Preparing for Upcoming ESG Disclosure Requirements

The future of ESG disclosure reporting will no longer allow companies or consultants to cherry-pick or determine what ESG information is reported. Companies will have to disclose specific ESG information that regulators and accounting standards require. ESG reporting standards are transitioning from the wild west to ridged government and accounting-imposed standards.

To navigate the evolving landscape of ESG reporting standards, companies must proactively integrate the forthcoming disclosure requirements into their reporting processes. International accounting standards will require sustainability disclosure alongside finance statements. Regulatory bodies such as the Securities and Exchange Commission (SEC), the United Kingdom (UK) and the European Union (EU) are all introducing frameworks that will each require their own future ESG reporting requirements. Furthermore, these reporting standards will require adopting internal controls that can support an independent audit.

Below is a summary of some sustainability reporting standards companies will be subject to.

Beginning in 2024, International GAAP (IFRS) will require sustainability disclosure reporting as spelled out by the International Sustainable Standards Board (ISSB). The ISSB’s initial requirements require climate reporting as set out in IFRS S2 Climate-related Disclosures and are similar to the Task Force on Climate-related Financial Disclosures (TCFD) framework. In future years, reporting will be expanded to IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information. IFRS S1 includes industry-specific ESG factors that are material to financial stakeholders. Industry-specific ESG factors are expected to follow the Sustainability Accounting Standards Board (SASB) standards, which merged with the ISSB in 2022.

Each jurisdiction will require its own IFRS sustainable reporting requirements. When jurisdictionally required, IFRS Sustainability Disclosure Statements are to be issued alongside IFRS financial statements and may be subject to audit.

Sometime in 2023, the SEC is expected to adopt climate reporting requirements for all US public companies. The SEC proposal requires management to expand climate reporting and develop robust internal controls over climate disclosures. A registrant’s emissions scope 1 and 2 emissions data will be verified by an independent verifier and reported in its annual financial statements. Scope 3 emissions would only be reported if they are material or if the company set emissions targets. Scope 3 emissions will not be subject to audit.

Climate-related disclosures such as risks, opportunities and emissions targets will be reported in the Management, Discussion, and Analysis (MD&A) section of the annual Form 10K. Climate-related disclosures also include disclosing the financial impact of climate-related risks on the line items of financial statements.

The EU recently enacted the Corporate Sustainability Reporting Directive (CSRD) for reporting years beginning in 2024. The CSRD initially requires larger EU companies to prepare annual audited corporate sustainability reports (CSR) covering ten detailed disclosures as outlined by European Sustainability Reporting Standards (“ESRS”), which are as follows:

Approximately 50,000 companies will be required to report under CSRD’s current requirements. ESRS also intends to expand on current disclosures for companies in high-impact and energy-intensive industries such as agriculture, coal mining, mining, oil and gas (upstream) and oil and gas.

The UK’s climate disclosure requirements apply to UK-listed and certain large private UK companies. Companies that fall within the scope must indicate whether they have published disclosures consistent with the TCFD’s recommendations in their annual financial reporting, or if not, explain why not. The UK is also creating its own reporting standards and green taxonomy, which is expected to incorporate a mixture of IFRS sustainable reporting disclosures and CSRD reporting standards.

The growing breadth of sustainable factors required to be reported goes well beyond most firms’ current “annual and manual” method of sustainability reporting. To meet new reporting requirements, companies must adopt ESG reporting controls that are on par with financial controls. Elements of effective internal controls are:

Companies need to incorporate processes that aggregate decentralized ESG data in an automated fashion to create auditable reports that meet a growing volume of regulatory demands. Other considerations include governance and strategy, which are an integral part of internal controls.

The EU’s CSRD reporting requirements are by far the most extensive sustainability reporting standards. CSRD not only requires reporting on climate and ESG factors materially to financial stakeholders but also covers ESG factors that affect society as a whole. CSRD reporting is similar to double-materiality or triple-bottom-line reporting, where people, planet and profits are considered. The CSRD also makes it mandatory for companies to have an audit of the sustainability information that they report.

The ISSB standards are based on financial materiality and do not consider CSRD’s double-materiality perspective. The ISSB and CSRD are taking steps to align standards that overlap to simplify reporting. There is no mandatory audit requirement as this is determined at the jurisdictional level.

SEC and UK discloser requirements incorporated the TCFD framework in their reporting requirements. The SEC’s proposed and UK rules only require disclosure of climate-related information, rather than the CSRD’s broader focus on other ESG factors. The SEC requires limited assurance on the reported information, whereas, in the UK, an issuer must take reasonable care to ensure that the information provided is correct and not misleading.

Unlike the SEC, the UK is looking to expand its sustainable reporting requirements to make them more in line with EU reporting. It is unlikely the SEC will do the same.

Companies today must prepare for a future where regulators and the accounting profession dictate ESG disclosure reporting requirements. No longer will investors accept cherry-picked self-reported ESG information. In the near future, all ESG reports will be based on a set of standards subject to independent verification. Managers today need to start thinking about building processes that meet the increasing demand for ESG information.