With new regulations on reporting requirements coming out of the European Union and some US states, companies need to prepare now to get into compliance with their ESG disclosures
About 75% of companies say they are unprepared for upcoming audits around areas of environmental, social & governance (ESG) criteria, according to a recent study by KPMG.
This lack of preparedness for ESG-related audits comes at a critical time because these audits are a key component of California’s new climate disclosure law and the European Union’s corporate sustainability reporting directive (CSRD). Indeed, ESG assurance by a third party is widely seen as demonstrating trust and integrity in companies’ reporting.
Obtaining ESG assurance is only one part of the headache that companies are experiencing with ESG disclosure compliance. The scope of CSRD and the 1,000-plus data points that are required for the European Sustainability Reporting Standards (ESRS) is causing difficulty for impacted companies. “Right now, companies are in a moment of shock or concern that a lot of different jurisdictions are coming up with these new requirements. They do not yet feel prepared to meet those regulations,” explains Matthew Rusk, head of the Global Reporting Initiative (GRI) in North America.
The roadmap ahead, however, is gaining clarity. On a global scale, there are two sets of standards that are proving to be the most relevant to meet the requirements for CSRD, ESRS, and most other regulations and rules for ESG reporting: GRI’s standards, and those from the International Sustainability Standards Board (ISSB).
Both sets of standards are necessary — as detailed in the mandate of the European Financial Reporting Advisory Group (EFRAG) — because its pillar on the impact disclosure of materiality and financial materiality (together known as double materiality) is important for a broader stakeholder group, beyond just investors and capital markets. “There’s a recognition that stakeholder engagement and appeasing different stakeholder groups is critical to the financial success and longevity of an organization,” Rusk explains. “Investors and capital markets are also very interested in the impact disclosures because of a different lens of systemic risk, which would affect a portfolio of holdings.”
Using GRI standards, which are translated into more than a dozen languages, companies can comply with approximately 80% of the requirements for social and environmental impact outlined in ESRS. “GRI seeks to create the global common language and relevant metrics that speak to an organization’s impact on the environment, economy, and society, and how they manage those impacts,” Rusk says, adding that GRI continues to produce new standards and revise existing ones to embed the latest best practices, intergovernmental authoritative instruments, and foster global disclosure consistency.
In fact, GRI is requesting feedback on the exposure drafts for its revised Climate Change Standard and Energy Standard. These revisions ensure alignment to a high extent and interoperability with other global standards, such as the International Financial Reporting Standards’ IFRS S2, regulatory standards like the ESRS, and frameworks like the Green House Gas Protocol, the most well-recognized and most used standard to measure and manage emissions.
Also, EFRAG sought to leverage existing standards and included GRI as a collaborator for the impact pillar because more than 11,000 organizations already use GRI standards for voluntary reporting. Further, EFRAG and GRI recently entered into a second collaboration agreement, which includes commitment around sector standards, standards for small and midsize EU organizations, and standards for non-EU organizations that will be pulled into CSRD reporting. The groups also aim to create educational materials and collaborate on an XBRL digital reporting system. As a first tangible outcome, a GRI-ESRS Interoperability Index was released, setting out how the disclosure requirements and data points in each set of standards relate to each other.
Because the foundation of ISSB is financial materiality built upon the reporting framework of the Task Force on Climate-related Financial Disclosures, leveraging ISSB standards assists in compliance with ESRS. ISSB also is working on interoperability with EFRAG, the organization which drafted the standards, according to Rusk.
Guidance on how to comply with CSRD
Rusk admits that there is a recognition for companies based in North America that will have dramatic ramifications for organizations with operations in the EU that meet the minimum threshold or as a supplier to EU-based companies. In addition, there will be pressure for companies not subject to CSRD to report information anyway because investors and stakeholders will demand similar information, regardless of the outcome of the U.S. Securities and Exchange Commission (SEC) rules.
As a result, Rusk advises companies that are preparing for ESG reporting to start with voluntary standards and get their data, systems, people, and procedures in place as soon as possible in order to meet the rigor that will be mandated with ESRS and CSRD. “Companies in the US and Canada have this window of opportunity to keep an eye on ESRS and get prepared for it by leveraging these voluntary standards,” he says. “They also should use this time to prepare the appropriate controls, expertise, systems, and procedures to meet audit requirements outlined in ESRS.”
Now is the time organizations should get serious about embedding ESG reporting throughout their operations. Indeed, for the disclosures to have credibility and be valuable, they have to have data owners, users, and those that affect a company’s performance to be involved with this disclosure process. It cannot be siloed.
Sustainability is a journey. There is a realization as a collective that ESG information is just as critical as financial reporting. Indeed, 73% of organizations led by members of The Business Roundtable leverage GRI Standards to produce ESG or sustainability reports. In addition, more than 60% of Fortune 500 and S&P 500 companies already leverage the GRI standards for disclosures.
Companies can anticipate the need to be well prepared to comply with ESRS by reporting with the GRI standards for the impact pillar and with ISSB for the financial materiality requirement; and although the timelines to comply for companies differ for companies based inside and outside the EU, those in North America have an opportunity to continue to bolster their transparency and accountability in the hopes of receiving a positive reputational bump.
