ESG Compliance: Understanding ESG Reporting Requirements
July 5, 2023
Authors: Gabriela Payne, Senior Manager, Risk & Accounting Advisory Services
Is Your Organization Ready To Comply With Recently Evolving ESG Reporting Requirements?
To date, sustainability reporting has been voluntary, and the lack of consistent and transparent methodology or standards has not met the information needs of investors. Depending on where you operate, where your securities trade or who you do business with, you are likely to be subjected to comply with one or more jurisdictions’ corporate responsibility mandates either directly or indirectly, depending on your supply chain position.
Three key regulatory mandates to track include the International Financial Reporting Standards (IFRS) Sustainability Standards, the European Union (EU) Corporate Sustainability Reporting Directive (CSRD) and the U.S. Securities and Exchange Commission (SEC) proposed disclosure rules. Unfortunately, the requirements of these standards are different and might require separate assessments.
Key ESG Compliance Standards
On October 9, 2023, Governor Newsome of California enacted two laws that are expected to have global impacts on corporate climate accountability:
- SB 253 – Climate Corporate Data Accountability Act (CCDAA)
- SB 261 – Greenhouse Gases (GHG): Climate-Related Financial Risk
Companies that earn at least $1b in global revenue must comply with both laws. This also affects US-based companies and US subsidiaries of non-US-based companies “doing business in California” with global revenue thresholds as follows:
- SB 253 – Companies that report $1b+ in revenue will have to complete annual GHG reporting with Audit; Scopes 1, 2 & 3 will require full GHG reporting.
- SB 261 – Companies that report $500m+ in revenue will have to complete biennial reporting using qualitative TCFD framework, as well as Scopes 1 & 2.
Because “doing business in California” is a broad, all-encompassing definition, we expect that the CCDAA will affect over 6,000 companies that offer products, services, or sales within the state, including those who are obligated to report their carbon emissions through Scope 3 in the supply chain. The GHG law will have a larger impact, affecting over 10,000 companies.
IFRS Sustainability Standards
The International Sustainability Standards Board (ISSB) published its inaugural standards on June 26, 2023; IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures. The rules apply to over 140 jurisdictions and will apply to entities with financial years beginning January 1, 2024, with the expectation that the first financial reports to integrate these standards will be released around mid-year 2025. The rules provide sustainability accounting language that will enable management to disclose value-added sustainability information to help better inform investor decisions.
Under the IFRS S1 rules, companies will be required to perform detailed cash flow and cost of capital analysis of its sustainability-related risks and opportunities over its entire value chain in the short, medium and long term. The usefulness of the sustainability-related financial disclosures is built upon the conceptual tenets that the information must be comparable, verifiable, timely and understandable. The IFRS S2 rules set out specific climate-related disclosures that are designed to be used with IFRS S1. The ISSB is providing transition relief regarding certain IFRS S1 disclosures for the first year to enable companies to integrate these into their reporting processes. There will be no transition relief to IFRS S2 requirements.
The ISSB worked alongside various jurisdictions to create the IFRS S1 and S2 standards, including the International Organization of Securities Commissions (IOSCO) of which the U.S. SEC is a member of. It is possible that IOSCO will endorse these standards upon completion of its due process.
EU Corporate Sustainability Reporting Directive (CSRD)
Earlier this year, the EU finalized the CSRD, requiring more detailed sustainability reporting for EU companies, non-EU companies meeting certain thresholds for net turnover in the EU and companies with securities listed on a regulated EU market. These rules will be phased in starting from January 1, 2024, for certain large EU and EU-listed companies, and will apply to all companies within the scope of the CSRD by January 1, 2028.
This is the most comprehensive of the three taxonomies. Companies will be required to disclose information about how sustainability-related factors affect their operations and information about how their business model impacts sustainability factors ensuring that they align with the Paris Agreement and the EU’s own European Climate Law. The required reporting covers environmental, social and governance factors with broad consideration of environmental factors that not only include climate, but also integrate impact to water/marine resources, circular economy, pollution and biodiversity. The CSRD itself provides only a broad outline of the required reporting. Detailed disclosure requirements are being developed by the European Financial Reporting Advisory Group (EFRAG), a non-profit advisory group, and are expected to be adopted by the EU later this year.
A modified set of disclosure standards will apply to non-EU groups that are in scope of the CSRD because they surpass the net turnover threshold and have an EU branch or subsidiary. These standards are expected to be adopted by June 2024 and will be primarily focused on disclosures relating to companies’ impact on the environment and people.
U.S. Securities and Exchange Commission (SEC) Disclosure Rules
The U.S. SEC proposed climate-related disclosure rules in March 2022. The timing and content of the final SEC rules remain uncertain due to delays stemming from extensions of public commentary periods. However, the proposed SEC rules require disclosure of only climate-related information, as opposed to the more granular taxonomies set out by the CSRD and the IFRS.
Let Us Guide You Forward
Although additional taxonomy from the SEC and other jurisdictions are still evolving, it is certain that sustainability strategies and reporting compliance is imperative to remain competitive in today’s emerging economy. Specifically, the new regulations in Europe can impact your business if you have subsidiaries in respective countries. Also, suppliers and business partners of companies who must already comply with related standards will receive requests to provide ESG-related information. Assembling the needed information can be time consuming and challenging.
While finance and accounting departments may be short staffed in your current talent pool, Cherry Bekaert has an experienced advisor for every subject matter and is ready to deploy solutions for your organization. We have finance and accounting professionals who can assist you in navigating the different standards and requirements. We have ESG-specific accounting resources and technology solutions ready to help with related reporting and compliance needs. Save on recurring expenses with Cherry Bekaert’s forward-looking services for value creation, process improvement, digital acceleration, and ESG assessments and reporting. Whatever your need or your timeline, you do not need to build a new team – we have solutions to meet you where you are.
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