In early September 2023, I attended the Reuters Events Sustainability Reporting Europe 2023 in London, where some of the latest issues in sustainability reporting were discussed. The multiple themes at the event ranged from a comparison of reporting standards, to issues of data availability needed to comply with the new European Sustainability Reporting Standards (ESRS) requirements.
The panels sessions represented a variety of groups, ranging from investors to standards setters to affected reporting companies. I want to share a few of my observations from some of the panel sessions that I attended. I am currently developing a course on the ESRS. When it is available, I will post it on my schedule of courses. If you are interested, I hope to see you there.
Investors’ Perspective
Michael Eberhardt, Managing Director, BlackRock and Anita McBain, Managing Director, Head of ESG Research, EMEA, Citi provided the investor’s view of ESG reporting.
Investors care about company data on climate change, energy transition, and biodiversity. They noted that the availability of data is no longer an impediment to using sustainability information for investment purposes. Data is available and is being reported. What is reported is being read by analysts to make their investment decisions. Fundamental financial and sustainability information produced by the reporting company is considered more important than rating and rankings from third parties.
A common complaint about sustainability data has been its reliability and comparability. Hakan Lucius, Head of Corporate Responsibility & Civil Society at the European Investment Bank, made an interesting comment that rang true for me as an accountant. Financial accounting has been 400 years in the making, and you still cannot compare the bottom-line of two companies. He also noted that financial reporting was not obligatory 100 years ago. When it did become mandatory in many jurisdictions around the world, many of the same concerns raised today about sustainability reporting were once raised about financial reporting. As with financial reports, expectations for sustainability information are high and should be.
Standards Setters Perspectives
It was interesting to hear Saskia Slomp, CEO, European Financial Reporting Advisory Group (EFRAG), Eelco van der Enden, CEO, Global Reporting Initiative (GRI), and Richard Barker, Board Member, International Sustainability Standards Board(ISSB) talk about “interoperability” among their standards. They all agreed that climate disclosure is common across all of them. If you use the European Sustainability Reporting Standards (ESRS), you will be in accordance with the GRI Standards and the International Sustainability Standards Board (ISSB) IFRS S1 and S2. The general requirements are the same across all, but the public policy component for ESRS is different from GRI and IFRS. Companies that are reporting on Taskforce on Climate-Related Financial Disclosures (TCFD) will find it easier to apply ISSB and ESRS. The reason being is that both ISSB and ESRS use TCFD’s four pillars of governance, strategy, risk management, and metrics and targets as the basic structure of their standards.
The ESRS requires the use of double materiality to help companies decide what to report. Double materiality includes a company’s impacts from its operations and relationships (suppliers) as well as its risks and opportunities. Impact materiality involves determining a company’s most significant effects on the economy, environment, and society. These impacts are evaluated on how significant they are, but without concern for financial considerations. Risks and opportunities are evaluated on their financial impacts to the company’s revenues, expenses, liabilities, and cost of capital.
Affected Companies’ Perspective
Many of the attendees representing affected EU and non-EU companies voiced concerns about being able to meet all the required disclosures by specified deadlines. In the first few years of reporting on the ESRS, there will be considerable leeway given to companies. Companies need to make good faith efforts on disclosure and explain why they might not be able to do so. Transparency seems to be the key issue here. In addition, there is no current mechanism in place for evaluating strict enforcement of every disclosure by affected companies. That is, however, likely to come in time.