A new year calls for fresh and clear sustainability and climate reporting
A fresh set of sustainability and climate reporting standards are underway in many countries around the world. Our global team of ESG advisors shares what you can do now to prepare for mandatory reporting before it takes effect.
Many national and state governments are actively preparing legislation and regulations around corporate ESG performance. Australia is looking at a phased introduction of mandatory reporting, targeting completion by 2027. New Zealand is targeting this year (2024). For the United States (U.S.) it could be as early as April 2024 and California has already started. In Europe, major changes are coming, with the EU Corporate Sustainability Reporting Directive (CSRD) requiring significantly more firms to report on their greenhouse gas (GHG) emissions from 2025.
The reporting standards offering some of the clearest alignment with emerging regulation around the globe are the new International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards. IFRS S1 covers sustainability-related financial information across the value chain and IFRS S2 covers climate-related disclosures. These two new standards, issued in the summer of 2023, leverage the four pillars (governance; strategy; risk management; and, metrics and targets) from the Taskforce on Climate-Related Financial Disclosures (TCFD) and consolidate, Sustainability Accounting Standards Board (SASB), CDP (formerly the Carbon Disclosure Project) and TCFD principles.
Bearing this in mind, we asked our ESG Advisors across our regions what to focus on – wherever you are and whatever your current jurisdictional requirements.
1. Start with your specific reporting strategy
Identify the material ESG risks and opportunities - those that would impact the investment decision of a reasonable investor. Specifically, you should assess sustainability-related risks and opportunities that you expect to affect your cash flow and access to finance or cost of capital. For instance, if you use a lot of water, then assess the risk of disruption due to water quality or quantity and assess the opportunity to reduce water consumption and improve water quality and how that might provide a competitive edge or benefit local communities or biodiversity.
Supporting data can come without undue cost or effort from your existing risk management processes, industry and peer group experience, and external ratings, reports and statistics. Define the business requirements including customer demands, competitive pressures and employee expectations. Update existing systems and upskill employees for key reporting and data functions to execute your strategy at a pace that makes sense for the business.
2. Make measurement your firm’s New Year’s resolution
Measure your GHG emissions now. Whether your driver is current UK and EU GHG reporting rules, the new California GHG reporting rule SB-253, or the pending US SEC GHG reporting rule , get started now by measuring, reporting, and verifying GHG scope 1, 2 and 3 emissions. To speed up the process, work across corporate functions to identify existing data that can be used and what, if any, digital support may be required to eventually collect and report ‘financial-quality’ GHG data.
As GHG reporting and broader ESG disclosure rules hit the investment and insurance communities, they will increasingly turn to investees and portfolio companies to reduce GHG emissions through credible science-based targets (SBTs).
3. Jump right in by forecasting climate risks and opportunities.
Develop plans to address climate-related risks and opportunities in line with your enterprise risk management (ERM) framework, including:
a. Physical risks – Both in terms of the increasing frequency of major weather events such as hurricanes and drought, and longer-term, gradual physical changes like heatwave frequency and length, increased storms and rainfall, depleted groundwater supply, and hotter ambient temperatures.
b. Transition risks resulting from the relative uncertainty created by the global shift towards a more sustainable economy. Harder to quantify or model, these may include:
- Market risks such as shifts in supply and demand and increased green product premiums
- Policy changes such as carbon pricing mechanisms, shifting energy use to lower emissions sources, and energy and water efficiency incentives
- Risk of litigation based on failure to mitigate impacts of climate change, failure to adapt, and insufficient disclosure of material financial risks
- Utilizing emerging energy technologies such as renewables, future fuels (e.g., hydrogen), battery storage, and carbon capture and storage.
- Attracting and retaining STEM professionals within your workforce.
4. Mandatory disclosures, coming soon!
Disclosures – Integrate your ESG climate disclosures into existing reporting workflows now. Be ready to disclose related financial risks in public company registration statements, as well as in annual reports. For most companies, this means ESG climate disclosures will be incorporated into existing reporting workflows, involving your legal, investor relations, risk, compliance, and communications teams.
Internal controls over financial reporting (ICFR) – ESG-related financial statement line items, expenditures, and impacts to estimates must be included in a note to your audited financial statements. That places it within the scope of your ICFR. Bring your treasury and finance teams on board now to ease the transition and make for a robust 2024.
Forecasts – The new IFRS standards require public disclosures on climate risk management, governance, and strategy as well as disclosures regarding climate goals and transition plans, plus disclosure of broader ESG information, your business plans to achieve targets and transition plans.
How we can help
Our ESG specialists support clients to create impactful risk management and reporting strategies that include IFRS and TCFD adoption and integration, all while ensuring robust metrics and reporting functions are front and center. Speak with one of our ESG experts to see how we can help your business transition smoothly to mandatory reporting and risk management review in 2024.