What’s the big deal?
By Christopher Jones, Partner
Once they have cut through the near impenetrable prolix, seasoned sustainability reporters may be thinking ‘What’s the big deal ? This is a consolidation of the best and most complex sustainability requirements from existing frameworks and standards’; following their review of the long-awaited drafts for both EFRAG’s European Sustainability Reporting Standards (ESRS) and IFRS’s International Sustainability Standard Board’s S1 and S2 papers. For those unfamiliar, the ESRS disclosures will be required for larger and listed EU companies (as well as those with significant operations within the EU) from January 2024. Meanwhile, the ISSB standards seems likely to be the government and stock exchange adopted ESG disclosure for the UK and other non-EU countries such as Norway in the next couple of years (if not a UK Taxonomy to match the EUs).
Much of the guidance deliberately builds on existing standards and frameworks from SASB and TCFD, but adds a unifying badge to this regulatory consolidation of general sustainability and climate risk disclosures. Buchanan’s review stumbled across a few inconsistencies and contradictions in the drafts, but it is ‘draft’ and there will be some leeway for reporters in their first few years of publications, as well as some settling down of the requirements. What’s clear is that the scope and granularity is going to be a challenge for those at the start of, or early on in their sustainability journey. But we hope that the ‘double materiality’ assessment enables companies to prioritise their disclosures and avoid many that just aren’t relevant or material.
So what is the big deal (apart from the fact your inbox is going to be inundated with invites to forums and roundtables to discuss these requirements from ‘professional’ service companies hoping to panic you into a £2,000 seminar event.)? The big deal is that the ‘financial materiality’ of your ESG risk and opportunity profile is the game-changing stipulation and drags sustainability disclosure out from the purview of your comms/IR/marketing departments and slams it down on the CFO’s desk. Hard. We’re witnessing the shift from sustainability being an exercise in supplementary corporate communications to one embedded within strategy, risk and financing management processes.
Finance teams will now need to provide clear quantifiable £££$$$EUR assessments of the impacts of primary ESG risks and opportunities, over short-, medium- and long-term time horizons, and be audited. The EU’s taxonomy regulation will also assess your overall eligibility for their ‘sustainability’ classifications which may or may not support your attractiveness to responsible investors.
Sobering, I know.
A number of thoughts may be flooding through your mind, not least ‘this is going to make the already demanding reporting obligations, even more onerous’. It’s clear that ESG risk assessment now needs to be part of your Audit and Risk oversight, if not already. Your sustainability strategy needs to fully align with your growth strategy and your non-financial performance measures require the same exacting internal reporting governance and mechanisms as financial metrics. Only then will they withstand the scrutiny that will come from the audit partner who’ll be running their rule over your previously unassured data.
Add to this the fact that your reporting boundary will also be expanded to cover material impacts related to the upstream and downstream value chain; and these assessments are no longer limited to matters within the company’s control. What might alert some is that these factors and their financial impacts will likely be included in future analyst coverage and sentiment, which had previously been limited to a secondary reputational consideration rather than influencing their core recommendations. So, whether this is a big deal or not will depend on your ESG disclosure progress to date and your company’s mindset towards sustainability integration. What’s for certain, non-financial performance is now…er…financial.