Sustainability Reporting will soon be mandatory for wider range of companies

Can you imagine that financial reporting would not be standardized? But it wasn’t always like that. As many as 80 years have passed since standard financial statements were established.

Is this the case with non-financial reporting or sustainable development reporting? This field has developed rapidly in recent years, and many different standards were introduced. This development is emerging in response to the demands of a wide range of stakeholders, including investors, governments, transnational organizations, regulators, and non-governmental organizations. Although there is a great need to harmonize non-financial reporting, the landscape is still fragmented.

According to the EU Non-Financial Reporting Directive, around 11.000 companies in EU are obliged to report about sustainable development. This number will soon increase approximately 50,000 companies with the new directive (CSRD). These are:

  • ·         companies that meet two of the three criteria: have more than 250 employees and/or more than EUR 40 million in turnover and or more than EUR 20 million in the capital,
  • all listed companies in the EU, including small and medium-sized enterprises (except micro-companies).
What else does the new CSRD directive bring:
  • It will introduce more detailed reporting requirements which are in line with mandatory EU standards on sustainable reporting;
  • It will require an audit of the information provided;
  • It will required companies to digitally “tag” the reported information so that it is machine-readable and powered by a single European access point;
  • It will require reporting on double materiality, which means that companies will need to identify and report on how sustainability issues affect business and how the company affects people and the environment.
The objectives of the CSRD are:
  • Improve sustainability reporting to make better use of the potential of the European single market, which would contribute to the transition to a fully sustainable and inclusive economic and financial system in line with the European Green Agreement and the UN Sustainable Development Goals;
  • Ensure public availability of information about the risks that sustainability issues pose to companies and the impact of companies themselves on people and the environment;
  • Reduce systemic risks to the economy and improve the allocation of financial capital to companies and activities dealing with social, health, and environmental problems, and increase the responsibility of companies for their impact on people and the environment;
  • Reduce unnecessary costs of sustainable reporting for businesses and effectively meet the growing demand for sustainability information.
When can we expect it?

The proposal was adopted on 21 April 2021. The first draft will be ready by mid-2022 and is expected to be adopted by the end of 2022. By 2024, companies are expected to publish their report in line with EU sustainability reporting standards. After that, small and medium-sized businesses will be given 3 years to meet.

Notwithstanding the directives, companies can also opt for voluntary reporting.

This is an increasingly common practice, as reporting is important not only for the reporting company but also for many other stakeholders. Due to the requirements of different stakeholders, some companies report according to more than one standard.

Let’s take a look at some of the more widely used sustainable reporting standards.

GRI (Global Reporting Initiative) is a prevalent standard in Europe, which allows any organization, large or small, private or public, to understand and report on its impact on the economy, environment, and people comparably and credibly, thereby increasing the transparency of their contribution to sustainable development.

It is designed as a modular set that is easy to use and provides a picture of the essential topics of the organization, their related effects, and management mode. A novelty of the GRI standard is sectoral standards. They will develop them for 40 sectors, starting with the most important ones. The significant advantages of these standards are their ease of use and the fact that they consider all stakeholders’ essential themes.

The purpose of SASB

(Sustainability Accounting Standards Board) standards is to cover essential (material) topics related to sustainability that are financially important and have a reasonable probability of having a significant impact on our company’s financial performance or condition. The primary stakeholder for SASB standards is investors, and it is mostly used in the US.

The significant advantages of SASB standards are that they contain standards across different industries (77 industries) and that these standards guide your company’s future.

The TFCFD (Task Force Climate-related Financial Disclosures) are recommendations for disclosing precise, comparable, and consistent information on the risks and opportunities posed by climate change. Topics include management, strategy, risk management, measurement, and objectives. The advantage is that they are closest to the mandatory requirements. Still, this form of reporting is focused primarily on the environment, but at the same time, it is very complex and demanding.

The CDSB (Climate Disclosure Standards Board) is an international consortium of businesses and environmental NGOs committed to developing and coordinating a global corporate reporting model to equate natural capital with financial capital. They provide companies with a framework for reporting environmental information rigorously as financial reporting.

The IR (Integrated Reporting) is a coalition of regulators, investors, companies, standards developers, NGOs, etc. It encourages thinking about sustainability that needs to be incorporated into business practice. It supports value creation in the short, medium, and long term and addresses vital topics for all stakeholders. However, the standards are deficient in environmental terms.

The CDP is developing a global environmental disclosure system. It supports thousands of businesses, cities, countries, and regions each year in measuring and managing their risks and opportunities for climate change, water safety, and deforestation. They do this at the request of investors, buyers, and city stakeholders.

ISO 26000

provides recommendations for the socially responsible operation of organizations and companies. Unlike other ISO standards, company cannot be certified under this standard. It aims to clarify what social responsibility is, helps companies and organizations translate principles into practical action, and it shares best practices on social responsibility at the global level. It is intended for all types of organizations, regardless of their activity, size, or location.

Standards will continue to evolve, most likely they will be merged, and due to increasingly clear legislation, they will have to be unified at some point, at least in some parts.

Where to start if you are new to reporting?

I suggest you read some of the sustainability reports from different companies first. Most standards are available for free, but it is true that these are usually very extensive documents. For example, you can find GRI standards for free and you can also apply for paid training within the GRI Academy, which also includes online training, where you determine the pace of progress.

This article written by Barbara Modic from Sila & Modic consulting was originally published in Svet Kapitala.