ESG Reporting: From Voluntary Disclosure to Mandatory Compliance

The ESG Reporting Landscape

Environmental, Social, and Governance (ESG) reporting has undergone a dramatic transformation. What began as voluntary sustainability disclosures driven by investor demand is now becoming mandatory regulation. The proliferation of frameworks, including GRI, SASB, TCFD, and CDP, created confusion. Recent developments, particularly the ISSB standards and the EU CSRD, are consolidating the landscape and raising the bar.

ISSB Standards: A Global Baseline

The International Sustainability Standards Board (ISSB) released its inaugural standards in June 2023:

• IFRS S1 (General Requirements): Requires disclosure of sustainability-related risks and opportunities that could affect cash flows, access to finance, or cost of capital
• IFRS S2 (Climate-related Disclosures): Builds on the TCFD framework, requiring disclosure of climate governance, strategy, risk management, and metrics

The ISSB standards serve as a global baseline. Several countries, including the UK, Australia, Canada, and Singapore, have announced plans to adopt or align with them.

EU Corporate Sustainability Reporting Directive

The EU CSRD, which began phased implementation in 2024, significantly expands sustainability reporting:

• Scope: All large EU companies, listed SMEs, and non-EU companies with significant EU operations
• Standards: Reporting in accordance with European Sustainability Reporting Standards (ESRS)
• Assurance: Reports must be subject to limited assurance, moving to reasonable assurance over time
• Digital reporting: Tagged in XBRL format for machine readability

The first companies began reporting under CSRD for the financial year 2024.

Climate Disclosures

Climate disclosures are the most mature area of ESG reporting. Key elements include:

• Governance: Board oversight of climate risks and management's role
• Strategy: Actual and potential impacts on business and financial planning
• Risk Management: Processes to identify, assess, and manage climate-related risks
• Metrics and Targets: Scope 1, Scope 2, and (where material) Scope 3 emissions, along with reduction targets

Scenario analysis, including assessment against 1.5 degrees Celsius warming, is increasingly expected.

Understanding Double Materiality

Double materiality, central to the EU CSRD, requires reporting on:

• Financial materiality (outside-in): How sustainability matters affect the organisation's financial position
• Impact materiality (inside-out): How the organisation's activities affect people and the environment

A topic is material if significant from either perspective. This is broader than the ISSB's financial materiality focus alone.

Conducting a Double Materiality Assessment

To conduct the assessment:

• Identify potential sustainability topics relevant to your sector and value chain
• Engage stakeholders including investors, employees, customers, and suppliers
• Assess financial materiality: how each topic could affect cash flows or enterprise value
• Assess impact materiality: severity and likelihood of your organisation's impacts
• Determine which topics are material from either or both perspectives
• Document methodology, stakeholder input, and conclusions

Practical Steps for Compliance

1. Determine which reporting requirements apply based on jurisdiction, size, and listing status
2. Conduct a materiality assessment appropriate to your applicable framework
3. Establish governance structures for sustainability reporting, including board oversight
4. Inventory data collection capabilities and identify gaps, particularly for Scope 3 emissions
5. Implement data collection systems and internal controls
6. Engage assurance providers to prepare for assurance requirements
7. Build internal expertise through training
8. Start reporting early to build capability and identify challenges

ESG reporting is no longer optional for most large organisations. Those that build robust processes now will be better prepared for the evolving regulatory landscape.