As business leaders tread a rapidly evolving sustainability reporting landscape, with policies being put in place and revised, they are tasked to find and master cost-effective ways to meet the requirements and expectations of both policymakers and investors.
According to EY, there are currently four key developments that are shaping the evolution of the sustainability reporting landscape: the simplification of EU sustainability reporting requirements, the adoption of sustainability reporting standards by many jurisdictions based on the model standards developed by the International Sustainability Standards Board (ISSB), a shifting regulatory environment in the US, and the release of a global sustainability assurance standard and a global sustainability assurance ethics standard.
It is important that business leaders, particularly those in the Finance function, fully comprehend these developments and their implications.
EY says business leaders should consider taking several steps to help them navigate the complex and dynamic sustainability reporting landscape.
These steps include:
1. Starting early - If business leaders determine that sustainability reporting is either required or advisable from a market perspective, they will likely want to consider the policies, processes and personnel needed to meet their regulatory and business objectives.
2. Incorporating sustainability reporting into the firm’s overall business strategy - Evidence suggests that firms are more likely to succeed in meeting their sustainability-related objectives when they view reporting as part of their overall business strategy rather than as a compliance exercise. CEO and board sponsorship of the sustainability agenda, along with collaboration between the Chief Sustainability Officer, Chief Financial Officer and the board, are essential.5 Such an approach can further companies’ goals of unlocking value, driving innovation and creating greater efficiencies.
3. Making sure that the audit committee has oversight over nonfinancial reporting - Given the increasingly regulated nature of sustainability reporting, it is important that the audit committee has effective oversight of nonfinancial reporting processes and metrics.
This oversight includes encouraging executive teams and boards to help ensure that the controls used for identifying, managing and reporting nonfinancial disclosures are material and necessary.
Where audit committees have oversight of sustainability reporting, they should assess whether the processes for data collection are robust and lead to reliable, quality reporting.
Additionally, they should consider data provenance, the reasonability of underlying assumptions and whether all regulatory reporting requirements have been addressed. Audit committees may also want to oversee integration between sustainability reporting and the financial statements, as well as external assurance, if and as appropriate.
4. Differentiating through rigorous reporting - Fairly or not, some investors and other stakeholders may perceive companies that have already reported under Wave 1 of CSRD as a cohort of first-mover companies providing rigorous and reliable nonfinancial disclosures, distinguishing them from peer companies that did not report. As such, business leaders of companies that have not reported under Wave 1 may want to consider whether there is a market advantage to voluntarily reporting under Wave 1 or another standard viewed as comparable by investors and others.
5. Easing the reporting burden with technology - Firms may want to inventory existing data sources to understand where sustainability-related data currently exists, as well as its relative quality and completeness. They may also want to make high-quality data with inherent business value available in a centralized data hub for improved accessibility. A sustainability reporting solution – sometimes available as an add-on to financial reporting applications – can facilitate disclosures and support tracing and documenting data lineage.
6. Engaging with policymakers - Establishing a regular dialogue with policymakers provides an opportunity to stay informed about regulatory developments, provide data and other information about market activities, and offer feedback on proposed regulations.
7. Monitoring jurisdictional differences and emerging reporting standards - While some jurisdictions are moving away from requiring sustainability reporting, others are considering sector-specific, biodiversity and human capital-related reporting requirements. The EU CSRD and the CS3D already include requirements related to nature, biodiversity and human capital.
Additionally, the ISSB is researching areas for future standard-setting consideration, such as biodiversity, ecosystems, ecosystem services and human capital. Nature-related disclosures (via ey.com US) are also becoming increasingly important to investors and financial institutions. As a result, it is crucial to monitor these developments and build related organizational competencies.
