Corporate reporting involves disclosing any material fact or change by an organization and provides financial performance of the organization during a period, including information about the operations, how economic resources were utilized, details of the transactions, and claims to those resources and transactions. This helps provide useful information to regulatory authorities, banks, investors, and others in making rational investment, credit, and similar decisions.
Nowadays regulators and investors are looking at organizations’ sustainability performance and strategies to address environmental and societal challenges. Organizations have started integrating sustainability into their business strategy to provide insightful, holistic, and trusted information.
This evolution of corporate reporting has pressed regulators across the globe to focus on sustainability or non-financial information and introduce legislation requiring organizations to disclose against the Environment, Social, and Governance (ESG) reporting metrics. In this article, we examine some of the new and upcoming regulatory mandates in UK and EU that every organization needs to keep a close eye on…
UK Task Force on Climate-Related Financial Disclosures (TCFD)
The Task Force on Climate-Related Financial Disclosures (TCFD) was incorporated in December 2015 for organizations to disclose climate-related financial risk information to stakeholders with utmost transparency. With recommendations focused on four thematic areas (Governance, Strategy, Risk Management, Metrics & Targets), the TCFD framework facilitates decision-useful disclosures among companies, where they can evaluate and manage financial risks and move towards a sustainable economy.
From 6 April 2022, large registered companies in the UK- regulated market are required to provide mandatory disclosures in line with the TCFD requirements. This includes 1,300 UK-registered companies, banks, or insurers with more than 500 employees and with a turnover of more than £500 million. The current focus is on governance-related activities and a degree of flexibility has been provided for the ‘Strategy, Metrics, and Targets elements of the TCFD’s framework (materiality filter). The first annual reports including mandatory TCFD disclosures are expected in March 2022.
Apart from UK, Switzerland and New Zealand are set to introduce the TCFD mandate in 2024 and 2025 respectively. Other nations with upcoming TCFD proposals are the USA, Canada, France, Germany, Italy, and Japan.
Sustainable Finance Disclosure Regulation (SFDR) Level 2 Disclosures
The EU Sustainable Finance Disclosure Regulation (SFDR) was introduced in 2019 and aims to enhance visibility in the financial market for sustainable investment. The SFDR provides a roadmap to financial market participants (FMPs) to disclose their sustainability risks and encourages them to shift capital towards sustainable activities. Since March 2021, FMPs such as investment firms, asset managers, banks, venture capital funds, insurance companies, pension providers, and applicable credit institutions that have more than 500 employees are required to report how they implement Principal Adverse Impact (PAI) indicators in their organization.
The Level 1 disclosure requirements are already being adhered to by reporting entities wherein they report information on identification, description of the PAIs and the appropriate action plan on a ‘comply or explain’ basis. The Level 2 disclosure requirements will be applicable from January 2023 wherein FMPs will have to provide ESG reporting disclosures in addition to the Level 1 reporting. The Level 2 disclosures will bring in 13 Regulatory Technical Standards (RTS) and taxonomy-related obligations. The first Level 2 disclosure reports are expected by July 2023 for the reporting period of 1 January 2022 to 31 December 2022.
International Sustainability Standards Board (ISSB)
The International Sustainability Standards Board (ISSB) was established in the fall of 2021 and will operate under the oversight of the International Financial Reporting Standards (IFRS). ISSB aims to develop a global comprehensive baseline for sustainability and ESG reporting-related standards and provide transparent, comparable, and quality information to investors for informed decision-making.
ISSB will be built upon the foundation of global bodies like the Sustainability Accounting Standards Board (SASB), TCFD, Climate Disclosure Standards Board (CDSB), and the International Integrated Reporting Framework (IIRC). This will ease the adoption of the new standards by organizations that have already adopted TCFD or SASB disclosure standards.
To digitize ESG reporting, IFRS will shortly publish an initial proposal for the IFRS Sustainability Disclosure Taxonomy. The ISSB is expected to become fully functional and issue new standards by the end of 2022. The ISSB standards are expected to be used across jurisdictions.
Corporate Sustainability Reporting Directive (CSRD)
To bridge the gap between the EU and global ESG reporting standards, the European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) are working together to establish the Corporate Sustainability Reporting Directive (CSRD). The new legislation will apply to approximately 49,000 EU companies.
Both GRI and EFRAG will co-construct a framework whereinESG reporting and financial disclosures are interconnected and comparable. The first set of CSRD standards is expected to be adopted by October 2022.
With globally-accepted standards for ESG reporting being prepared, it is important for every organization to start preparing themselves for providing non-financial information and demonstrate that they are responsible and socially conscious.
