Comparing Sustainability Reporting Requirements
WHAT IS THE ISSUE ?
Sustainability reporting is developing quickly, with new requirements from the ISSB and EU, and proposals from the US.
There is commonality among the requirements – including that the TCFD framework forms a shared input. However, there are also areas where they are not aligned, which may create practical challenges for companies trying to design coherent and consistent reporting that meets the needs of both global investors and jurisdictional requirements. In addition to points of detail, this includes the greater scope and scale of the ESRSs with their wider stakeholder focus.
WHAT IS THE IMPACT ?
The requirements are ambitious and will have a significant impact on companies. For multinationals and others needing to apply multiple frameworks, the challenges will be magnified if the requirements are not compatible. A key practical consideration is aligning calculation methodologies – minimizing the different data requirements.
Achieving a global baseline will support companies in applying the standards, as well as drive consistent reporting across jurisdictions – reporting that is internationally comparable, but also meets local needs.
WHAT IS NEXT ?
1. Understand where similarities and differences exist between the requirements that may affect you.
2. Identify what you will be required to report vs what you may choose to adopt.
3. Prepare for fast adoption of all the requirements that may affect your company.
In this document, we use the term ‘requirements’ to refer collectively to:
•the final standards from the ISSB, referred to individually as IFRS® Sustainability Disclosure Standards or ISSBTM Standards;
•the final text of the first set of ESRSs from the EU, referred to as European Sustainability Reporting Standards (ESRSs); and
•the proposed requirements from the US, referred to as the proposed US SEC climate rule.
This document relates to the requirements as of 31 July 2023.
Two ISSBTM Standards
•Investor focus
•General principles, including requirement to report across all sustainability-
related risks and opportunities
•Topic-specific standard on climate1
•Climate-first option available in the first year of reporting
Twelve EU standards
•Multi-stakeholder focus, including investors
•Core principles for disclosure
•Granular requirements published for sustainability impacts, risks and opportunities
One US climate proposal
•Investor focus
•Detailed requirements to report on climate only
•Future proposals expected (e.g. human capital)
There is commonality among the requirements – including that the TCFD framework forms a shared input. However, in this document we highlight areas where the requirements are not aligned. In addition to points of detail, this includes the greater scope and scale of the ESRSs with their wider stakeholder focus.
ISSB
As determined by individual jurisdictions – e.g. based on listing status. Some –(Nigeria and the UK) – have already indicated that these standards will form a key part of future requirements. Others – (ex Japan) – plan to develop national requirements based on the standards.
EU
A broad range of listed and private EU companies or groups,1 and non-EU companies or groups with significant operations in the EU.
As the starting point for disclosures, all three requirements use the same reporting entity as the financial statements. However, companies will need to carefully consider their broader value chain for at least some sustainability disclosures.
1. EU: ESRSs w ill apply to all large companies (including large subsidiaries of non-EU parents) and all companies listed in the EU other than micro-companies. Large companies meet two of the following criteria: > 250 employees; > €40Mturnover (revenue); > €20Mtotal assets.
2. Non-EU: ESRSs w ill apply to non-EU companies or groups with an aggregated revenue within the EU of more than €150M if there is at least one branch in the EU with revenue of more than €40Mor one large EU subsidiary.
3. The proposed US SEC climate rule would apply to: accelerated, large accelerated and non-accelerated filers; smaller reporting companies (with some relief); emerging growth companies; foreign private issuers; and companies filing registration statements, including IPOs.
4. This example assumes that the aggregated revenue in the EU is less than €150M.
The needs of users of sustainability reporting information may differ. Materiality provides the filter that helps companies focus on what matters to users.
Double materiality
The EU adopts ‘double materiality’ principles – aiming to report on all significant impacts by considering both the investor and wider stakeholder lenses.
Impact materiality required by EU
Impact materiality requires disclosures about sustainability matters that relate to a company’s actual or potential positive or negative impacts on people or the environment. Some of these disclosures may also be financially material.
The principles are consistent with reporting under GRI standards.
Financial materiality (required by all)
Information that would influence an investor’s decisions – e.g. by affecting their assessment of the company’s cashflow prospects.
Under the ISSB Standards, information included outside the annual report via cross-referencing to other documents (ex. in a separate sustainability report) will need to be prepared on the same terms as the annual report, including being released at the same time.
The ISSB Standards include transition reliefs to support companies.
ISSB
Climate standard includes industry-specific disclosures
Companies will need to consider SASB Standards for other topics – based on 77 industry-specific SASB Standards
EU
No industry-specific requirements but the EU plans to release industry- specific standards in the future
US (proposed)
No industry-specific disclosures would be required other than industry-appropriate GHG emissions intensity metric (see Question 7)
The SICS® industry classification system used by the ISSB is inconsistent with the EU’s intention to use NACE codes. Multinational groups will need to map between the two systems, particularly if they operate in more than one industry.
The GHG Protocol Standard is used by many companies to measure GHG emissions. The underlying guidance was largely developed in the early 2000s; following a consultation, a project is being undertaken to update the guidance.
The three sets of requirements have different bases for the organizational boundary, with consequential practical implications for companies subject to multiple frameworks.
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The ISSB climate standard provides support for companies disclosing Scope 3 emissions to help address data availability and quality challenges.
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Smaller reporting companies would be exempt.
ISSB
•Final standards released on 26 June 2023 with an effective date of 1 January 2024–e. reporting in 2025
•However, local jurisdictions to decide when the requirements would apply
•A climate-first option will be available in the first year of reporting
EU
•Final text released on 31 July 2023, and will first apply for years beginning on or after 1 January
2024 – i.e. reporting in 2025
•Phased introduction will start with certain large companies1 with listed securities in the EU
US (proposed)
•Effective date will remain open until adoption of the final rules; the dates shown here are an illustrative example
Adoption of IFRS Sustainability Disclosure Standards will be mandated by local jurisdictions. As such, the effective date may vary by location.
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Certain large companies with listed securities on EU-regulated markets and more than 500 employees (e.g. companies currently subject to NFRD).
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Separate standards w ill be developed for SMEs and non-EU parent companies.
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Small and non-complex institutions and captive insurers are treated like listed SMEs (opt-out option until 2028 does not apply unless they also meet the definition of SME).
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Micro-undertakings are companies that do not exceed two of the following three criteria (including subsidiaries): 10 employees, net revenue of €0.7M or total assets of €0.35M.
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Initial reporting of Scope 3 GHG emissions would lag by one year and smaller reporting companies would be exempt (see Question 7). The earliest reporting period of FY24 show n in the diagram is illustrative only.
ISSB
•Does not have the mandate to require assurance
•Instead, information is designed to be verifiable
•Local jurisdictions could choose to quire either limited or reasonable assurance
EU
•EU requires limited assurance initially, moving to reasonable assurance over time
•Limited assurance standards to be adopted no later than 1 October 2026
•Reasonable assurance standards to be adopted
after feasibility assessment no later than 1 October 2028
US (proposed)
•US proposals would require assurance only on Scope 1 and Scope 2 GHG emissions
The proposed US SEC climate rule would require some disclosures in the audited financial statements,
in addition to requiring assurance over GHG metrics.
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Certain large companies with listed securities on EU-regulated markets and more than 500 employees (e.g. companies currently subject to NFRD).
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The dates shown here are illustrative only. They reflect the one year lag between the reporting dates (see Question 8) and assurance requirements that w ere included in the proposal.
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Read more about ESG Assurance in Audit. The assurance requirements will have no bearing on a company’s responsibility to report accurate information from the first reporting year – ex. limited assurance does not mean limited reporting.
Understand the impact
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Understand which requirements will impact your company and wider group.
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Understand how the requirements differ from your current reporting.
Determine what is material
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Understand the scope and breadth of your value chain.
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Decide what information is material under each of the requirements.
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Undertake a materiality assessment to determine which topics are relevant to report on under both ESRSs and ISSB Standards.
Assess maturity
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Assess the maturity of processes, the control environment, data model and policies.
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Understand the current distribution of roles, available knowledge and capacity.
Transform reporting
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Design the future state of your reporting – including designing the most efficient reporting structure to meet group and individual company needs.
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Develop and deploy your target operating model, including training as well as support for change management.
Get ready for assurance
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Assess the control environment, data quality and availability of sufficient documentation to support assurance.
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Rectify issues ahead of the formal assurance process.
