From a European perspective, the approach to reporting ESG data is regulated by the NFRD (Non-financial Reporting Directive), which specifies the scope of entities subject to reporting obligations, the general reporting framework and gives wide freedom regarding the format of reports, the form and place of their publication. But now There are new reporting requirements on the horizon that will be regulated by the CSRD directive (Corporate Sustainability Reporting Directive). These regulations significantly expand the group of organizations that will have to report their ESG activities and specify reporting standards. Moreover, the new directive introduces the obligation to audit reports, an element that has not had mandatory application so far.
Global perspective
This process looks slightly different from a global perspective. In this case, we are dealing with investors’ needs for ESG data, which is increasingly required by companies, but there is no uniform standard defining the scope of reported data. A certain answer is the offer of news agencies, stock exchanges or specialized scoring entities that provide either a wide set of indicators or those defined according to their own evaluation principles.
An important alternative in this context are the step-by-step sustainability reporting standards developed by IFRS. So far, this organization has focused on building financial reporting standards, but in the last two years it has taken dynamic actions to build ESG standards – ISSB (International Sustainable Standard Board).
In the middle of this year, the first two IFRS standards were published. S1 sets out how the entity prepares and reports such disclosures, setting out general content requirements and presentation of these disclosures so that the information is useful to users of the information. In particular, this standard requires disclosure of information on topics such as the entity’s management processes, controls and procedures to monitor, manage and supervise sustainability-related risks and opportunities, and the entity’s strategy for managing sustainability-related risks and opportunities. In contrast, the S2 standard includes detailed climate-related disclosure requirements. Its main goal is for entities to disclose information about climate-related risks and opportunities that are important to report users.
Strong institutional mandate
Importantly, the IFRS standards fully take into account the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and have a strong institutional mandate. The ISSB developed IFRS S1 and IFRS S2 using extensive market feedback and in response to calls from the G20, the Financial Stability Board and the International Organization of Securities Commissions (IOSCO), as well as global leaders in the business and investor communities.
In this context, companies’ approach to these standards seems interesting. The answer to such a question may be the results presented as part of the EY Global Climate Risk Barometer report, which concerned, among others: companies’ approach to reporting in accordance with ISSB guidelines. The survey was conducted among 1,500 companies from 13 sectors and 51 countries.
As part of the assessment of disclosures relating to the four main pillars of S2, which include corporate governance, strategy, risk management and indicators and targets, it was found that corporate governance is characterized by the highest level of reporting. The data provided shows that 60 percent companies disclosed information about the skills and competences to supervise the strategy and the method of appointing committees to supervise the setting of goals, but 3 percent of them disclose information on changes to the process used to identify climate-related risks ahead of the reporting period. Moreover, 65 percent companies revealed progress in achieving previously set goals, 54 percent companies disclosed emissions in scope three and only 5 percent revealed quantitative and qualitative information affecting financial planning.
A chance to gain an advantage
The report also examined disclosures about transition plans. It was found that 53 percent companies disclose a specific zero-emission transition or decarbonization strategy. In this respect, companies from the sectors most exposed to risk dominated: energy and mining companies and transport companies.
According to the authors of the report, in a situation where it is necessary to meet climate commitments, the process of transition to a zero-emission economy should be significantly accelerated, because the analysis results indicate that there is a large gap between declarations regarding climate ambitions and the actual results of their implementation. Therefore, climate risk disclosure should not be seen as a separate area of activity, but as an opportunity to present a broader business strategy and gain a competitive advantage.
Dr. Tomasz Wiśniewski, EY Polska expert
