3 key sustainability reporting standards to keep track of in 2023
They are called the “big three’s”. Some are even stating that they will revolutionize the ESG landscape for good. Get to know the recent sustainability standard proposal from EFRAG, ISSB, and SEC and why they are considered the future of ESG reporting.
For years now, businesses and investors have called for a simplified sustainability reporting landscape. And at last, it might actually happen.
Earlier in 2022, three new proposals for standardized sustainability disclosure were announced:
- The European Sustainability Reporting Standards (ESRS) in Europe;
- The United States Securities and Exchange Commission (SEC) proposed climate disclosure rule in the US; and
- The International Sustainability Reporting Standard by the International Sustainability Standard Board (ISSB) as a global baseline of sustainability disclosures for the capital markets.
These three disclosure proposals are all preceded to set the foundation for future ESG reporting and improve the completeness, comparability, reliability, and accountability of corporate sustainability reporting.
Many companies will find themselves affected by one or more of the proposed disclosure regimes – and should start adopting their reporting processes sooner rather than later. While they are similar in various ways, there are also distinct differences to be familiar with.
This blog will provide you with a first-hand glance at each of the three’s proposals. Get an understanding of what they are, whether or not they will affect your business and what you can do now to prepare your sustainability reporting.
Comparing the EFRAG, ISSB, and SEC proposals:
… And let’s have a better look into each of the standard proposals:
European Sustainability Reporting Standards (ESRS):
The European Sustainability Reporting Standards are the new mandatory standards which companies under the CSRD will be required to comply with. The European Commission (EU) introduced these standards to ensure that corporate sustainability reporting within the EU becomes comparable, relevant, and reliable – and make it clear for the reporters what they are expected to disclose on.
The standards are currently under development by the European Financial Reporting Advisory Group (EFRAG)and are expected to become mandatory from 2024.
Which companies will be affected by the ESRS?
All companies covered by the EU Corporate Sustainability Reporting Directive (CSRD) will be required to align their corporate sustainability according to the ESRS. These companies are:
- All large companies, regardless of capital market orientation, with:
1) more than 250 employees and;
2) more than 40 million EUR in net turnover, or, 20 million EUR in assets.
- All capital-market SMEs, except for micro-enterprises, starting from 2026. According to the EU (Directive 2013/34/EU), companies qualify as small if they exceed one of these two thresholds:
1) more than 10 employees;
2) more than 700 00 EUR in net turnover; and
3) 350 000 EUR in assets.
When are the ESRS expected to become mandatory?
The implementation date for the ESRS differs depending on the size of the company:
- For companies that are currently obliged to report under the EU’s Non-Financial Reporting Directive (NFRD): financial year 2024 (report issued 2025);
- Large companies: the financial year 2025 (report issued 2026); and
- SMEs and other small and non-complex institutions the financial year 2026. However, they will have the option to opt-out of the reporting rules until 1st January 2028.
SEC’s new climate disclosure proposal
In March 2022, the US Securities and Exchange Commission (SEC) proposed a new rule to add standardized climate reporting disclosure for public companies. The new proposed rule requires companies to annually provide certain climate-related information, including their governance on climate-related risks and how climate risks are identified, assessed, managed, and disclosed.
Given the absence of strong accountability and overview of ESG reporting in the United States – particularly in comparison to the accelerating rate of new and stricter mandatory disclosure requirements in the European Union – this proposal is seen as an important and urgent game-changer on U.S capital markets.
Which companies are covered by the SEC’s climate disclosure rule?
SEC’s climate disclosure rule will apply to all SEC registrants – including non-US companies. However, companies classified as smaller reporting companies will have limited reporting requirements and their phase-in period starts later compared to larger companies.
When is the SEC’s climate disclosure rule expected to become effective?
The final compliance date will differ depending on whether a company classifies as a large accelerated filer, accelerated or nonaccelerated filer, or small reporting company. If the disclosure rules start applying in late December 2022, which is what many are expecting, and a registrant has a fiscal year ending December 31st, then the compliance date for the proposed disclosures in annual reports, other than the Scope 3 disclosure, would be:
- For large accelerated filers: fiscal year 2023 (filed in 2024);
- For accelerated and non-accelerated filers: fiscal year 2024 (filed in 2025); and
- For SRCs: fiscal year 2025 (filed in 2026).
Tracking and reporting on Scope 3 emissions will not be required until the second fiscal year for in-scope registrants. In the current proposal, only the small reporting companies are exempted from the Scope 3 disclosure requirements. However, it’s been publicly reported that SEC is considering removing the Scope 3 disclosure requirement entirely – although this has not been confirmed. Subscribe to our newsletter to always stay notified on important changes in the sustainability reporting landscape – including the SEC climate disclosure proposal.
The International Sustainability Reporting Standard by the International Sustainability Standard Board (ISSB)
During COP26 in 2021, the International Financial Reporting Standards (IFRS) announced the formation of a new standard-setting board: the International Sustainability
Standard Board (ISSB). The new board was created in response to the growing demand for standardized information about corporations’ sustainability-related risks and opportunities. The announcement of the international Sustainability reporting standards has been welcomed by stakeholders, including the G20 and UN, as it will provide a global baseline on what and how to disclose ESG information for organizations worldwide.
Just days after the SEC published its climate discourse proposals, the ISSB issued
its two first proposed standards — one on climate and one on general sustainability-related disclosures. ISSB has also announced its intention to develop further standards, both thematic and industry-based requirements in the future.
When are ISSB’s finalized standards expected to be issued?
ISSB has the ambition to have completed the technical standard-setting work and go through all feedback around the end of 2022 – with the goal of issuing the final standards as early as possible in 2023.
What to do now?
Work with the alignment of the TCFD framework to guide your current reporting
Each of the standard proposals by ISSB, EFRAG, and SEC draws numerous parts from already existing and accepted disclosure frameworks instead of being built from scratch – which is a much-welcomed relief amongst businesses. The standards will be built on the work from established frameworks and industry leaders, particularly the Task Force on Climate-Related Financial Disclosures framework (TCFD). This means that businesses already focusing on TCFD for their ESG reporting have an advantage over those that aren’t.
Do yourself a favor and start aligning with TCFD today if you haven’t already done so. Did you know that you integrate your ESG reporting in Worldfavor to automate the collection and calculations of your emissions (scope 1,2,3) – which are KPIs companies need to report to according to the TCFD? Let us tell you more!
Related blog posts you might like: