A sustainability reporting update - why the mid-tier market must pay attention
By Bettina Cassegrain, HLB Global Assurance Leader
When the IFRS Foundation launched the International Sustainability Standards Board (ISSB) at COP26, the objective was to set standards requiring companies to disclose their sustainability efforts. The Board would address fragmentation within the voluntary disclosure market and ensure that information would be consistent, high-quality, and transparent.
The ISSB is now sharpening its teeth, and mid-tier companies will soon need to deal with mandatory disclosure as each business identifies its environmental, sustainability, and governance (ESG) position.
Many companies have already recognised the Global Reporting Initiative (GRI) or Task Force on Climate-Related Financial Disclosure (TCFD) and may release some ESG information voluntarily. However, the ISSB has now defined a baseline set of corporate sustainability disclosure standards.
Further, the European Financial Reporting Advisory Group (EFRAG) has developed its own Corporate Sustainability Reporting Directive (CSRD), which will dictate further reporting standards for mid-tier companies.
New sustainability standards coming in 2023
ISSB
The ISSB met in January to clarify its 2023 standards and requirements. If all of the suggestions are adopted, companies will now need to provide information about how they measure, monitor, and manage sustainability-related risks or opportunities. The rules could require them to assess these risks and opportunities (both quantitative and qualitative) using reasonable and supportive information. They will need to explain their position if they cannot provide the required data and go into great detail about the information they actually use instead.
Further, affected companies must explain how they link this information to the risks and opportunities they identify in their general-purpose financial statements. The ISSB will also require these companies to identify any judgements they may have made that have significantly affected sustainability disclosures.
Sometimes, a company may declare that there is uncertainty around its estimates. If so, this uncertainty should also apply to current or anticipated efforts around sustainability-related risks and opportunities on the company's financial position, cash flow, or financial performance.
The ISSB met in February 2023 and could confirm its first report on standards by the end of June. This means that the standards may come into force by early 2024, meaning that the first sustainability reporting under these new standards comes due at the beginning of 2025.
EFRAG
Meanwhile, the CSRD came into force on 5th January 2023 with directives that include significant sustainability-related reporting requirements. Further, any disclosures will extend to the value chain, including services and products, supply chain providers, and business relationships.
Companies must report on a double materiality basis, covering sustainability risks and opportunities, as well as the company's impact on people and the environment.
CSRD will apply to all large EU companies, that is, EU companies (including EU subsidiaries of non-EU parent companies) exceeding at least two of the following criteria: more than 250 employees; a turnover of more than €40 million; or total assets of €20 million.
Sustainability Reporting Standards
Companies will need to disclose information per the European Sustainability Reporting Standards (ESRS) set out by EFRAG. The first set of standards will kick in on 30th June 2023 and detail the confirmatory information needed to report on sustainability matters by 30th June 2024.
The Commission may consider any global, standard-setting initiatives for sustainability reporting within the new standards to avoid creating an additional administrative burden for companies.
Sustainability Assurance
There are also standards on the way that will introduce a requirement for limited assurance on sustainability information and, ultimately, reasonable assurance in the long term.
The EU Commission will introduce a requirement for limited assurance on sustainability information and, ultimately, reasonable assurance in the long term. The proposal so far indicates that the European Commission should adopt assurance standards for limited assurance before 1st October 2026 and reasonable assurance standards no later than 1st October 2028. Many large companies will be in the scope of this new legislation, but it may also affect other listed, small and medium-sized companies. However, the disclosure requirements may be less demanding, and these companies may be able to opt-out until 2028.
The International Auditing and Assurance Standards Board (IAASB) has recently confirmed [iaasb.org] it will advance a consultation on a new sustainability assurance standard International Standard on Sustainability Assurance (ISSA) 5000. IAASB hopes to have the final standard ready in 2024.
What this means for mid-tier market companies
Although the scope of the CSRD and the ISSB standards falls very much towards the publicly listed sector, the mid-tier market cannot become complacent. There will be a trickledown effect. Any medium size or even small company may become intwined in any obligations their large clients currently have to comply with. If not prepared, they could potentially run the risk of losing existing and new clients if they cannot provide relevant information when it is required. This should not be seen as a constraint however, but part of anticipating requirements the mid-tier market may be subject to down the line.
There are many ways that the mid-tier sector can harness the benefits of investing in ESG and sustainability. Companies in this sector can position themselves as an essential element of the supply chains of larger businesses. There have already been instances of shifting tender requirements in many sectors including financial services.
Companies in the midmarket will need to start reporting in accordance with ISSB standards and may need to keep an eye on the CSRD as well. So, as they set an ESG strategy, they should follow developments and plan their approach to gathering information and reporting. In addition, they need to be keenly aware of any updates as further clarifications emerge so they know exactly what data to collect and how to report it.
As companies develop a robust, sustainability reporting ecosystem, they can monitor their progress as they roll out a strong ESG strategy. This should help them to drive value but, crucially, also make them attractive to capital markets. Then, investors can help support them as they provide innovative solutions with an eye on sustainability.
How HLB can help
For many mid-tier companies, these requirements (stated and potential) may seem onerous. However, we are ready to help. Our people are well-placed to provide guidance around the ESG reporting agenda and to help you develop effective and clear ESG plans. For further information about ESG reporting and to get help with an internal strategy, contact us for more information.
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