Regulation & Standards

Question Answered: Sustainability regulation

Published: Jan 2023

“How prepared are companies for new sustainability reporting rules designed to tackle greenwashing and create a single set of corporate climate reporting standards?”

Enviromental technology concept
Portrait of Jo Holmes, Head of ESG Reporting, Marshalls plc

Jo Holmes

Head of ESG Reporting
Marshalls plc

We’ve been reporting our carbon footprint since 2004 and we’ve been a FTSE4Good constituent for 17 years. So sustainability reporting isn’t new for us, but it’s certainly become much more complex. It is now rightly driven by data, controls and the need for transparency.

The sustainability reporting landscaping has changed dramatically over the last few years. We’re not only engaging with numerous ESG ratings agencies, but legislation and standards are also driving reporting, and developing quickly. As a FTSE 250 plc, we have a mandatory requirement to report according to the Task Force on Climate-related Financial Disclosures (TCFD). The process of TCFD reporting has been a welcome one as it gives our stakeholders a well-rounded view of our approach to climate change. We’re now anticipating the launch of the International Sustainability Standards Board (ISSB) standards worldwide and the TPT (Transition Plan Taskforce) guidelines in the UK. Though they are both going to add another layer to our reporting processes, they will also offer a much more level playing field. Stakeholders will now be able to compare different companies because we’ll all be reporting to the same standards – which we see as a positive step.

As a manufacturer and supplier of hard landscaping products like concrete paving, drainage solutions and roof tiles, we know that our carbon footprint is something we not only need to understand, but also manage, measure and report. We measure our Scope 1 and 2 emissions and we’re proud to have reduced our carbon footprint by 50% between 2008 and 2020. Our Scope 3 emissions are those from our suppliers, including cement producers, so it’s a large footprint. Though we haven’t previously reported our Scope 3 emissions, we have measured it and this year we’ll be looking at it in more detail with a view to reporting. It’s important to us to show our entire footprint, not just the part that we have a direct impact on.

Our reporting of sustainability progress is mainly in our Annual Report and our Sustainability Report, both of which are available on our website. At this stage, these reports are separate though I know the direction of travel is to have integrated reporting. This isn’t something we’re contemplating right now but as sustainability reporting becomes much more standardised, our reporting will evolve.

My advice to those in the sustainability reporting field is to keep a keen eye on what’s coming. We’ve been watching developments in the US and the EU, as well as looking at what might happen in the next few years, so for example the likely rise of biodiversity reporting. Being prepared for these developments is key and it’s driving what we’re doing internally. The other important part of sustainability reporting is materiality. Assessing and reporting on what really matters to you and your stakeholders gives a much more transparent view of your business, which is what those reading your Annual Report are really looking for.

Portrait of Chris McGarry, Partner, White & Case

Chris McGarry

Partner
White & Case

The European Union’s Green Deal ushered in four key pieces of legislation. First on the scene was the Sustainable Finance Disclosure Regulation (SFDR) followed by the EU Taxonomy Regulation, which together with the SFDR define what classifies as an environmental investment and a social investment. Now we have the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).

CSRD will come into law early 2023 and will be implemented in phases. It requires companies to report the risks they face from climate change and other sustainability issues, and how their business is impacting climate change. It also requires companies to publish the policy they have put in place for Paris alignment and their exposure to carbon generated power. It entails mandatory information gathering and reporting. Larger companies will have to comply for the financial year starting 2024 but companies not domiciled in the EU will have longer unless they are listed in the EU. The detailed reporting templates within CSRD will use ISSB standards as a baseline. In the UK, which is drawing up a Sustainability Disclosure Requirements (SDR), ISSB global standards will also be the baseline in the reporting templates.

The EU’s CSDDD regulation is still being negotiated between the Council on the one hand and the Commission and European Parliament. It will require companies to publish a measurable transition plan to Paris alignment and the eradication of human rights adverse impacts. The Council of Ministers recently published its mark-up of CSDDD regulation. France has pushed back on requirements that banks contractually impose the legislation on their borrower clients, arguing it was too much of an operational burden for banks.

Both pieces of legislation represent a paradigm shift for businesses to take responsibility for their own supply chains and to think strategically about the impact of their business on stakeholders. CSDDD will hold the most severe penalties for non-compliance since it allows penal sanctions to be imposed by member states, plus any impacted stakeholder may bring civil litigation against companies which breach CSDDD obligations. The penalties member states impose under CSRD must be effective and fines will be based on global turnover, while injunctions will be able to stop activities. It is not going to be a case of just a slap on the wrist for non-compliance. In another important element, the EU has also commented on co-opting businesses to deliver international treaty obligations which include the Paris Accords and the Universal Declaration of Human Rights.

We advise companies not to wait for the detailed CSRD reporting templates due by 30th June 2023, but to take steps to do the work now on the headline strategic, governance and operational issues which are already clear under the CSRD. Aspects of the regulation are going to apply to EU subsidiaries of non-EU businesses. There is also an element of group-level reporting, so a non-EU parent company will have to provide information. Companies don’t have to be that large to be caught by these laws. EU subsidiaries with a turnover over €40m and non-EU parent companies with a turnover of over €150m or if they are listed in the EU must also comply.

Portrait of George Richards, Partner, Head of ESG Reporting and Assurance, KPMG

George Richards

Partner, Head of ESG Reporting and Assurance
KPMG

Currently there are many different standards for sustainability reporting, and because they are mostly voluntary, there is considerable divergence in what companies report. Finding consistency and comparability amid a patchwork of voluntary frameworks and standards has proven to be a major challenge.

To drive higher-quality comparable reporting, processes for preparing sustainability reporting need to be designed and operated with the same rigour as those for financial reporting. The consolidation of sustainability reporting standards that is now taking place, notably under the ISSB, presents an opportunity to do this, and we are fully supportive of the ISSB’s ambition.

New proposals on the first IFRS Sustainability Disclosure Standards, part of the ISSB work, mark the next step towards equal prominence for sustainability and financial reporting. The proposals aim to create a global baseline for investor-focused sustainability reporting that local jurisdictions can build on and be compatible with other sustainability reporting regulations being issued by the EU and by the SEC in the US.

It looks likely the standards will be published in 2023, and a rapid route to adoption is expected in several jurisdictions. In some, the standards will provide a baseline either to influence or to be incorporated into local requirements while others are likely to adopt the standards in their entirety. This is a critical milestone in the journey towards a consistent global baseline of investor-relevant sustainability reporting. The aim is to drive transparency and enable investors to make better informed choices.

These standards are being developed at a much faster pace than IFRS Accounting Standards. Under the proposals, companies would report on all relevant sustainability topics (not just on climate-related risks) across four content areas that are consistent with the TCFD eg governance, strategy, risk management, and metrics and targets.

Reporting would be connected to the financial statements and released at the same time. Therefore, companies will need processes and controls in place so that they can provide sustainability information of the same quality, and at the same time, as their financial information. Getting ready now is critical even if the final standards may not be identical to the proposals. We know more standards will be coming along the horizon, such as those discussed at COP15 in December 2022 relating to biodiversity loss and natural capital. And sustainability reporting requirements are not just limited to listed companies. Large private companies will also need to report, initially on climate related disclosures and eventually a range of other topics.

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.

Corporate sustainability reporting can – and should – start driving a different conversation in the board room such that business owners stretch their thinking and ensure, from the top down, leadership teams are making principle based and strategic decisions that take the climate, as well as broader sustainability considerations, into greater and sustained account. These conversations become less about what a company ‘must’ do (comply) and more about what a company ‘wants’ to do (bring change).

Here in the UK, we have an opportunity to build a world class reputation for sustainability reporting and external assurance and 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 we seize this moment, and we are fully committed to playing our part as a firm.

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