Working Group
ESG disclosure standards are rapidly changing. To stay ahead, companies must reevaluate their approach to nonfinancial reporting
ESG disclosure standards are rapidly changing. To stay ahead, companies must reevaluate their approach to nonfinancial reporting
Across the globe, demand from investors, customers and consumers for transparency into corporate ESG performance is increasing. This, in turn, has triggered the number of ESG-related disclosure requirements that businesses must now report against to increase.
The key difference between this new batch of disclosure frameworks and those that preceded them is the depth of information that they demand. In many instances, companies must now include a level of detail in their ESG disclosures that was previously unnecessary. This has created urgency and, often, confusion as to how organisations should comply with these requirements. This is adding significantly to the workload of ESG teams, as well as driving companies to reevaluate how they are structured to manage sustainability.
Sustainability Leaders’ ESG Disclosures working group explored these challenges, examining how companies are preparing to comply with the new disclosure environment, collecting disclosure data and redeveloping their governance structures.
The Corporate Sustainability Reporting Directive (CSRD) is a new piece of EU legislation that requires larger companies to publish reports on both their environmental and social footprint. It is intended to establish a common reporting framework for EU member states, instead of the often fragmented reporting that currently exists. Reporting is set to commence in 2026 on the 2025 financial year, but many companies in the working group are beginning preparations now.
The difficulty that many have experienced with the CSRD is its double materiality requirement. A double materiality assessment asks that companies define their impact on the environment and society (impact materiality), as well as how sustainability affects the company’s financial health (financial materiality). Given most businesses have little experience of such assessments, the exercise is a learning experiment for many members.
Most firms carrying out a double materiality assessment will create separate questionnaires for internal and external stakeholders. These will include how the stakeholder rates the company’s impact on a range of ESG areas, which will be determined by the nature of the company’s footprint. The data accumulated from these surveys will be used to create a two-dimensional matrix of the company’s impact and financial materiality.
The challenge most companies face here is stakeholders’ understanding of how to fill out such a survey. Because the concepts are also new to them, they may not know how best to answer. For this reason, it is essential that a company carrying out double materiality first educates relevant stakeholders on how to fill out such a survey before distributing it.
“We’re starting CSRD early as we want to start making people comfortable with the outputs and how to interpret and define all its material aspects. We’re also looking at the interconnections of the output of a double materiality from a finance perspective, which will take time”
Senior manager, ESG and reporting, life sciences company“We need a group-wide project to adapt to CSRD’s requirements because they’re so in-depth. Our first assessment shows our current data collection process isn’t sufficient. Artificial intelligence may be necessary to make the process more efficient, as well as a bigger team to cover it all”
Sustainability manager, energy company
The US Securities and Exchange Commission (SEC) proposed new rules around ESG disclosure requirements in June 2022. These would mandate publicly listed companies to share a range of climate-related information in their SEC filings, requiring many to alter their ESG reporting to comply with the new standards.
Many companies anticipate the commission’s Scope 3 reporting requirements will be the most difficult aspect of the new rules. The SEC’s proposed rules necessitate public companies to make separate detailed disclosures for their Scope 1, 2 and – if it is deemed material or if the business has set relevant targets– its Scope 3 emissions. Given many organisations have yet to establish how they will manage Scope 3, this is leading many to accelerate their Scope 3 planning.
In a similar way to the CSRD, the SEC framework is expected to prompt firms to adopt consistent reporting standards in the US. As such, many CSOs consider the proposal to represent an opportunity for businesses and issuers to standardise their approaches to ESG.
“When our colleagues in finance understood that SEC was moving forward with a new level of disclosure and materiality, they became more interested in what we were doing from an ESG perspective. So what has worked nicely is a greater partnership with our financial colleagues; they are now leading the analysis of our ESG data and how it could be material.”
CSO, pharmaceutical company
The Task Force on Climate-related Financial Disclosures (TFCD) was established in 2015 by the Financial Stability Board. Its stated aim is to improve how businesses report their global climate impact – and it is quickly gathering momentum. The EU, Japan, Canada, Singapore and South Africa have already integrated TCFD into their regulations, while New Zealand and the UK require climate risk disclosures in line with TCFD standards by the end of 2023 and 2025, respectively.
The TCFDs differ from the CSRD in that they do not require a double materiality assessment; and from the SEC guidelines in that they are less stringent on the disclosure of Scope 3 emissions. However, they do require companies to disclose information on:
All of the above have some relevance for an SEC or CSRD disclosure. For this reason, several companies are using some of the information they have gathered for TCFD to streamline compliance with CSRD and SEC.
“On a voluntary basis, we’ve been on a journey to be ready for our first TCFD disclosure and anticipate publishing in May 2023. We were on this journey prior to the SEC announcing its intentions to make a more mandatory reporting disclosure requirement from a nonfinancial perspective, so the timing and our TCFD preparation may have accelerated us to be more ready for the SEC”
CSO, chemicals company
Devising effective methods of collecting and processing ESG data is one of the principal challenges teams face in meeting disclosure standards. Materiality assessments need to be carried out to determine which aspects of ESG need to be prioritised. With many stakeholders involved, it is necessary to ensure regular communication and exercise influence to gain access to all the relevant data.
There is a risk that without efficient processes in place, the burden of these challenges can detract from teams’ wider sustainability efforts. For one company, this process is overseen by an executive oversight group at the corporate leadership team level, which sits above a core team that looks at disclosures more frequently. However, the team works with colleagues across the organisation to raise awareness and ensure accountability through management lines. The core team meets every month and provides an update on performance on a biweekly basis.
The strategy is implemented over seven steps:
The process continues to be refined and developed as it becomes more deeply embedded, with plans to introduce a new end-to-end software tool to manage the entire workflow and bring data together from across the organisation’s various data sets.
“The challenge is getting the data within the right standards and level of detail, so it can be used both for reporting and for other internal reasons, such as a joint venture where we might report on ESG criteria. The data we use for nonfinancial reporting is going to be useful to meet these types of requests. It’s about striking a balance of getting the data into the right format and level of detail to be useful for different uses”
Sustainability manager, energy company
With mounting resources and stakeholders required to meet the different disclosure requirements, most companies need to develop new governance for how they will be managed. The number of people working on disclosures within central sustainability tends to be small – typically between one and four people. Several companies in the working group reported that the level of work required for disclosures is now more than these individuals can manage.
To address this resource gap, most companies are either looking to embed responsibility more widely across the business or making the case for additional resources.
One step that most participants are taking is aligning themselves more closely with their finance and legal departments. Because new disclosure standards are bringing ESG reporting in line with financial reporting, there is generally more interest from finance and legal departments to be directly involved in their management. Sustainability teams are seizing this as an opportunity to build a more direct relationship with colleagues in finance and legal, as well as develop formal governance between the three functions.
“We meet with our colleagues in finance each month and with legal each week, as they now need to be directly involved in how we are preparing for SEC and CSRD. This has been the biggest evolution compared to before these disclosures were released”
CSO, pharmaceutical company
Many organisations are also seeking additional resources. To make the business case, one company determines what its future targets related to disclosures will be and uses this to determine the new resources it will need. Meetings with investor relations and accounting teams have been organised to decide how and when these resources can be added, and where in the company they will sit.
“Efficiency and automation will help, but it will only take us so far. We’re quite sure that, because of the breadth of work that is now required to meet various disclosure frameworks, new resources are needed”
Senior manager, ESG and reporting, life sciences company
