Double materiality sits at the core of the new European sustainability reporting standards. The Corporate Sustainability Reporting Directive (CSRD) affects more than 50,000 companies, requiring them to disclose the impacts, risks and opportunities associated with environmental, social and governance issues, as well as what the company is doing to address those issues. For almost three-quarters of these companies, it is the first time they face mandatory reporting in the EU.
Unlike other sustainability reporting initiatives, which look at social and environmental impacts or the influence of sustainability issues on financial performance, companies falling within the scope of CSRD must combine both lenses, looking simultaneously inwards and outwards:
Impact materiality looks from the inside out to assess the impact of the company’s business activities on stakeholders, society and the environment; and
Financial materiality looks from the outside in to understand how external sustainability impacts could affect the company’s financial risks, opportunities and future profitability.
An effective and systematic process for assessing sustainability materiality is fundamental to align a company’s impact on society and the environment with strategic choices and financial performance. It ensures CSRD compliance, but also builds resilience, reputation and trust.
1. Understand context and define stakeholder engagement strategy
CSRD requires companies to look at the full value chain from raw material production to product use. The process starts with mapping all activities — upstream and downstream. This helps to define the internal and external stakeholders affected at each stage, as well as identify the groups who may have an impact on the organisation.
The perspectives of all these groups should inform the materiality assessment. However, you need to plan where and how to engage and involve them, and how to bring different groups of stakeholders together to build a holistic picture. For example, some people may be well-placed to identify the issues they think are important, but not to assess their financial impact on the company. Companies will also need to consult a broad group of stakeholders after assessing impacts, risks and opportunities (stage 4) to validate the final list of the most material topics.
2. Identify initial list of material sustainability matters
The next step is to compile a list of issues that are potentially relevant to the company. The European Sustainability Reporting Standards (ESRS) stipulates 10 cross-cutting environmental, social and governance topics that all companies must consider, including climate change, biodiversity loss and workers in the value chain. These include a series of sub-topics, e.g. working conditions, and sub-sub-topics, e.g. health and safety. You also need to take sector- and company-specific issues into account, which may include matters not directly covered by ESRS.
The list will be quite long at this stage. Subsequent steps help to identify those sustainability matters that are material to the organisation. Your company will only have to report on the material issues and not this longer list of issues.
3. Define impacts, risks and opportunities
Next, you need to define each sustainability matter in greater detail and assess it against a range of parameters.
What impact does the sustainability matter have on society or the environment? Is it a positive or negative impact? Over what timescale? Will the impact occur in the next year, next few years or over the longer term? Where does the impact occur, e.g. in the company’s supply chain, its operations or with customers? Is it already an issue (actual), or is it something that could happen if conditions change (potential)? For example, business expansion, such as construction of a new facility or increased raw material use following a new product launch, could lead to biodiversity loss if the move is not considered carefully from the outset.
Similarly, it is important to consider how the sustainability matter will affect your company, including whether it presents a risk or an opportunity, and whether it relates to the company’s direct operations or the wider value chain.
4. Assess impacts, risks and opportunities
Once you have a full understanding of the sustainability matters, impacts, risks and opportunities, you can start to assess their materiality.
Assessing impact materiality includes answering questions such as how many people are affected by an issue, whether the damage can be restored and at what cost. This helps to determine the scale, scope and irremediability of an issue. At this stage, research and industry reports can add supporting evidence. The information gathered could also help to shape future targets, demonstrating how the company is addressing key topics.
You will then need to understand how each issue is likely to affect company financial performance and to what extent (magnitude). Will it increase costs slightly or add significantly to the company’s cost-base, e.g. because key raw materials are less available, or the company will have to find new suppliers? Similarly, opportunities may cause a slight uptick in company fortunes or generate significant new revenues.
When assessing both impact and financial materiality, it is important to consider the likelihood of an issue arising and whether this might change based on future events. For example, could a change in regulation alter the risk profile, making a sustainability matter more important for your company.
5. Produce ranked list of sustainability matters
Now is the time to rank the sustainability matters based on the assessment of the impacts, risks and opportunities and to narrow down the issues that are material to the organisation. Up to now you have assessed each issue’s impacts, risks and opportunities on a range of different parameters. These now need to be combined to create a single view of an issue’s importance. A sustainability matter meets the criteria of double materiality if it is significant in terms of impact materiality, financial materiality, or a combination of both.
You will also need to determine the materiality threshold or cut-off point to split the list into material issues and those that are not material for the company.
It can be helpful at this stage to bring all stakeholders back together to review the list and ensure that issues have come out in the right order. Does it make sense that biodiversity loss sits above climate?
6. Produce materiality matrix and overview
Companies need to report on the prioritised list of material issues. There are no requirements on format within the CSRD; the list can be presented in a traditional materiality matrix or table. That said, it can be helpful to plot the assessment on a materiality matrix, especially to present and explain the material issues to stakeholders.
7. Disclose measures to manage environmental and societal impacts
Under CSRD, your company will be required to report on the outcomes of your double materiality assessment and the process used to create it.
You will also need to explain how you are addressing each of the issues identified. This includes detailing the measures and targets you have put in place to reduce impacts, mitigate risks and capitalise on opportunities, as well as the underlying policies and processes needed to achieve your goals.
Following these clear and logical steps will put you in a good position to report and comply with the requirements.
Context supports companies to assess materiality and develop, communicate and implement effective sustainability strategies. If you’d like to chat about your organisation’s needs, please get in touch via www.contextsustainability.com or helen.fisher@contexteurope.com.
As the urgency to combat climate change continues to grow, so does the importance of having a robust and credible climate strategy and net zero roadmap. Getting this right is key to the success of your organisation’s wider corporate sustainability strategy. Here are my 10 top tips for developing, implementing and evolving your climate strategy and driving meaningful change within your business.
1. Make the business case
Before developing your climate strategy, make sure your key stakeholders understand the business case for it. Use stakeholder mapping and analysis to find your champions and hear from your challengers. Clarify the benefits for the planet, and also for your business — gain competitive advantage, improve reputation, meet customer and investor expectations and retain and attract employees.
2. It’s all about the data!
Your net zero roadmap is only as robust as your greenhouse gas (GHG) emissions inventory. And your GHG inventory is only as accurate and complete as the underlying data — such as energy consumption, travel, supply chain and waste data. Improving your source data gathering, verifying, and storing processes is essential to an accurate and reliable climate strategy.
3. Understand the science
A solid grasp of climate science is key when developing your net zero roadmap and overall climate strategy. Stay informed about the latest research, frameworks, trends, and projections to make informed decisions, align to reporting requirements and set science-based goals.
4. Set ambitious, but realistic goals
Establish clear and measurable targets aligned with the latest science-based criteria. Aim for ambitious GHG emissions reductions while ensuring feasibility within your organisation based on capabilities and resources.
5. Engage your stakeholders throughout the process
You can’t do this alone. Effective climate action requires collaboration with stakeholders across your full value chain. Engage leaders, employees, suppliers, customers and partners to gain and maintain buy-in, gather diverse perspectives, and combine collective expertise. Fostering cooperation and setting shared goals will support you to implement your plan and successfully manage change.
6. Start with quick wins
This may sound like an obvious one, but focusing on the quick wins should show return on investment and positive results early on. This will help with stakeholder buy-in and future requests for resourcing and investment as you scale up the programme and shift the focus to longer-term initiatives.
7. Prioritise renewable energy alongside energy efficiency
Transitioning to renewable energy sources is the foundation of any climate strategy. Explore opportunities to invest in and generate new solar, wind, hydro, or other renewable energy, alongside procuring renewable energy contracts. In parallel, implement measures to optimise energy efficiency. Upgrade equipment, improve insulation, and adopt smart technologies to reduce energy consumption and costs.
8. Embrace innovation
Encourage innovation and creativity to deliver solutions for your climate challenges and develop opportunities. Embrace emerging technologies, explore alternative materials, and think outside the box — for example, by partnering with disruptors and peers, and testing out new business models.
9. Manage your climate-related risks
Climate change brings risks and uncertainties — such as extreme weather events, resource scarcity and supply chain disruptions. Assess, monitor and mitigate your climate-related risks as part of your wider risk management procedures, resilience planning and adaptation measures.
10. Stay agile and adapt
Establish robust monitoring and reporting mechanisms to track your climate goal progress. This will help you evaluate performance and identify areas for improvement. Remember that your net zero roadmap is not a static plan until you achieve your net zero target. As legislation, frameworks and climate science evolve, so will your strategy. Keep agile and adapt your strategy as needed.
With a rise in sustainability and ESG related language in marketing communications, regulators are cracking down. But will the new greenwashing legislation be effective?
In 2021, for the first time, greenwashing was the focus of the European Commission’s annual online “sweep” to identify breaches of EU law. Forty-two percent of “green” claims gave authorities reason to believe they may be false or deceptive, and 59% of claims were not backed up with any evidence. These results led the EU Justice Commissioner Didier Reynders to state that many firms “pull the wool over consumers’ eyes with vague, false or exaggerated claims” when it comes to sustainability. It isn’t all that black and white, however: at best, the lines of communication between sustainability and marketing functions are poor, and at worst, some companies are wilfully misusing sustainability claims to increase sales.
Indeed, there is evidence to suggest marketers aren’t deliberately indulging in greenwashing: the 2021 Chartered Institute of Marketing survey found that half of marketers were wary of working on sustainability marketing campaigns, with many citing “fear of being accused of greenwashing by consumers”, and yet three quarters had done so without any training. This is a justified fear: YouGov polls show Volkswagen’s reputation has yet to recover from its 2015 emissions scandal, even after fines, brand redesigns, and a product overhaul. There is thus a recognition that misusing sustainability claims could lead to significant and lasting reputational damage, but that the industry currently lacks capacity and training around the responsible use of environmental and social messaging. That tension has to be resolved to enable companies and their marketers to use sustainability messaging responsibly and comply with emerging requirements.
With all this in mind, let’s examine where the legislation seems to be going.
International responses
National governments have started to react. Earlier in June, the British Advertising and Standards Authority banned a Tesco advert making the unsubstantiated claim its veggie burgers were “better for the planet”. In May, German police raided Deutsche Bank on the basis it was exaggerating the sustainable credentials of certain investments. In the U.S., the Securities and Exchange Commission took Brazilian mining company Vale to court in April for its misleading ESG claims regarding its dams, at the same time as the Federal Trade Commission was handing out fines to Wal-Mart and Kohl’s for deceptively marketing products as being made from bamboo.
While these regulators are using existing rules to target greenwashing, other countries are introducing laws specifically to combat it. In April, French president Emmanuel Macron passed a decree stating that, from 2023, organisations found to be greenwashing could face fines amounting 80% of the costs of the false promotional campaign, with an obligation to publish corrections on billboards, in the media, and on company websites.
Given individuals and investors can’t be expected to verify the green credentials of products and funds, there is a growing consensus that relevant national watchdogs — whether in finance or advertising — need to operate within a universal framework to be effective. The EU is spearheading the largest of these efforts.
The EU steps in
In February this year, the European Securities and Markets Authority released its Sustainable Finance Roadmap 2022-2024, which identifies tackling greenwashing and promoting transparency as the first of three key priorities for sustainable finance. It plans to create a legislative regime to clearly set out the legality or illegality of certain market practices.
The EU Commission went a step further in March, when it proposed Directive amendments that would ban certain greenwashing practices outright — a step up from the current rules, which consider accusations of greenwashing on a case-by-case basis when they are found to negatively affect consumers. This would be accompanied by a set standard that brands would have to meet to make certain environmental claims. The Commission’s proposal hints that this standard could be the provision of “reliable, comparable, and verifiable information”, which it claims would facilitate enforcement by consumer protection authorities such as the watchdogs of member states.
Will it work?
All of this seems to be a step in the right direction. But with the EU itself recently itself being accused of greenwashing by including gas and nuclear in its definition of green energy, will new legislation have the teeth it needs to be effective? There are other potential issues to consider here too.
Firstly, approaching the issue from a consumer rights perspective shifts the onus of action to make informed purchases onto the consumer. While it’s essential to give people more information on the products and services they buy — and indeed there is some evidence that sustainability credentials are starting to impact consumer choice — some might argue there is a risk of this taking the focus away from more significant systemic issues. The elimination of greenwashing won’t remove the other drivers of consumer choice such as cost, familiarity and quality. What it might do is expose how far many companies still have to go in shifting their overall product and service offering to something genuinely more sustainable. In other words, even if the legislation works, will it really make a difference to the overall impact companies have on people and planet?
Secondly, enforcement is likely to prove a significant challenge. Whereas some claims can be relatively easily verified — for example whether a product is made of 100% recycled plastic — others are much more complicated. The Commission aims to tackle this by blacklisting generic claims such “eco”, “green”, and “climate-friendly” where environmental excellence cannot be demonstrated. But not all misleading labels can be so neatly categorised. For example, should a company be unable to advertise its products as sustainable when it is temporarily not the case (a debate currently taking place in the UK where “free range” eggs have not been available due to avian flu)? This approach also fails to address the types of marketing and advertising that give the impression of sustainability without words: positive associations with the colour green, environmental and natural imagery, and even certain fonts.
It’s also likely that companies will find other words to replace those on the blacklist, such as when juice companies started using the phrases “freshly bottled” and even “squeezed fresh” when the U.S. Food and Drug Administration limited the use of “freshly squeezed” in the 1990s. Altogether, this poses the question as to the suitability of the law as a mechanism to tackle greenwashing.
What can companies do?
So, what can companies do to ensure their marketers and advertisers use sustainability messaging more responsibly?
Better communication with sustainability specialists is a key way to keep abreast of legislation surrounding environmental and social messaging. This is a very fast-moving space — just last week the United Nations backed a crackdown on climate change-related advertising — and keeping up is essential to not fall foul of ever-heightening requirements. With the correct guidance, firms can build capacity for marketers to work with the spirit of emerging legislation rather than trying to find loopholes that may backfire. This responsible use of messaging is likely to strike a chord with consumers who increasingly value honest, transparent brands.
Ultimately, there are two main courses of action for companies. Firstly, get used to always backing up claims with facts. Make sure you are collecting accurate data, using unbiased terminology when analysing it, and not cherry-picking narrow instances to be publicised. Secondly, if you feel the temptation to greenwash, consider investing the money you would have spent on misleading marketing into creating more sustainable offerings — products and services your company can genuinely be proud of and that don’t require exaggerated claims.
In recent years, stakeholder demand for environmental, social and governance (ESG) information has increased exponentially. Investors need clear, comprehensive, and comparable information to make informed investment decisions. Customers are paying progressively more attention to how their purchases impact people and the planet.
In response, attempts to produce — and increasingly to mandate — various sustainability-related reporting frameworks and standards have also multiplied. This has led to a growing set of overlapping frameworks that are often confusing and resource-intensive to engage with. Could the newly formed International Sustainability Standards Board (ISSB) reduce duplication and provide much needed clarity, or will it simply exacerbate the burden on companies already struggling to navigate the disclosure landscape?
We’re left with a vast patchwork of frameworks and standards, all with varying parameters:
Global or country-specific
Mandatory or voluntary
Finance-focused or broader
Covering all aspects of ESG or narrower
Aimed at one industry or multiple
Aimed at SMEs and / or large public companies
It’s pretty challenging to explain the current landscape of sustainability reporting standards in a clear, concise manner: it’s too complicated and there are far too many acronyms. How can businesses be expected to provide their stakeholders with clear, comparable and comprehensive ESG information when the task of simply choosing which frameworks to use is onerous, and the resources needed to gather the required information often seem disproportionate?
The strong drive for transparency and disclosure is certainly positive in itself, but the piecemeal way it’s happened over the last couple of decades is far from helpful. The need for a definitive alignment of standards is pressing.
New efforts to simplify
Arguably the most interesting recent development in the complex world of ESG disclosure standards is the creation of the ISSB, announced last year as an IFRS initiative, in collaboration with the leading group of voluntary standard-setters. The aim is to combine the existing frameworks to produce a comprehensive, global set of sustainability reporting standards.
There are several challenges that the ISSB will have to overcome in order to achieve this aim. First is the difficulty of a globally adopted framework – one study found that only the GRI can demonstrate widespread global implementation, with current use by 73% of G250 companies. Western Europe and North America generally dominate the ESG reporting landscape, despite being less populous and producing fewer emissions than the Asia-Oceania region. ESG is simply not a high priority in all countries, compounded by issues such as corruption and variable data quality. Global mandatory disclosures may simply not be successful unless supported by an effective global system of data verification.
In addition, the variation in global approaches to issues such as human rights can be controversial and politicised. Many companies operating across multiple markets already face political and cultural challenges when working to increase transparency. An effective global framework will need to accept and embrace these complex relationships and potentially recognise the strength of shared data and disclosures across groups of peers and mutual suppliers as a mechanism for moving the needle in a positive direction.
And what about small and medium enterprises (SMEs)? These companies make up around 90% of businesses globally, yet the vast majority of reporting standards are aimed at large and listed companies. While ESG information from SMEs is crucial to understanding the big picture of business sustainability, and to encourage good practice, the question of proportionality arises. Is it fair to request increasingly complex information from companies that may not have the resources to gather the necessary data? Perhaps the ISSB should consider having different disclosure requirements depending on the user – an approach currently under consideration for the SEC 10-K ESG Disclosure.
Reasons for optimism?
The ISSB has numerous challenges ahead if it is to produce a comprehensive set of standards for global sustainability reporting. There is, however, reason to be optimistic. Many major actors are supporting the ISSB, including the UN, the International Monetary Fund, G20 Finance Ministers, the World Economic Forum and IOSCO. The “building blocks” approach proposed for the ISSB, which accommodates for differing stakeholder views, will hopefully provide the necessary flexibility required to achieve its aim. It’s clear that any framework this ambitious will have to continually adapt to the plethora of differing global regions, stakeholders, industries and businesses. Let’s hope the ISSB can rise to the challenge.
I used to think the concept of materiality in sustainability-speak was rather hard to understand until I came across the concept of “double materiality” in the EU proposal for improvements to company reporting.
Is double-materiality significant or merely a bureaucratic oxymoron?
The answer lies in your point of view.
If you are an unreconstructed financial traditionalist, then the concept is something quite new and potentially disruptive.
If you’re a sustainability advocate, it’s heartwarming because the concept accelerates the cause for greater corporate responsibility, transparency and positive action.
Before understanding double materiality, it helps to know what single materiality is.
Traditional view
The Securities and Exchange Commission (SEC) is the US government regulatory agency that, among other duties, specifies what listed companies should report to investors. It defines materiality as the information “a reasonable person would consider important” when valuing an enterprise.
In practice, information is deemed material to a company’s financial stability and therefore its value to investors. For example, if the share price drops alarmingly because of, say, revelations of widespread corruption or a major accident. When BP’s Deepwater Horizon oil rig blew up in the Gulf of Mexico, the financial and reputational impact of the resulting oil spill had a material affect on the value of the business.
Small accidents or “traffic ticket” fines for pollution would not have the same commercial impact and would not be considered financially material. And until quite recently, the nature of BP’s core business – producing and marketing oil and gas – was not considered a material issue because it contributed to the prosperity of society and BP’s shareholders.
Sustainability view
Sustainability advocates have long argued that the negative impact of an enterprise on the planet and society should influence its value. To make their point, they borrowed the materiality term and devised ways to determine a new set of material issues that the financial community had long ignored as “externalities” (and mostly still do). For example, long before carbon began rising up the financial agenda, it was of great concern to other stakeholders worried about climate change. Stakeholders also fretted about other issues that the financial community ignored, such as human rights, diversity and impacts on nature.
The inclusion of “stakeholder” concerns resulted in the materiality matrix commonly found in sustainability reports. The matrix is plotted by establishing the relative importance of an issue to:
The company’s management
The company’s stakeholders
Plotting the matrix is more of an art than a science. It is usually done by consultants who (should) take a neutral view. Their process goes something like this (there are many variations on a theme):
Step 1. Stakeholders are asked what sustainability issues the company should be managing, and then to rate the relative importance of each issue. For example, on a scale of 1-10, encouraging diversity could be, for arguments sake, rated 9 while protecting biodiversity could be rated 5 by the stakeholders.
Step 2. The consultant (knowing the company), then rates the issues according to their potential importance to the company.
Step 3. Using two axes (importance to the company; importance to stakeholders) the issues are plotted. The top right quadrant contains the issues that are the most important to the company and its stakeholders. It is those topics that are considered material and which define the contents of the sustainability report.
What’s the double fuss?
Sustainability reporters rightly ask what the fuss is about because their concept of materiality broadly accounts for impacts on stakeholders (proxy for the planet) and impacts on the company. Is this not already double materiality, they ask?
Partly. But the important point here is that the concept of double materiality is aimed at the financial community, not the Sustainerati.
The regulators are saying that the traditional financial definition of materiality is pertinent but too narrow. They want reporters to acknowledge that longer-term issues, such as the impact of climate change on a company, are material to the value of an enterprise.
By promoting “double” materiality the regulators are asking companies and the financial community to acknowledge that a much broader range of issues and events affect an enterprise. The regulators are siding with sustainability advocates who have long argued this case. And what’s more, the actions of companies affect society and the environment too. The concept of double materiality acknowledges that interconnection – hence double.
Phew! What a long explanation, say the Sustainerati: that’s what we’ve been arguing for all along!
Sustainability advocates have got their way. Their view of materiality is (largely) being enshrined in regulations and will dictate what large companies are required to report to an increasingly interested financial community.
It may take a little while. But materiality is about to double.
You’re thinking of including more sustainability information in your annual report. Given that universal standards for fully integrated reporting are some way off, what do you do?
It’s a good time to make a start, for three reasons:
Integrated reporting will be the norm within a few years
Work on reporting standards is advancing fast and you can make reasonably accurate assumptions of what investors and regulators will want in the near future
Starting early – as early adopters have shown – keeps you in control as you voluntarily broaden your disclosures, learning as you go.
But where and how do you start? And can you abandon your sustainability reporting?
Other than disclosures legally required by some countries and stock exchanges, you’re still free to choose your own reporting path. Your choice should be influenced by the needs of your audiences (those you are reporting to) and what’s important to them and your business (materiality).
Audience
With the dramatic increase in demand for environmental, social and governance (ESG) information, your reporting audience is now made up of two distinct groups:
Financial community (investors and other players in the capital markets)
A broad group of stakeholders that include employees, potential recruits, policy makers, sustainability professionals, engaged consumers, NGOs and other influencers.
This marks a change from the early days of reporting where it was difficult to decide on the relative importance of different stakeholder groups. Targeting priority audiences has become a little easier with investors clearly in the crosshairs.
Investors want clarity on ESG risks and how the business plans to deliver robust ESG performance, with data to back up assertions. The remaining stakeholders are primarily interested in understanding corporate purpose, tone and approach (stories). Of course, there is an overlap of needs, but the data/story difference is helpful in planning how and what to report to the different audiences. And where to locate the information.
Most of the work underway in developing ESG reporting standards is to satisfy the needs of investors. Given that it has taken well over a century to produce standards on financial reporting, it’s not surprising that investors, regulators and companies are taking a while to agree on the detail.
Standalone no more?
As integrated reporting progresses, we see the standalone sustainability report morphing into story telling on the company website. This means the performance data will be consolidated in the integrated report and what used to be the standalone sustainability performance report will become an evergreen section on the website. The level of detail on the site will be defined by the sector and the company’s impact. For example, companies in the extractive industries will have to provide a lot more detail compared with, say, those in software services.
It’s this sectoral difference that makes materiality so crucial. An honest analysis of what’s important to whom will define the level of sustainability information demanded by the two audiences. It is the materiality analysis that will determine what goes into the integrated report and how much detail is needed on the evergreen web pages.
Of course, the urge to gild the corporate message will prevail. There is a danger that those evergreen pages will be awash with green assertions and images of happy, diverse faces. If the forthcoming reporting standards are any good, they will ensure that integrated reports avoid greenwashing.
Standards landscape
It’s certainly a busy time for standard setters. After early, sleepy years with only the GRI doing anything significant, the standards landscape is now a frenzy of activity. Here is a quick updated summary of the current mix of existing and expected standards that apply to integrated reporting, and the organisations working on them (alphabetical).
CDP (formerly known as Carbon Disclosure Project), which against all expectations has been highly successful in getting companies to disclose their carbon emissions voluntarily.
EU’s Corporate Sustainability Reporting Directive (CSRD). The EU wants to make sustainability reporting by large companies more consistent and comparable. It says it will work with existing standard setters to ensure corporate reporting supports the European Green Deal and the flow of capital bolsters sustainability. The CSRD is part of a package of sustainable finance initiatives, defined by the EU’s Taxonomy, a classification system of environmentally sustainable economic activities.
Global Reporting Initiative (GRI). The grandaddy of the pack which produces standards to satisfy multi-stakeholders and which investors find woolly. The GRI will publish its “universal” standards this year. It has promised greater cooperation with the different standard-setting groups, although its promises to do so in the past have not come to much.
International Financial Reporting Standards (IFRS) Foundation is working towards the creation of an international sustainability standards board and will decide if this is feasible by November, 2021. This is potentially the most significant standards initiative because IFRS rules on financial disclosure are required in 140 jurisdictions around the world. This includes the EU but not the USA, which follows the US Generally Accepted Accountancy Principles (GAAP). If the IFRS goes ahead with its plans, it will split the ESG reporting standards world in two: USA – probably using the SASB standards (below); and the rest of the world, using IFRS.
Task Force on Nature-related Financial Disclosures (TCFN) is hoping to do for biodiversity what the TCFD (above) has done for climate change reporting. It was founded by Global Canopy, the United Nations Development Programme (UNDP), the United Nations Environment Programme Finance Initiative (UNEP FI), and the WWF. It’s at the very beginning of its work.
Value Reporting Foundation. This is the name of the recently merged Sustainable Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC). The Foundation’s standards are known as the SASB standards. It remains to be seen how the IIRC’s standards will be integrated by the Foundation, if at all.
World Economic Forum’s (WEF) efforts to set ESG standards, instigated by the big four accountancy firms, is underway. WEF has emphasised the need for collaboration and endorses the efforts of the IFRS.
Another significant push for ESG reporting standards is coming from the US Securities and Exchange Commission (SEC) which is preparing tougher disclosure rules on carbon emissions. This is supported by the Biden administration and is creating the inevitable political resistance from Republicans who complain that the metrics are not yet mature enough to avoid misinterpretation by investors.
Next steps
While it will take a few years for integrated reporting standards to become the norm, it’s rewarding to see the positive impact of early initiatives to engage the financial community, such as the UN-supported Principles for Responsible Investment.
Many companies have been experimenting with integrated reporting for some time. They are about to be joined by many more. Soon, we hope, you will have a clear roadmap to follow.
Sales pitch: hear more about how we can help you build a future-proof sustainability reporting eco-system. (peter.knight@contexteurope.com).
