Sustainability Reporting Explained

Sustainability reporting is more than just another regulatory requirement; ESG has quickly become an integral part of corporate strategy for businesses worldwide. Read on to find out how businesses are leveraging their ESG data and reporting to gain a competitive edge:

1. Improved Risk Management

By systematically assessing and reporting on ESG factors, companies can better identify and manage risks associated with environmental, social, and governance issues. This proactive approach helps businesses anticipate regulatory changes, supply chain disruptions, and reputational risks, thereby enabling them to mitigate potential negative impacts. Effective risk management can lead to increased operational resilience and long-term sustainability.

2. Enhanced Reputation and Brand Value

Sustainability reporting allows companies to demonstrate their commitment to environmental stewardship, social responsibility, and ethical governance. By transparently sharing their ESG initiatives and performance, businesses can enhance their reputation and build trust with customers, investors, and other stakeholders. A strong commitment to sustainability can differentiate a brand in the marketplace, attract environmentally and socially conscious consumers, and foster customer loyalty.

3. Increased Access to Capital

Investors are increasingly incorporating ESG criteria into their investment decisions. Companies that provide transparent and comprehensive sustainability reports are more likely to attract investment from ESG-focused funds and socially responsible investors. Additionally, sustainability reporting can improve a company’s credit rating by demonstrating robust risk management practices, potentially lowering the cost of capital.

4. Operational Efficiency and Cost Savings

Sustainability reporting often involves a detailed analysis of a company’s resource use and environmental impact. This process can uncover inefficiencies and opportunities for cost savings, such as reducing energy consumption, minimizing waste, and optimizing supply chains. By implementing sustainable practices, companies can lower operational costs and improve their bottom line.

5. Enhanced Stakeholder Engagement

Sustainability reporting facilitates communication with a wide range of stakeholders, including employees, customers, investors, regulators, and communities. By engaging stakeholders through transparent reporting, companies can gather valuable feedback, build stronger relationships, and address stakeholder concerns more effectively. This engagement can lead to improved stakeholder satisfaction and support for the company’s initiatives.

6. Innovation

The process of sustainability reporting encourages companies to innovate and develop new products, services, and business models that align with sustainable practices. By integrating sustainability into their core strategy, businesses can tap into new markets and opportunities, gaining a competitive edge. Companies that lead in sustainability are often seen as industry pioneers, attracting top talent and setting benchmarks for others to follow.

7. Long-term Value Creation

Ultimately, sustainability reporting contributes to long-term value creation by aligning business strategies with societal and environmental needs. Companies that prioritize ESG factors are better positioned to adapt to changing market conditions, regulatory landscapes, and consumer preferences. By focusing on sustainable growth, businesses can ensure their long-term viability and success.

In summary, sustainability reporting offers a multitude of benefits that extend beyond mere compliance. By embracing transparency and accountability, companies can enhance their reputation, manage risks effectively, attract investment, and drive innovation. As the business landscape continues to evolve, sustainability reporting will remain a critical tool for companies seeking to thrive in a sustainable future.

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In the contemporary business landscape, climate is no longer a niche concern but a strategic and long-term priority for many industries. The Greenhouse Gas (GHG) Protocol from the World Resources Institute provides the most widely used international accounting tool for government and business leaders to understand, quantify, and manage GHG emissions.

Understanding the distinction between Scopes 1, 2 and 3 under the GHG Protocol is crucial for businesses trying to calculate and report their carbon footprint. We provide below a simple explanation of the three emissions scopes and a general step-by-step guide for implementing the GHG Protocol in your business:

Scope 1: Direct Emissions

Definition: Scope 1 emissions are direct GHG emissions from sources that are owned or controlled by the company. These include emissions from combustion in owned or controlled boilers, furnaces, vehicles, and emissions from chemical production in owned or controlled process equipment.

Examples:

• Fuel combustion from company-owned vehicles

• On-site manufacturing emissions

• Fugitive emissions from refrigerants or other equipment

Business Implications: For businesses, managing Scope 1 emissions involves taking direct actions to reduce emissions from their own operations. This could include transitioning to energy-efficient technologies, optimizing fuel use, or investing in renewable energy sources. Reporting Scope 1 emissions is often the starting point for companies as they have the most control over these emissions.

Scope 2: Indirect Emissions from Energy

Definition: Scope 2 emissions are indirect GHG emissions from the consumption of purchased electricity, steam, heating, and cooling. These emissions occur at the facility where the energy is generated but are accounted for in the reporting company’s GHG inventory because they result from the company’s energy use.

Examples:

• Electricity purchased from the grid

• District heating and cooling

Business Implications: Addressing Scope 2 emissions typically involves improving energy efficiency and sourcing energy from renewable sources. Businesses can invest in energy-efficient appliances, lighting, and machinery, or purchase renewable energy credits (RECs) to offset their electricity use. Scope 2 emissions are crucial for businesses to manage as they often constitute a significant portion of a company’s carbon footprint.

Scope 3: Other Indirect Emissions

Definition: Scope 3 emissions are all other indirect emissions that occur in a company’s value chain. These emissions are a consequence of the company’s activities but occur from sources not owned or directly controlled by the company.

Examples:

• Purchased goods and services

• Business travel and employee commuting

• Waste disposal

• Use of sold products

• Transportation and distribution (upstream and downstream)

Business Implications: Scope 3 emissions are often the largest source of emissions for companies, but they are also the most challenging to measure and manage due to their complexity and the involvement of external partners. Companies need to collaborate with suppliers, customers, and other stakeholders to gather data and implement reduction strategies. This might involve redesigning products for lower emissions, optimizing logistics, or engaging in sustainable procurement practices.

Applying the Scopes to Business

Understanding and managing emissions across all three scopes is essential for businesses aiming to achieve comprehensive carbon management and sustainability goals. Here’s how companies can approach this:

1. Inventory and Baseline: Start by conducting a comprehensive GHG inventory to establish a baseline for all three scopes. This will help identify major sources of emissions and prioritize reduction efforts.

2. Set Reduction Targets: Based on the inventory, set ambitious yet achievable targets for emissions reductions across all scopes. Consider adopting science-based targets to align with global climate goals.

3. Implement Strategies: Develop and implement strategies for reducing emissions in each scope. This could involve operational changes, technology investments, supply chain engagement, and product innovation.

4. Engage Stakeholders: Collaborate with internal and external stakeholders, including employees, suppliers, and customers, to drive emissions reductions. Transparency and communication are key to fostering a culture of sustainability.

5. Monitor and Report: Regularly monitor emissions performance and report progress to stakeholders. Utilize frameworks like the GHG Protocol, CDP, and TCFD for consistent and credible reporting.

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The Corporate Sustainability Reporting Directive (CSRD) is a significant regulatory development in the realm of sustainability reporting within the European Union that is coming into force over the next few years. It builds upon the existing Non-Financial Reporting Directive (NFRD) and aims to enhance and standardize sustainability disclosures, ensuring that stakeholders have access to reliable and comparable information on companies’ ESG impacts. Read on to find out what changes are from NFRD and if your business will be within its scope:

Who is in Scope of CSRD and When

One of the most notable changes under the CSRD is the expansion of its scope. While the NFRD applied to approximately 11,000 large public-interest entities, the CSRD will cover nearly 50,000 companies. The following four groups of companies are or will be subject to CSRD requirements:

1. For EU listed entities which have securities listed on an EU exchange and have over 500 employees, or which already report to NFRD, CSRD already started applying from Jan 1 2024, assuming a calendar financial year-end.

2. For EU large entities which meet two of the following criteria:

   • More than 250 employees

   • €40 million or more in net turnover

   • €20 million or more in total assets

CSRD applies from Jan 1 2025, assuming a calendar financial year-end

3. For small and non-complex credit institutions, captive insurance undertakings, and SMEs which have securities listed on an EU exchange and also meet at least two of the following criteria:

   • More than 50 employees during the relevant financial year

   • €8 million or more in net turnover

   • €4 million or more in total assets

CSRD applies from Jan 1 2027, assuming a calendar financial year-end, with an option to opt-out until 2028.    

4. For non-EU entities with at least €150 million or more in net turnover in the last 2 years generated in the EU and for which one of the following two criteria also applies:

   • Has an EU subsidiary that is classed as an EU Large Entity

   • Has an EU branch with €40 million or more in net turnover

CSRD applies from Jan 1 2028, assuming a calendar financial year-end

Key Requirements of CSRD

1. Detailed Sustainability Reporting: Companies are required to report on a wide range of sustainability issues, including environmental factors (such as climate change, biodiversity, and pollution), social matters (such as employee treatment, diversity, and human rights), and governance issues (such as business ethics and corruption). This comprehensive approach ensures that stakeholders have a holistic view of a company’s ESG performance.

2. Double Materiality: The CSRD introduces the concept of double materiality, meaning companies must report on how sustainability issues affect their business and how their business impacts people and the environment. This dual perspective ensures that companies are accountable for their role in broader societal and environmental contexts.

3. Alignment with European Sustainability Reporting Standards (ESRS): The CSRD mandates that companies align their reporting with the ESRS, which are being developed by the European Financial Reporting Advisory Group (EFRAG). These standards provide detailed guidance on the information companies need to disclose, promoting consistency and comparability across reports.

4. Audit and Assurance: To enhance the reliability of sustainability information, the CSRD requires companies to obtain limited assurance for the reported data. This is a step up from the NFRD, which did not mandate external assurance, and it underscores the importance of trustworthy sustainability disclosures.

5. Digital Reporting: Companies will need to prepare their sustainability reports in a digital format, specifically in XHTML, and tag them according to the European Single Electronic Format (ESEF). This will facilitate the accessibility and comparability of data across the EU.

Preparing for Compliance

To comply with the CSRD, companies in scope should start by conducting a thorough assessment of their current reporting practices and identifying gaps relative to the new requirements. Engaging with stakeholders to understand material ESG issues and implementing robust data collection and management systems will be crucial. Companies should also consider investing in training and resources to ensure they are prepared for the assurance process and the digital reporting requirements.

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The sustainability regulatory landscape is evolving at an unprecedented pace. As stakeholders increasingly demand transparency and accountability, companies worldwide are grappling with a complex array of regulations aimed at standardizing non-financial disclosures. This article explores the current state of sustainability reporting regulations, highlighting key developments and what they mean for businesses.

Key Regulatory Developments

1. The European Union’s CSRD

The European Union has been at the forefront of sustainability regulation with the introduction of the Corporate Sustainability Reporting Directive (CSRD). The CSRD, which came into effect in January 2024, expands the scope of the previous Non-Financial Reporting Directive (NFRD) to include a broader range of companies. It requires detailed disclosures on sustainability risks, impacts, and opportunities, aligning with the EU’s Green Deal objectives. Companies will need to report according to the European Sustainability Reporting Standards (ESRS), which emphasize double materiality—considering both the impact of sustainability issues on the company and the company’s impact on society and the environment. For more information about the EU CSRD and if your company is in scope, see our in-depth article on the topic. 

2. The SEC’s Climate Disclosure Rule

In the United States, the Securities and Exchange Commission (SEC) has been working on a landmark climate disclosure rule. Expected to be finalized by the end of 2024, the rule would require publicly traded companies to disclose their greenhouse gas emissions, climate-related risks, and governance processes related to climate change. This move aligns with the Biden administration’s broader climate agenda and aims to provide investors with consistent and comparable data to assess climate risks.

3. The ISSB’s Global Baseline

The International Sustainability Standards Board (ISSB), established under the IFRS Foundation, has been developing a set of global sustainability disclosure standards. The ISSB’s aim is to create a comprehensive global baseline for non-financial reporting, which can be adopted by jurisdictions worldwide. The first set of standards, focusing on climate-related disclosures, became effective in early 2024. These standards are designed to complement existing frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD), and provide a unified approach to sustainability reporting. For more information about the ISSB global baseline, see our deep dive article here.

Implications for Businesses

The proliferation of sustainability reporting regulations presents both challenges and opportunities for businesses. On one hand, companies must navigate a complex web of reporting requirements that vary by region and industry. This necessitates significant investments in data collection, analysis, and reporting infrastructure. On the other hand, robust ESG reporting can enhance a company’s reputation, attract investment, and improve risk management.

Find out how our services can help make compliance with existing and upcoming regulation simple for your business. Contact us for a free consultation today

The International Financial Reporting Standards (IFRS) Foundation has been actively working on developing global sustainability reporting standards through its newly established International Sustainability Standards Board (ISSB). This initiative aims to provide a comprehensive framework for ESG reporting that can be applied internationally, complementing the financial reporting standards that IFRS is known for. Significant progress has been made in this area, particularly with IFRS S1 and IFRS S2 taking effect in January 2024. Here’s an overview of these standards and what is involved:

IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information

Objective: IFRS S1 establishes the foundational requirements for companies to disclose sustainability-related financial information. The goal is to ensure that investors and other capital market participants have access to information that is relevant for assessing the enterprise value of a company.

Key Requirements:

• Materiality: Companies are required to disclose information that is material to the assessment of their enterprise value. This involves considering both the impact of sustainability-related risks and opportunities on the company and the company’s impact on the environment and society.

• Holistic Approach: IFRS S1 encourages an integrated approach to reporting, where sustainability-related disclosures are connected with financial statements to provide a comprehensive view of the company’s performance and prospects.

• Consistency and Comparability: The standard emphasizes the need for consistent and comparable information across reporting periods and among companies, facilitating better decision-making by investors.

• Governance and Risk Management: Companies must disclose their governance structure and processes for managing sustainability-related risks and opportunities.

IFRS S2: Climate-related Disclosures

Objective: IFRS S2 focuses specifically on climate-related disclosures, building on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The aim is to provide investors with clear, comprehensive, and comparable information about the climate-related risks and opportunities that companies face.

Key Requirements:

• Governance: Disclosures should include the organization’s governance around climate-related risks and opportunities, detailing the board’s oversight and management’s role.

• Strategy: Companies must describe the actual and potential impacts of climate-related risks and opportunities on their business model, strategy, and financial planning.

• Risk Management: Information on how climate-related risks are identified, assessed, and managed must be disclosed, integrating these processes into the company’s overall risk management framework.

• Metrics and Targets: Companies are required to disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities, including Scope 1, Scope 2, and, where applicable, Scope 3 greenhouse gas emissions.

Progress and Implementation

The development of IFRS S1 and S2 marks a significant step towards a global baseline for sustainability reporting. These standards are designed to be applicable across different jurisdictions and industries, providing a consistent framework for companies worldwide. The ISSB is working closely with other international standard-setters, such as the Global Reporting Initiative (GRI) and the European Union, to ensure alignment and reduce the reporting burden for multinational companies.

The ISSB continues to engage with stakeholders globally to refine these standards and support their adoption, ensuring they meet the needs of capital markets and contribute to a more sustainable global economy. Many international jurisdictions, such as Canada, Australia, Japan and the UK, are expected to closely align their sustainability disclosure requirements with IFRS S1 and S2. 

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All companies within scope of the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) requirements, which we explain in depth in our CSRD article, will be required to report sustainability information in accordance with European Sustainability Reporting Standards (ESRS).  These requirements are designed to provide stakeholders with comprehensive insights into a company’s ESG performance and impacts and standardize ESG reporting quality and consistency. Here are the key features of ESRS:

1. Double Materiality

• Financial Materiality: Companies must assess and report on sustainability matters that could affect their financial performance, position, or cash flows. This involves analyzing how environmental, social, and governance issues might impact the company’s financial health.

• Impact Materiality: Companies are also required to disclose how their activities impact the environment and society. This includes reporting on the company’s contributions to climate change, resource depletion, social inequalities, and other sustainability issues.

2. Comprehensive ESG Disclosures

• Environmental: Companies must report on their strategies and performance related to climate change, including mitigation and adaptation efforts. Disclosures should cover areas such as greenhouse gas emissions, energy use, water and waste management, biodiversity, and pollution.

• Social: Reports should include information on workforce-related issues such as employee well-being, diversity and inclusion, and labor practices. Companies must also address their impact on human rights, community engagement, and social value creation.

• Governance: Disclosures should cover governance structures and practices, including board diversity, executive remuneration, business ethics, and anti-corruption measures. Companies should also report on their risk management frameworks and internal controls related to ESG issues.

3. Sector-Specific Standards

• The ESRS include sector-specific standards that tailor reporting requirements to the unique characteristics and risks of different industries. This ensures that disclosures are relevant and meaningful, reflecting the specific sustainability challenges and opportunities faced by each sector.

4. Assurance and Verification

• To enhance the credibility and reliability of sustainability reports, companies are required to obtain limited assurance from an independent third party on their reported information. This step is intended to build trust among stakeholders and improve the quality of disclosures.

5. Digital Reporting

• Companies are encouraged to use digital formats for their sustainability reports, which facilitates easier access, analysis, and comparison of data by stakeholders. This aligns with broader trends towards digitalization in corporate reporting, making information more accessible and user-friendly.

6. Alignment with Global Standards

• The ESRS are designed to align with international sustainability reporting frameworks such as the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD). This alignment helps reduce the reporting burden on companies operating across multiple jurisdictions and ensures consistency in global sustainability reporting.

7. Governance and Risk Management

• Companies must detail their governance structures and processes for managing sustainability-related risks and opportunities. This includes describing the roles and responsibilities of the board and management in overseeing ESG matters and integrating these considerations into the company’s overall strategy and risk management framework.

By adhering to these requirements, companies can provide stakeholders with a comprehensive view of their ESG performance and impacts, ultimately contributing to more informed decision-making and sustainable business practices. The ESRS represent a significant step towards standardizing sustainability reporting across the EU, promoting greater transparency and accountability.

Contact us today to see how our solutions can help your business prepare for CSRD and ESRS