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ESGApril 24, 2024

Sustainability requirements include a demand for delivery, not just data

When it comes to sustainability, there are many issues companies need to keep in mind. The list can be daunting. But many items are inter-relatable.

An Economist Impact article, Top Sustainability Trends for 2024, cites climate disclosure, reporting a company’s impact on nature, and the need for identifying effective adaption plans as the top three concerns.

In the United States, final rules released by the US Securities and Exchange Commission (SEC) outline disclosure requirements for material climate-related information in registration statements and annual reports.

In Europe, companies need to follow the European Union’s requirements outlined in the Corporate Sustainability Reporting Directive (CSRD), as well as the Corporate Sustainability Due Diligence Directive (CSDDD).

The CSRD requires large institutions that have issued securities trading on a regular market to disclose ESG risk information. The Directive also requires investment firms to look at the introduction of an ESG risk dimension in the Supervisory Review and Evaluation Process “by competent authorities.”

While data is important, there is also an increased call for delivery — concrete actions by companies that will curtail climate disasters.

Peter Bakker, president of the World Business Council for Sustainable Development (WBCSD), is concerned companies may be paying too much attention to dotting their I’s and crossing the T’s. Bakker cautions, “Businesses must ensure that they do not report for the sake of it, but use reporting to aid better decision-making and bring about actual change.”

He believes that instead of reporting, companies should be rewarded for progress. “Aligning changing business needs with capital-allocation models used by the financial markets will boost the speed of the transition, which is currently nowhere near sufficient,” he says.

Mark Lee, Partner and Director at ERM, a sustainability consultancy, agrees that there needs to be more focus on accountability and change, rather than just reporting. He says in the Economist Impact article, “We’ve got much better at broadcasting what we’re doing, but without changing much – emissions continue to rise, deforestation is accelerating,” he says.

Impacts on nature

Another type of disclosure growing in importance is the impact a company has on nature and vice-versa.

Last fall, the Task Force for Nature-Related Financial Disclosures (TNFD) released its final recommendations explaining how companies should assess, disclose, and manage nature-related risks and impacts.

At the core are four principles that align with TCFD and incorporate the ISSB’s IFRS-S1 General Requirements:

  1. Support for increasing the breadth and depth of disclosures over time, consistent with both the ISSB Standards and its global sustainability reporting baseline, and the global policy goals and targets in the Global Biodiversity Framework.
  2. A call for organizations to disclose material information about their nature-related dependencies, impacts, risks, and opportunities.
  3. A recognition that there are different approaches to materiality. The TNFD recommends that, as a baseline, organizations apply the ISSB’s approach to identifying information that is material for those filing general purpose financial reports.
  4. For comprehensiveness, TNFD recommends the identification and assessment of all four types of nature-related issues – dependencies, impacts, risks, and opportunities. When reporting, organizations should delineate the four types of issue and explain the links between them.

This type of reporting will demand an increasingly larger focus as the world heads to the UN nature talks at COP16 in Colombia this October.

However, reporting requirements still are not clear. In the Economic Impact article, Mr. Bakker of the WBCSD says that many companies struggle with what being “nature positive” means. There will be a lot of work to better understand this in 2024, Bakker predicts.

Adapting to climate change

Because of the increasing number of weather-related disasters in 2023, as well as it being declared the hottest year ever recorded, many expect investors to ask, and companies to deliver on their efforts to adapt to climate change.

Supply chain resilience is front and center, especially regarding flood protection and maintaining access to water for supply chains.

According to Tom Beagent, a partner in PwC’s sustainability services, companies have their work cut out for them. Many may need to build up their capacity and skill set to deal with future challenges. “None of this is going to be easy,” he says in the Economist Impact article, “but then we're talking about some quite significant challenges that need to be overcome.”

In conclusion, as pressure from regulators and stakeholders on ESG and sustainability disclosure ramps up, companies should be aware that pressure for also more action may not be far behind.

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