Sustainability reporting: Riding the tide of change

However, an increasing drive for more clarity and transparency on sustainability reporting has been highlighted by the 2021 EY Global Institutional Investor Survey. Vanessa Müller and Renaud Breyer from EY Luxembourg, share insights.

Institutional Investors around the world are placing greater emphasis on their investee companies’ Environmental, Social, and Governance (ESG) performances. 74% are now more likely to divest from companies with poor ESG track records. However, clarity and comparability of data remains a concern, and rising number of investors feel there is an urgent need for better quality disclosure.

Fueled by this, as well as societal expectations, the number of Environmental, Social and Governance (ESG) regulations and standards globally have nearly doubled in the last five years. An Increasing number of businesses are voluntarily committing to being more transparent about their nonfinancial value. Standards are converging and streamlining to create a common language. The IFRS Foundation is endeavouring this with the launch of its initiative in November 2021 to build on existing major frameworks and create a minimum global framework for sustainability-related financial reporting standards that are aligned with enterprise value. 

The EU Sustainable Finance Action Plan launched in 2019 sets out a series of regulations with the aim to increase transparency over the capital flows towards the real economy thus directing investments towards sustainable activities. Mandatory ESG disclosures for financial market players through the Sustainable Finance Disclosure Regulation (SFDR) which came into force in March 2021 are augmenting the need for information. While the Taxonomy Regulation, applicable from 2022, mandates the use of a common language on sustainable activities for both financial and non-financial entities, the Corporate Social Responsibility Directive (CSRD) proposed in April 2021 significantly extends the content scope and coverage of current non-financial reporting requirements.

What can companies do to be ready for SFDR, CSRD and Taxonomy?  

Due to these escalating expectations, businesses will be required to disclose more sustainability-related information than ever before, including details about their business models, strategy, forward looking targets, and supply chains. This requires sufficient preparedness and involvement of all business functions.

“Ultimately, every business will be affected by disclosures or their related information seekers. This should not be considered as a burden but rather a way to differentiate a company. EY Luxembourg recently conducted its own exercise on voluntary reporting and released its first sustainability report this November, providing us with valuable learnings and insights on the way forward” comments Renaud Breyer, Partner, Sustainability Leader at EY Luxembourg.

Here are some concrete measures that businesses can proactively undertake:

Compliance and market assessment: Assess the impact of current compliance requirements, evaluate the major global framework and assess the practices of competitors to avail of frontrunner opportunities.

Apply the typical sustainability reporting methodology: The stakeholder engagement and materiality exercises are valuable ones to identify key impacts and priorities and to reorient existing business strategy and processes. Mature organizations should strengthen their existing processes, with particular focus on ESG data and target-setting.

Get the company and various functions engaged: Facilitate sustainability trainings across all functions and nominate ambassadors to further support the cause.  Nominate sustainability leadership to provide ownership. Get sponsorship from the top management.

Seek external assurance on existing sustainability reporting: The CSRD is aiming to mandate limited assurance and increase responsibilities of the audit committee. Companies can use audit preparedness as a mean of building stakeholder confidence and complying with the upcoming obligations. EY is a partner of choice, building on its clients trust on non-financial reporting and sustainability matters.

Getting the finance function engaged into the sustainability agenda

As evidenced by the EU and global trends, sustainability reporting is steering closer to financial reporting both in terms of quality expectations and the redefining of value.

Finance can play a key role in understanding and connecting the requirements of stakeholders and the reporting requirements. Additionally, more financially relevant ESG approaches — “FESG+” —will enable businesses to deliver change and fully measure their value and impact.

“Ultimately, sustainability reporting is not just about transparency. It is about vision and transformation. Businesses should take this opportunity to ride the coming tide of change to position themselves for whatever comes next”, concludes Vanessa Müller, Partner, ESG Leader at EY Luxembourg.