🌱Corporate Sustainability Reporting Unit 11 – Regulatory Landscape and Compliance

Key Regulatory Bodies and Frameworks

• Global Reporting Initiative (GRI) provides widely adopted sustainability reporting standards covering economic, environmental, and social impacts
  • GRI Standards are modular and interrelated enabling organizations to report on material topics
  • GRI Universal Standards apply to all organizations and cover foundation, general disclosures, and material topics
  • GRI Sector Standards provide industry-specific disclosures (oil and gas, coal)
• Sustainability Accounting Standards Board (SASB) develops industry-specific sustainability accounting standards
  • SASB standards identify financially material sustainability information to include in SEC filings (10-K, 20-F)
  • SASB standards are designed for communication to investors about how sustainability issues impact long-term enterprise value
• International Integrated Reporting Council (IIRC) provides the International Integrated Reporting Framework
  • Integrated reporting combines financial and non-financial information to show value creation over time
  • Guiding principles include strategic focus, connectivity of information, stakeholder relationships, and materiality
• Task Force on Climate-related Financial Disclosures (TCFD) develops recommendations for climate-related financial risk disclosures
  • TCFD recommendations cover governance, strategy, risk management, and metrics and targets
  • Designed to help companies provide decision-useful information to investors, lenders, and insurance underwriters

Evolution of Sustainability Reporting Standards

• Early sustainability reporting focused primarily on environmental issues and was largely voluntary
• GRI launched first global framework for comprehensive sustainability reporting in 2000
  • Subsequent versions expanded to cover wider range of ESG topics and align with other frameworks
• IIRC formed in 2010 to integrate sustainability and financial reporting
  • Released International Integrated Reporting Framework in 2013
• SASB founded in 2011 to develop industry-specific sustainability accounting standards
  • Issued complete set of 77 industry standards in 2018
• TCFD released climate-related financial disclosure recommendations in 2017
  • Recommendations quickly gained support from companies, investors, and regulators worldwide
• Recent years have seen increased harmonization and alignment efforts among key standard-setters
  • For example, GRI and SASB released joint publication on using standards together in 2020
• Move towards mandatory sustainability reporting requirements in some jurisdictions (EU Non-Financial Reporting Directive)

Mandatory vs. Voluntary Reporting Requirements

• Historically, sustainability reporting has been largely voluntary
  • Companies chose to report to meet stakeholder expectations and demonstrate commitment to sustainability
• Growing trend towards mandatory sustainability reporting requirements in some jurisdictions
  • European Union requires large companies to disclose non-financial information under Non-Financial Reporting Directive (NFRD)
  • EU Corporate Sustainability Reporting Directive (CSRD) will expand requirements to all large and listed companies
• United States does not currently have mandatory sustainability reporting requirements at federal level
  • Some disclosure required in SEC filings if material to investors
  • Increasing pressure from investors and regulators to enhance climate and ESG disclosure
• Stock exchanges and industry associations may have mandatory reporting requirements for listed companies
  • Hong Kong Stock Exchange requires ESG reporting as part of listing rules
• Mandatory requirements often based on existing voluntary standards (GRI, SASB)
  • Allows for comparability and consistency in reported information
• Debate over benefits and challenges of mandatory vs. voluntary reporting
  • Mandatory can level playing field and ensure critical issues are disclosed
  • Voluntary enables flexibility and reporting on most relevant topics

Compliance Challenges and Best Practices

• Collecting and verifying sustainability data can be challenging
  • Data may be spread across multiple departments and systems
  • Need for robust internal controls and assurance processes
• Determining materiality and reporting boundaries requires judgment
  • What sustainability topics are most important to stakeholders and the business?
  • How to set boundaries for reporting (operational control, financial control, equity share)
• Keeping up with evolving standards and regulations
  • Sustainability reporting landscape is dynamic with frequent updates to standards and frameworks
• Ensuring reports are accessible and understandable to diverse stakeholders
  • Balancing completeness and detail with concise, user-friendly presentation
• Best practices include:
  • Engaging stakeholders to identify material topics
  • Integrating sustainability into core business strategy and decision-making
  • Investing in data collection and management systems
  • Seeking third-party assurance to enhance credibility
  • Using recognized standards and frameworks (GRI, SASB, TCFD)
  • Continuously improving reporting processes and disclosures

Impact of Regulations on Corporate Strategy

• Mandatory reporting requirements can drive changes in corporate strategy and decision-making
  • Companies may prioritize sustainability issues identified in required disclosures
• Reporting can reveal risks and opportunities related to sustainability
  • Climate-related risks (transition risks, physical risks) may impact business models and strategies
  • Sustainability initiatives can lead to cost savings, innovation, and competitive advantage
• Investors increasingly using sustainability disclosures to inform investment decisions
  • Poor sustainability performance or lack of transparency can lead to divestment or exclusion from ESG funds
• Customers and other stakeholders also using sustainability information to make decisions
  • Companies with strong sustainability credentials may be preferred suppliers or partners
• Regulations can level the playing field and create market incentives for sustainable practices
  • Carbon pricing regulations (cap-and-trade, carbon taxes) can drive shift to low-carbon technologies and business models
• Forward-looking companies proactively aligning strategy with sustainability considerations
  • Setting science-based emissions reduction targets in line with Paris Agreement goals
  • Integrating sustainability into core business strategy and risk management processes

Global Variations in Reporting Standards

• Sustainability reporting requirements and practices vary widely across countries and regions
• European Union has been leader in mandatory sustainability reporting
  • Non-Financial Reporting Directive (NFRD) requires disclosure from large public-interest companies
  • Upcoming Corporate Sustainability Reporting Directive (CSRD) will expand scope and require assurance
• United States has primarily voluntary reporting regime
  • Some mandatory disclosure in SEC filings if material to investors
  • Growing pressure from investors and regulators to enhance ESG disclosure requirements
• China has introduced mandatory environmental disclosure for listed companies
  • Requires disclosure on emissions, resource consumption, and environmental protection measures
• South Africa requires integrated reporting for listed companies on a "comply or explain" basis
  • King Code of Corporate Governance recommends integrated reporting to promote holistic view of value creation
• Different countries may have different reporting thresholds and materiality definitions
  • For example, NFRD applies to companies with 500+ employees while CSRD will apply to 250+
• Variations can create challenges for companies operating in multiple jurisdictions
  • May need to prepare multiple reports to meet different requirements
• International efforts to harmonize and converge reporting standards (GRI, IIRC, SASB)
  • Aim to reduce reporting burden and enable comparability across borders

Future Trends in Sustainability Reporting Regulations

• Trend towards mandatory reporting requirements expected to continue
  • EU Corporate Sustainability Reporting Directive (CSRD) will significantly expand mandatory reporting in Europe
  • US SEC considering enhanced climate and ESG disclosure requirements
• Greater harmonization and alignment of reporting standards and frameworks
  • IIRC and SASB merged to form Value Reporting Foundation (VRF) in 2021
  • IFRS Foundation launched International Sustainability Standards Board (ISSB) to develop global baseline sustainability standards
• Increased focus on double materiality and impact reporting
  • Companies expected to report not only on how sustainability issues impact the company, but also on how the company impacts society and the environment
• Greater emphasis on forward-looking disclosures and scenario analysis
  • TCFD recommendations encourage disclosure of climate-related risks and opportunities under different climate scenarios
• Demand for assurance of sustainability information expected to grow
  • EU CSRD will require limited assurance of reported sustainability information
  • Investors and other stakeholders seeking greater reliability and credibility of sustainability disclosures
• Integration of sustainability into mainstream financial reporting
  • Sustainability information increasingly seen as relevant to enterprise value creation
  • Move towards integrated reporting that connects financial and non-financial performance

Practical Implementation Strategies

• Engage stakeholders to identify material sustainability topics
  • Conduct materiality assessment to prioritize reporting topics
  • Consider impacts on the company as well as the company's impacts on stakeholders and the environment
• Integrate sustainability into core business strategy and decision-making
  • Embed sustainability considerations into risk management, product development, and investment decisions
  • Set measurable sustainability targets and link to executive compensation
• Invest in robust data collection and management systems
  • Establish clear roles and responsibilities for data collection and reporting
  • Use technology solutions to automate data collection and improve data quality
• Align reporting with recognized standards and frameworks
  • Use GRI, SASB, TCFD, or other relevant standards to guide reporting
  • Disclose alignment with standards and explain any omissions or deviations
• Obtain third-party assurance to enhance credibility
  • Engage external auditors to provide assurance over key sustainability metrics and disclosures
  • Communicate scope and level of assurance to stakeholders
• Integrate sustainability reporting into existing reporting processes
  • Align timing of sustainability reporting with financial reporting cycle
  • Leverage existing systems and controls for financial reporting
• Continuously improve reporting processes and disclosures
  • Regularly review and update materiality assessment and reporting practices
  • Seek feedback from stakeholders on the quality and usefulness of sustainability disclosures