In a matter of weeks, the first tranche of international and EU sustainability reporting standards will be published for implementation in the FY24 reporting cycle. But businesses do not need to (and indeed, should not) wait for publication: the key decisions have already been made giving business leaders the clarity they need to begin their implementation activities in earnest.
Investors and other stakeholders have, for some time, been calling for companies to disclose better, actionable ESG information that is comparable, trusted and transparent. So now we are closer than ever to getting there, companies will need to push ahead with their reporting strategies, including being ready to produce investor-grade data and being ready for assurance.
Building a state-of-the-art ESG reporting programme requires systems that permit advanced data collection technology, high-quality processes, controls over those processes and sound governance that ties it all together. With final standards just around the corner, no one should underestimate the time and effort that will be needed to implement them successfully.
It may be a lot of work. But these standards will help guide more effective boardroom decisions — what’s being measured needs to become a strategic issue across the entire organisation in the same way financial performance is today. So it is time to get ready for change. Changes in what you will report. Changes in the data you collect. Changes in how you use that data to inform your strategy and how it will be disclosed to stakeholders.
So, what should your company be doing now?
Prepare to be part of a value chain transition
Demand for better information goes beyond investors to wider stakeholders (including clients and customers, employees and suppliers) who want a better understanding of a business’s total impact on society and the environment. And it will end with scrutiny from governments and regulators expecting to see hard data, compiled just as rigorously as financials.
Reporting will encompass activities across the entire value chain – upstream and downstream – taking a deep look at how these activities can be monitored and measured. Investors and wider stakeholders are expecting to see this supported by a clear action plan, reflected in your company’s strategy, and – be in no doubt – they will challenge any unlikely assumptions or dependencies around, say, technology or funding.
Use the resources available for transition planning
There is a lot of information out there to support transition planning. The International Sustainability Standards Board (ISSB) has made a strong commitment to address capacity building in developing economies and is focused on proportionality so that its standards are feasible for all types of organisation to apply, not just the most sophisticated.
For example, at COP27 the ISSB announced its Partnership Framework of organisations to focus on supporting the implementation of the standards “across all economic settings” of which KPMG is proud to be a founder member. These efforts will be critical to achieving the all-important global baseline of consistent and comparable information.
Gather the information you need
Developing effective sustainability reporting will take time because its scope is broader than many companies are used to, involving data from outside the organisation and lots of estimates.
Now the standards are being finalised, identify the data requirements and start designing the systems and processes needed to report to your stakeholders. Perform a gap analysis and identify the ESG information – in addition to climate – that you’ll need to report.
Consider dual compliance
Timing is critical because both the international and the EU sustainability standards will be ready for the FY24 reporting cycle — which presents a challenging timeline for all organisations, not just the most complex. The EU standards will be mandatory for EU companies and many global organisations with operations in the EU. And now the ISSB’s timelines are aligned with the EU, companies may choose to voluntarily adopt IFRS® Sustainability Disclosure Standards regardless of local requirements.
For those reporting under multiple frameworks, such ‘dual compliance’ would certainly make sense because the ISSB is setting the global baseline, ready for jurisdictions to layer on their local requirements. One could view reporting in accordance with the ISSB requirements as a ‘global passport’ for companies operating in multiple jurisdictions.
This is important because multinationals may also have other requirements to comply with – for example jurisdictions such as Japan are vocal in their support for the ISSB and committed to developing standards that build on the global baseline. The SEC’s proposed climate rule is also pending.
There will be nowhere to hide – so get ready
Corporate activity will be scrutinised in ways it has never been before, with data leading the way.
Take every opportunity now to understand the new standards and highlight how your business model is impacted by (or is positively contributing to) the underlying societal issues. Investors will expect to see connectivity in an integrated manner across your reporting – to see the front and back of corporate reports telling the same story — and they will use data to shine a light on corporate activity as never before.
It is time to start managing the change so that when mandatory reporting is upon us all your stakeholders already understand the impact of the new standards for your corporate reporting.
Now is the time to get ready. Steps taken today will determine how successfully companies can meet the greater scrutiny and expectations of regulators, investors and stakeholders alike.
Update: the three frameworks discussed in this article – the ISSB Standards, ESRSs and SEC climate rule – are all now final. See Comparing sustainability reporting requirements for more information.
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