Disruption: the new normal for sustainability reporting
Sustainability disclosure is evolving at pace, moving away from a broad set of voluntary standards to become more consolidated and compliance driven. As this year’s reporting season draws to a close, Vic Taylor, ICRS Vice Chair and CEO of Flag, reflects on key trends about to disrupt the sustainability reporting landscape.
Since the first CSR and sustainability reports were published in the late 1990s and early 2000s, we’ve seen corporate sustainability and ESG reporting become commonplace for many of the world’s companies. This evolution is reaching the next stage, with the emergence of truly disruptive reporting trends.
Over two decades ago, when we were producing some of the first sustainability reports, these documents were niche, forward thinking and a ‘nice-to-have' luxury. Today, they are a necessity; an essential with increasing attention and resources behind them.
At the heart of the latest disruptions are large-scale, international trends. In this article, we will look at a few of the most salient.
1. A brave new world for reporting
Regulators across the globe are tying up loose ends. We’re seeing state-level initiatives to increase the veracity of reporting in the United States (SEC Climate Disclosure), the EU (Corporate Sustainability Reporting Directive (CSRD)) and the UK (the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022).
Internationally respected organisations – such as the UNGC, CDP and WEF – are also setting the standard for reporting frameworks, enhancing comparability and scientific rigor. And, with increased scrutiny from the EU Taxonomy for sustainable activities and Sustainable Finance Disclosure Regulation (SFDR), the definition of what makes good reporting is coming increasingly into focus.
In fact, over the last decade, the volume and variety of sustainability reporting frameworks, guidelines and standards have skyrocketed. Now, there is a growing trend towards consolidation and alignment to make reporting more consistent, comparable and standardised. One such example is the merger of SASB and IIRC under the Value Reporting Foundation (VRF), and the formation of the International Sustainability Standards Board (ISSB) – which consolidates the Climate Disclosure Standards Board (CDSB) and VRF – by the IFRS.
These frameworks are expected to lay the groundwork for future regulation. Organisations are now developing their own sustainability ambitions beyond Paris, proactively taking part in initiatives that will hold them to account – such as the Science Based Targets Initiative (SBTi) and public net zero carbon emissions timetables.
2. Cleaning up greenwashing
Increasingly, companies are under scrutiny for the green claims that they make, and the messaging and imagery they use. The EU directive on green claims, and new environmental guidance from the UK’s Advertising Standards Authority (ASA), require corporate and financial institutions’ ESG claims to be supported by credible data.
These regulations have teeth. And the principles apply across communications – from advertising to reporting. Between 2017 and 2020, lawsuits relating to environmental claims almost doubled, rising from 884 to 1,550 – and, as recent high-profile cases show, all organisations are fair game.
3. Smarter data
Incoming CSRD and SEC regulations will put greater emphasis on robust ESG data. As a result, leaders are establishing better ESG data controls, involving internal (and external) audit and compliance, establishing controllership teams and aligning reporting processes with financial reporting processes.
At the same time, the launch of generative artificial intelligence (AI) tools like ChatGPT, Bard and Bing, is increasing stakeholder access to, and understanding of, company data around sustainability progress – making it even more important to publish ESG data and information that is accurate and balanced.
This technology also offers opportunities to streamline and strengthen reporting processes, through new automated and AI-enabled financial and non-financial reporting software, such as Workiva, Diligent, OneTrust and OneReport.
4. Biodiversity: the next climate crisis
Biodiversity is increasingly being seen as the next climate crisis. Ecosystem-based adaptation to climate change is vital to achieve the global vision for biodiversity defined by the Kunming-Montreal Global Biodiversity Framework agreed at COP15.
This trend is translating to reporting, driven by the release of international climate and biodiversity initiatives, including the Taskforce for Nature-related Financial Disclosures (TNFD), the Science Based Targets Network (SBTN) and new standards expected from GRI and the ISSB.
5. Human rights spotlight
The EU’s new Corporate sustainability due diligence directive requires EU companies, or companies with significant EU operations, to prevent negative impacts on human rights and the environment. This has spurred a rise in companies disclosing against the UN Guiding Principles Reporting Framework (UNGPRF) raising the bar on human rights management and disclosure globally.
6. Double materiality: how to prioritise what matters
Increasing demands from investors, regulators and standard setters for a more holistic view of business impacts and risks, with sustainability baked-in, has resulted in the emergence of a new concept: double materiality.
This new approach brings together the two previously separate perspectives of outward and financial materiality to help companies prioritise their focus and resources and inform reporting. It puts an increased focus on how a company’s outward impacts on the economy, environment and people affect operational and financial risk.
Roadmap to progress
Each of these trends represents opportunities for us to build more sustainable businesses that are in-tune with what consumers, investors and society want. They are a roadmap for how companies can, and will, thrive in the present and in the future. It is essential now, more than ever, for companies to report on their sustainability progress openly, clearly and consistently. And, crucially, in anticipation of current, incoming and future scrutiny.