. Companies need to continue to make urgent progress with ESG reporting in a way that supports their business objectives. An effective and efficient sustainability reporting ecosystem will help businesses measure progress on executing their ESG strategy and drive value, while mobilising capital markets to help support solutions to the many societal issues we face.

So having finally arrived at the stage where we are scrutinising proposed standards in detail, we must also ensure we keep in sight the greater ambition – global alignment of sustainability reporting in principles, in structure and in measurement.

A version of this article previously appeared in Business Green.

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