What will the corporate sustainability report of the future look like?

Efforts to implement global sustainability reporting standards are progressing at a pace. Facing new mandatory compliance pressures and voluntary framework options, how will businesses change their reporting in this field?


What will the corporate sustainability report of the future look like?

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The past week has been one of several this year ripe with news on new sustainability disclosure frameworks. The European Commission adopted new sustainability reporting standards (ESRS) that will apply to 50,000+ larger businesses from their 2024 annual reports. Days later, consultations opened up to shape the world’s first global standard for auditors of corporate sustainability reports.

These are but two steps in the bigger and longer journey being made to unify and mandate better quality corporate sustainability reporting globally.

The key player in this is the International Sustainability Standards Board (ISSB), which was established in 2021 and launched its first two frameworks earlier this summer. With an initial focus on climate, the ISSB exists to promote comparable reporting standards globally, hopefully ending years of businesses striving to comply with disparate standards.

To help us make sense of this year’s changes in context, edie speaks with Judy Kuszewski, who recently stepped down as chair of the Global Sustainability Standards Board after more than five years at its helm.

Reflecting on more than 25 years of work in sustainability reporting, she says standard setting – both voluntary and mandatory – has been “necessary and instrumental” to “drive sustainability reporting away from the very PR-driven approach” of decades gone by. In the 1990s, she notes, many reports were “little more than glossy pictures”.

Of course, simply adding qualitative information does not a robust sustainability report make.

This is the turning point we are at now, Kuszewski explains. Most large businesses now produce an annual sustainability report on a voluntary basis (pressure from their investors and customers has likely outpaced pressure from regulators, prompting them to do so for commercial reasons). This report likely includes narrative information and imagery alongside data.

But the data may not make much sense to investors or other stakeholders if businesses cannot be compared against their peers. Reports may also omit – whether deliberately or not – information that is material to the company’s financial wellbeing. Within the past month, corporates have been accused of failing to measure the full extent of legal risks relating to plastic pollution, nor the likely severity of climate-related risk on the global economy.

This lack of meaningful and comparable information is the crux of the push for new reporting standards.

Integrated reporting

Most newer ESG reporting standards compel businesses to measure risk and opportunity, allocating this measurement a financial value if possible. The Taskforce on Climate-Related Financial Disclosures’ (TCFD) scenario analysis component, for example, requires businesses to measure financial risk at a range of different global warming scenarios, including those detailed in the Paris Agreement.

Integrated reporting is becoming increasingly common as pressure mounts on businesses to evidence the link between financials and ESG goals and impact. More than 2,500 firms now produce integrated reports.

Pressure for integrated reporting, Kuszewski notes, has largely come from voluntary standards and external pressures thus far – except in markets like Japan and South Africa where integrated reporting is “all but mandatory”.

Explaining why so many companies are exploring integrated reporting on a voluntary basis for now, Kuszewski says: “I think one of the hallmarks of really useful sustainability reporting is the extent to which it references and reads across to the financial report. If you can’t understand how sustainability affects how the business is run on a day-to-day basis… there’s not that much evidence that it means very much, in my opinion.”

Integrated reports are meant to bring together all material information about a business’s strategy, governance, performance and future prospects. If a particular sustainability issue is missing from an integrated report, this tells readers something about whether a company truly treats it as material.This is why, under the new ESRS, companies which do not deem climate mitigation as material will need to explain why.

The Institute of Chartered Accountants of Scotland’s (ICAS) chief executive Bruce Cartwright highlights why taking integrated reporting mainstream globally will require those already auditing financial reports to upskill.

He says: “A high-quality process already runs through the financial reporting, so if we can take that understanding and bring it to the new world of sustainability data… we can help businesses make sense of how sustainability impacts the internal controls of risk management, performance and board decision-making.

“We certainly have a challenge on our hands.”

Global standards

Integrated reporting will likely be globally mandated as ISSB standards are adopted over the years.

Several countries, including the UK, have already pledged to embed the ISSB’s first standards in their own frameworks. Many more are likely to do so at COP28 this winter.

Cartwright says the ISSB’s launch has been a turning point for “enhanced cooperation” on non-financial reporting. He explains: “Many moons ago, financial reporting evolved on a country-by-country basis… it took years. Common sense has prevailed here.”

The stage has been set in terms of standard development timelines and processes. Cartwright and Kuszewski agree that the main challenge with ISSB standards, now, will be gaining agreement on what key terms mean globally. After all, how can a business evidence that it is ‘net-zero-aligned’ if ‘net-zero’ does not have a set definition?

Cartwright notes: “If there are differences in terminology, we need to make it easy to understand that difference. Otherwise, you’ll have companies going off on a tangent. This won’t be maliciously, it will be because of misunderstandings.”

Beyond definitions, there will be fine-tuning. The inaugural “ISSB-aligned” reports are unlikely to be perfect but they will serve as a baseline case for future improvements.

ISSB standards, like their predecessors, will likely be taken up voluntarily before any mandates come into effect. But some of the standards that the ISSB is aiming to absorb or interoperate with are mandatory in some places, like the TCFD in the UK.

Transatlantic dilemmas

It bears noting that not all businesses will move voluntarily. Mandates may be needed to kick the laggards into line. And laggards may be keeping quiet out of fear and confusion.

As Cartwright puts it, “[businesses] who are more ambitious will go beyond the baseline voluntarily. They will see a strategic advantage of doing so.” But those not acting yet have a “big learning curve” ahead of them and may be wary of “not getting it right the first time”.

Similarly, Kuszewski argues that changing annual reporting “does make people nervous” if their business’s mindset is adverse to change.

One source of nerves is the current disparity between demands in different markets. The ISSB may iron this issue out in time, but it is still prevalent. While the EU particularly is pressing ahead with major disclosure mandates, businesses in the 15 US states hit with anti-ESG legislation are being encouraged to neither measure nor discuss their environmental and social impacts.

Kuszewski’s advice to multinationals facing this challenge is to look at the bigger picture – the long-term view and the demands of most investors.

The fact that global ESG regulations have increased by 155% in the last 10 years shows that most investors want more information and to see more corporate ambition – not a short-term slamming of the brakes on transparency/

Kuszewski summarises: “For businesses, this is a minefield. It will not be possible to please everyone on both sides of this unless you go invisible. I think it’s about being true to your own strategy and values consistently, clearly and credibly.”

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