Practical perspectives on reporting #26: Meeting new sustainability requirements while preserving the integrity of reporting (and your sanity!)
By Tamara O’Brien, TMIL’s roving reporter
Regular webinarians will be used to the high level of expert knowledge this series makes available to the corporate reporting community (free, gratis and for nothing!). But this was no ordinary webinar, even by Falcon Windsor standards. As one FTSE100 reporter later commented to Claire, ‘so much clear and practical insight packed into 45 mins’. My phone recorder could barely keep up, as Jonathan, Janice and Harriet delivered fact-packed, eye-opening commentaries, in the way that only people with many years’ immersion in their subject can.
So I do urge you to listen to the recording, because much more ground was covered, and inside-track tips shared, than can be set down in a blog.
NEWS FLASH FOR UK REPORTERS: EU CSRD/ESRS statement can sit outside the AR
If that wasn’t enough – the webinar was topped by breaking news to gladden the hearts of companies reporting against the European Sustainability Reporting Standards, or ESRS. Rejoice ye nations outside the EU (or companies listed in those nations anyway), because we can confirm that your sustainability data CAN be put in a supplementary document published at the same time as the AR. Thanks to Harriet’s amazing finance colleagues for finding this info buried in an FAQ issued from Europe (which you can find here, questions 25 and 86 being the relevant ones). So UK reporters don’t need to bend themselves into pretzels, wondering where to shoehorn hundreds of data points into a report that’s supposed to be ‘fair, balanced and understandable’.
Back to the webinar. If I could pin a theme onto the session, it’d be ‘Let’s keep things simple’. This unspoken phrase hummed throughout the discussion – as heartfelt plea, strategic approach, and rallying cry of encouragement – as each panellist shared their particular perspective on the issues raised: Jonathan from the world of standard-setting, Janice as consultant/adviser, and Harriet as seasoned corporate reporter.
The heartfelt plea
Claire introduced the session by recalling simpler reporting times. You might remember those days too, when ESG was called CSR, and could be slotted into a couple of spreads towards the end of the strategic review. Or even have its own report, if you operated in photogenic locations and were feeling fancy.
Back then, of course, few of us understood what an existential tiger we’d grasped by the tail. CSR in its infancy was mainly about good works and trophies, with a dollop of self-promotion. Certainly not much in the way of hard data, comparability or usefulness to investors.
Well, times have changed. Along with social attitudes, how companies are viewed and governed, and our knowledge of what’s happening to the climate. In this new era, Claire continued, some jurisdictions have seized upon corporate reporting as a means of encouraging investment in the societal change they want to see, and regulated it accordingly. The EU, for example, has openly stated its desire to ‘green the economy’, which is reflected in the way ESRS are constructed. In adopting ISSB standards, the UK is less overtly political, more focused on the practicalities of how a company should identify and report on its sustainability issues.
Sizing up the challenge
Whatever the political drivers, corporate reporters can be forgiven a certain amount of what-fresh-hell-is this-ishness. For them, more regulation simply means Tonnes More Stuff To Do. Closely followed by What Do We Have To Report On Now; and, How On Earth Do We Weave It Into What We’re Already Doing for ESRS. Hence the howls for clarity, consistency and consolidation that have been echoing around the ESG space for some time now.
On the plus side, these pleas have largely been answered by the ISSB’s new IFRS standards: 1 (general requirements for sustainability-related financial disclosures) and 2 (specific disclosures relating to climate). The UK government aims to decide how these will be endorsed in Q1 of 2025, and the standards will form part of a wider Sustainability Disclosure Reporting framework led by the Treasury (you can read more about it here). The unavoidable downside being, of course, that it’s yet more regulation.
Jonathan Labrey of the ISSB, who is part of the team that developed IFRS S1 and S2, didn’t shy away from the difficulties. But, having given us an overview of these and how they relate to ESRS, he reminded us that IFRS S1 and S2 are designed to help companies deliver clear decision-useful information to investors on sustainability-related risks and opportunities. The ISSB’s work with European body EFRAG on interoperability with ESRS could help companies to identify the missing link between their financial disclosures and ESG policies, actions and impacts. As well as being of huge help to investors, the silo-busting data-gathering process and resulting information will be valuable to the business itself; enabling it to have stronger engagement with investors, establish a firm business case for sustainability, and identify where it can make most difference.
Governance expert Janice Lingwood confirmed that most of the companies she’s talking to are currently much more focused on ESRS – with its two general standards, ten topic standards, and sub- (and sub-sub!) standards. A major new task for reporters will be meeting the ESRS requirement to carry out a double materiality assessment (ie, looking not just at the financial impacts of sustainability issues on the business, but at how the company’s actions, policies and processes affect the issues in question). And Janice reminded reporters that it’s just as important to get evidence around what is NOT material to their business, because you’ll need to be able to prove that too.
Harriet Cullum, Global Head of ESG Insights at Diageo, has long experience of working on Diageo’s environmental and social reporting. Now working with Diageo’s finance team to deliver under ESRS, and IFRS S1 and S2, across multiple jurisdictions, she made a powerful point about being at the sharp end of delivery. ‘This work is hard and it’s complex. A lot of companies are feeling the pressure of understanding what’s required of them, and then actually doing it.’ With their track record of reporting, Diageo is slightly ahead of the game; but many companies will be hit by new requirements coming at them from all angles.
So what should companies do? Our panellists got out their roadmaps.
The strategic approach
For Claire, navigating your way through the turbulent crosswinds when new standards are introduced means holding even harder to reporting’s ultimate purpose. Which is: to tell the truth about a company, through story and factual evidence, in a way that is ‘fair, balanced and understandable’.
In terms of IFRS standards, fair, balanced and understandable reporting involves taking the reader through all a company’s material impacts, and giving context to both the positives and negatives. Janice agreed with Claire that, as reporters, it's vital that we understand why we’re reporting. Because getting bogged down in factual detail risks losing sight of the story; which can lead to all kinds of muddle in the resulting communication. So keep coming back to those first principles.
Another back-to-basics tip: as you compile the report, decide what’s fundamental to ‘unobscured, decision-useful information’ and what’s supplementary. The supplementary stuff – all the supporting data – can be put in that separate document we spoke so highly of in the introduction.
How to decide which information is ‘decision-useful’? Janice had tips for that too. Bearing in mind that that the strategic report is there to help users assess the specific strategies adopted by a company, and how likely these are to succeed – a good approach is to pick out the ESRS stuff you’re doing that supports those strategies. Which boils down to four pieces of information:
Your material topics – what are they, and what do you want to achieve in each?
What are your metrics for assessing progress? (Not every single metric, just the really important ones: think Key Performance Indicators.)
How are you doing right now?
What do you plan to do next year?
Then it’s a matter of structure, and Janice doesn’t see anything wrong with that of the classic annual report. Key points upfront; then main narrative; detailed data either at the back or in a supplemental report.
There’s less good news for fans of the traditional materiality matrix. In the new era of double materiality reporting, explained Janice, this old way of showing the intersection of internal/external stakeholder views doesn’t work. This is because financial materiality and ‘impact’ materiality are determined independently. They don’t intersect, except when an issue is material under both definitions. So you’ll need to think of a different way to present the output.
Evolve with the times
When the virtual mic passed to Harriet, she said she felt ‘very reassured and comforted’ by Jonathan and Janice’s words, and wondered whether they’d consider forming a reporting support group! (Maybe not such a crazy idea…)
Harriet’s approach to maintaining both reporting integrity and personal sanity centred on reframing potentially burdensome requirements as learning opportunities, for company and individual. Viz:
Opportunity: there’s a huge opportunity for sustainability and finance professionals to work together and make the disclosure process valuable for the preparer, as well as robust for the user/investor. With Harriet coming from the sustainability world, working with finance colleagues on the new standards for the past couple of years has opened everyone’s eyes to different ways of approaching and solving problems.
Partners: It's important to work with external partners who will challenge as well as listen to you. ‘Providers who said they had all the answers was a red flag for us, because I don't think any company has all the answers on how to do a double materiality assessment, or how to report on the results.’
A clear brief: Diageo gave their chosen partner a clear brief: they wanted to be able to use the outputs of the assessment process to assess and manage their most material impacts, risks and opportunities; and then communicate that to the users of the information. The order is important. ‘We know we need to give useful, insightful, unobscured information to our investors and other stakeholders. But ultimately, for us, the reporting tail shouldn’t wag the dog of strategy and strategic action!’
A new community of practice? Harriet predicted that a community of practice in how reporters approach the new requirements will emerge over time. ‘As in all things sustainability, we iterate and learn as we go along. All of us working in this area have to apply a degree of pragmatism and embrace partnership with different organisations.’ Speaking of pragmatism, this fly-the-plane-as-you-build-it ethos means it’s important to start on a double materiality assessment early. And perhaps get an assurer’s private opinion on it, given that ESRS requires it to be assured.
With this banquet of information to bolt down and digest in 45 minutes, questions from the floor were of necessity a little curtailed. But you are cordially invited to feast at your leisure, by watching the video.
The rallying cry of encouragement
A final word from each of our panellists, in response to Claire’s question: Could you give a short piece of advice to anyone who already reports under ESRS, and is now facing the challenge of meeting IFRS S1 and S2?
Janice: I think this goes back to your double materiality assessment, where you have to identify what’s financially material, and what’s material from the impact perspective. Clarity in what’s financially material leads you easily into what you need to do under IFRS S1 and S2.
Harriet: Compliance is an important outcome of what you do, but not your only objective. By understanding your most material risks, impacts and opportunities, assessing them, and engaging your functions and leadership in that assessment – yes you’ll be able to report as a result of that work, but you’ll also be able to make your business more resilient, maximise opportunities, drive innovation – there are so many more benefits to doing a really robust materiality assessment than just reporting!
Jonathan: Our primary user is the investor, and one of the great investors, Warren Buffett, says that when he reads an annual report, he doesn’t start with the data. He wants to know how the company is performing, what the story is, what does the CEO think of the past year or two, and the future? Yes, as a company you need to be able to draw on verifiable, objective, standardised information – but its value lies in how you link that data to telling your story.
And finally, as Claire observed: compliance is a thoughtful process. If you’re convinced in your own mind that your information meets the spirit of the requirement, it probably will. If not, don’t include it. That way, you won’t swamp your report with information that really doesn’t need to be there.