In the race to create more sustainable, resilient net-zero economies, initiatives to enhance the status of sustainability reporting and ensure greater connectivity with financial reporting will be key. The legislative proposals now tabled by the European Commission address important issues around sustainability reporting, standards and assurance. They are comprehensive in scope, ambitious in timing and could help usher in a new era of corporate reporting.
While the proposals will be of interest first and foremost to EU countries, companies and stakeholders, the issues addressed are of keen international concern. EU legislative change and the forthcoming debate and scrutiny of the proposals will provide an important point of reference for other jurisdictions too.
A new era for corporate reporting
The growing demand for companies to report on a wider range of matters and to a broader set of stakeholders has been central to debates on the future of corporate reporting for many years. Improved sustainability reporting will be central to efforts to encourage system change.
Given the urgency of the challenge, we welcome the Commission’s move to strengthen sustainability reporting, paving the way towards a corporate reporting system that fully encompasses financial and sustainability reporting. Plans to extend the scope and requirements of the existing EU Non-Financial Reporting Directive should, if all goes well, help to significantly improve the depth and quality of sustainability information.
It is vital, however, to retain clarity over the ultimate objective of sustainability reporting, that of producing information that can help with efforts to address environmental and social challenges. This requires sustained focus on areas where there is wide demand from businesses and stakeholders to deal with practical information needs. This will be particularly important as more and more companies start to fall under the direct or indirect remit of the proposed EU legislation.
The move towards standardisation
The cornerstone of the draft Corporate Sustainability Reporting Directive is the mandatory requirement for listed and large entities in the EU to report detailed sustainability information covering their whole value chain. The proposed disclosures are far-reaching, qualitative and quantitative in nature and cover both forward-looking and historic information. This will be a significant change for many entities, particularly for those coming into the scope of the legislation for the first time. There will need to be consideration from the start as to how to support them in building up capacity and understanding.
As has been widely expected, the Commission also proposes that information should be prepared according to EU sustainability reporting standards, to be developed by the European Financial Reporting Advisory Group (EFRAG). The breadth and depth of the suggested standards – as well as the suggested timetable, with a first, core set of standards due for adoption by the end of October 2022 – are extremely ambitious. Meeting such ambitions will require the support, experience and expertise of existing sustainability reporting initiatives and standard-setters.
International alignment
ICAEW supports the development of international sustainability reporting standards, and we strongly encourage all parties to work towards this goal. Our experience tells us that European initiatives such as the proposed CSRD can help further catalyse global change, supporting the identification and application of common solutions to address shared challenges. To enable this to happen, all parties will need to work together in an open-minded way – cooperating rather than competing, aligning rather than duplicating – to deliver meaningful and ultimately globally consistent change with the urgency and scale required. Our June 2020 paper, Non-financial reporting: ensuring a sustainable global recovery, set out some practical suggestions that could help pave the way.
The route to reliability
With sustainability disclosures becoming increasingly important, there is a growing focus on the extent to which such information can be relied upon. This is a key feature of the draft CSDR, with the proposed introduction of mandatory sustainability assurance. The phased approach outlined by the Commission, starting with limited assurance and moving over time towards reasonable assurance, seems sensible. Making assurance more commonplace will require some basic challenges to be addressed, including strengthening control systems and enhancing the skills of boards and audit committees. These are not quick fixes and may require significant investment by some organisations.
Ensuring proper application and consistent enforcement is an essential corollary of good reporting. As recognised by the Commission, a robust regime will eventually need to be in place to realise the full benefits of this enhanced sustainability reporting regime.
Our role
ICAEW is committed to ensuring that chartered accountants are at the forefront of efforts to build more sustainable and resilient economies. We continue to engage with initiatives that can contribute to improvements in the quality and consistency of sustainability disclosures and governance and will continue to keep ICAEW members up to date with relevant developments in sustainability reporting and assurance in a period of rapid change.