In January 2023 the Corporate Sustainability Reporting Directive (CSRD) entered into force, following its adoption by the European Council on 28 November 2022. The new directive revises the 2014 Non-Financial Reporting Directive (NFRD), and significantly extends the scope of covered companies (ie it no longer impacts only companies that are headquartered in the EU) and strengthens the reporting requirements for in-scope companies.
The CSRD introduces substantial sustainability-related reporting requirements, with small variations for the different companies in scope. All relevant disclosures will now extend to the reporter’s value chain, including products and services, business relationships and supply chain. You can find more information on the main additions to the disclosure requirements in Grant Thornton International's article ‘The CSRD - a game-changing EU regulation’.
In June 2023, the International Sustainability Standards Board (ISSB) issued its first two international sustainability standards (the Standards):
The Standards become effective for periods beginning on or after 1 January 2024. Together they mark the start of a new era of requiring reporting entities to make sustainability related disclosures and a global baseline of sustainability-related standards.
IFRS S1 sets out the overall requirements for a reporting entity to disclose sustainability-related financial information about its sustainability-related risks and opportunities. This will enable reporting entities to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.
IFRS S2 sets out specific requirements for the identification, measurement and disclosure of climate-related financial information and is designed to be used in conjunction with IFRS S1.
The four pillars of governance, strategy, risk management and metrics & targets from the Taskforce on Climate-Related Financial Disclosures (TCFD) have been used to develop the Standards.
These Standards create a common language for disclosing sustainability risks and opportunities, initially focusing on climate-related risks and opportunities, to achieve global comparability. Together these two Standards will provide decision-useful, sustainability related information for investors.
Since the issuance of IFRS S1 and IFRS S2, the ISSB has sought feedback on its priorities for its next two-year work plan through a public consultation process which ended on 1 September 2023. We responded to the ISSB’s Request for Information and our comment letter can be read here. The ISSB is currently reviewing the feedback that has been received with a view of finalising its work plan in the first half of 2024.
In June 2023, the European Commission (EC) adopted a package of measures including the EU Taxonomy Delegated Acts. The new legislation includes additions to the EU Taxonomy criteria for economic activities making a substantial contribution to one or more of the non-climate environmental objectives, namely:
You can read more details on the package on the EC website, see the press release and EU taxonomy for sustainable activities page.
In June 2023, the ISSB updated the Sustainability Accounting Standards Board (SASB) Standards to align the climate-related disclosure topics and metrics with IFRS S2 ‘Climate-related Disclosures’.
The SASB Standards consist of 77 industry-based sustainability-related disclosure standards and include over 1,000 metrics. While they were not developed by the ISSB, the ISSB has been responsible for the maintenance and enhancement of these SASB Standards since the consolidation of the Value Reporting Foundation (VRF) with the IFRS Foundation in August 2022.
Appendix B of IFRS S2 sets out industry-based requirements and these have been derived from the climate-related topics and metrics in the SASB Standards. As a result of the ISSB including industry-based metrics in IFRS S2, consequential amendments were made to the SASB Standards in two areas:
The consequential amendments to the SASB Standards are effective for annual reporting periods beginning on or after 1 January 2024, with early application being permitted. This is consistent with the effective date of IFRS S2.
In August 2023, the EC issued the final regulation supplementing the CSRD regarding sustainability reporting standards to be followed in the European Union (EU). The European Sustainability Reporting Standards (ESRS) apply to all companies within the scope of CSRD. It is important to note, some reporting entities within the scope of CSRD will have to apply ESRS for reporting periods commencing on or after 1 January 2024.
The package contains the EC’s Delegated Act which sets out two cross-cutting standards and ten other sustainability standards for the disclosure of environmental, social and governance (ESG) information. Together they will become law in the EU from 1 January 2024. The package (sometimes called the first set of ESRS) also contains two appendices. Appendix I sets out the revised 12 ESRS and Appendix II provides a list of acronyms and a glossary of terms.
Since the initial finalisation of the Standards, a group of Members of the European Parliament (MEPs) filed an objection to the current ESRS as they believe they are too burdensome. This objection called for potential limitations to the ESRS, however this objection was defeated in October 2023. There are 631 MEPs, and 359 voted against the motion, 261 in favour and 11 did not vote.
There is also a delay to the sector-specific ESRS (SS-ESRS) by two years (June 2024 to June 2026) to allow for a sufficient transition period in preparing for the sector-specific requirements.
Listed small and medium-sized enterprises (SMEs) are required to report sustainability information commencing 2026. For non-listed SMEs that are not in the scope of the CSRD, European Financial Reporting Advisory Group (EFRAG) are drafting voluntary standards that will be simpler and enable them to respond to requests for sustainability information.
You can find more detail on the requirements set out in the standards by reading Grant Thornton International's article 'Final ESRS adopted by Europe', as well as 'CSRD Reporting: What you need to know'. Both articles were written to help you understand more about the CSRD and the ESRS that have been released.
In September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) released its final set of recommendations and disclosure framework. These recommended disclosures and related guidance build on the work of the TCFD and other climate and sustainability reporting standards and frameworks, but with a focus on an entity’s impact on ecosystems and biodiversity.
The TNFD was established in 2021, acknowledging the increasing need from stakeholders to factor nature into financial and business decisions. Its aim is to establish the importance of nature and its biodiversity within business and finance. The recommendations will help businesses and financial institutions integrate nature-related issues into decision-making, risk management and disclosures. As mentioned, it builds on the work on the TCFD, and doing this should encourage early adoption and promote alignment with existing risk management approaches.
There are six general requirements and 14 recommended disclosures set out in the TNFD.
In September 2023, the Global Reporting Initiative (GRI) and EFRAG issued a joint statement regarding the high level of interoperability reached between the ESRS and GRI Standards.
The effort to achieve interoperability between the two frameworks is the result of the CSRD requirement to adopt a double materiality approach and consider existing standards. As noted in the joint statement, the ESRS adopted the GRI definition of impact materiality and also leveraged the GRI’s existing expertise.
In October 2023, the state of California signed into law two bills introducing new climate-related reporting and disclosure requirements. The two bills, Senate Bill (SB) 253 ‘Climate Corporate Data Accountability Act’, and SB 261 ‘Greenhouse gases: climate-related financial risk’, expand the amount of information that needs to be disclosed by companies operating in the state of California. You can read a summary of the requirements and who they apply to in Grant Thornton International's article ‘California adopts new legislation on climate reporting’.
This legislation is another example of increasing climate reporting requirements around the world. For reporting entities that now fall within the scope of these two bills, a significant amount of effort will be required to collect and present the data and information required. Companies will need to plan carefully to meet all the new requirements.
Reporting of scope 3 Greenhouse Gas (GHG) emissions in particular can be challenging as reporting entities will need to consider their whole value chain, both up and downstream. Although the bills do not include non-US entities, it is likely that international businesses with legal entities operating in California will be caught by the requirements if they meet the revenue thresholds.
In October 2023, the Transition Plan Taskforce (TPT) published its final disclosure framework. Established in the UK in 2022, the TPT aims to help organisations meet their climate goals and support the UK government’s pledge to achieve net zero by 2050. While its newly developed framework has been developed in the UK, it has global applicability and is designed to be consistent with, and build on, IFRS S2.
The goal of the TPT Disclosure Framework is to develop a standard for climate transition plans. As reporting entities in the private sector make commitments and plans to reach net zero, there's a growing need for stakeholders to be able to assess the credibility of their transition plans. The TPT aims to drive good practice based on three key principles: ambition, action and accountability.
We are supportive of the release of this framework, as it will help entities with the disclosure of their transition plans. As a result of the impact climate is now having on organisations around the world, entities are developing transition plans in order to be more climate-efficient and have lower carbon business models. This framework will help them to develop and disclose these plans.
While the ISSB Standards do not currently require entities to put transition plans in place, IFRS S2 does require disclosure of information about any climate-related transition plans that the entity has. This means it should complement the ISSB Standards and provide a useful tool for entities developing their transition plans which will then help inform the disclosure requirements of IFRS S2.
In October 2023, the European Securities and Markets Authority (ESMA) issued a statement on European common enforcement priorities for 2023 annual financial reports. These enforcement priorities give preparers insight into specific areas that ESMA, as well as national enforcers in the European Economic Area (EEA), are focusing on and gives an opportunity to ensure that reporting requirements in these areas are complied with in full. The statement includes detailed recommendations for preparers, issuers and auditors to consider when preparing 2023 reporting packages to help with compliance of the Standards.
The priorities for non-financial reporting include, in order of priority:
In December 2023, we signed a declaration of support to the IFRS Foundation and particularly to the ISSB in their advancement of the adoption and use of their climate Standard. This declaration of support was announced during Finance Day at COP28, the United Nations Climate Change Conference that was held in Dubai.
The declaration of support demonstrates the strong support to advance action-oriented responses to the risk of climate change. It states:
“Climate risks are increasingly having a real effect on companies and capital. Therefore—in response to calls for climate action at COP28—we support the establishment of market infrastructure to enable consistent, comparable climate-related disclosures at a global level. We are committed to advancing the adoption or use of the ISSB’s Climate Standard as the climate global baseline.”
Close to 400 organisations from 64 jurisdictions, including associations gathering over 10,000 member companies and investors signed the declaration.
Following on from the amendments made to climate-related SASB Standards in June 2023, in December 2023, the ISSB published the second set of amendments to the SASB Standards which aim to strengthen the international applicability of non-climate related metrics. The amendments are intended to help reporting entities apply the SASB Standards regardless of the jurisdiction they are in or the generally accepted accounting principles (GAAP) they report under. However, they are not intended to significantly alter the structure or intent of the SASB Standards.
While the amendments in June 2023 addressed the climate-related disclosure topics covered within IFRS S2, these amendments aim to remove the jurisdiction-specific references from non-climate related disclosure topics and metrics. Therefore, aiming to assist reporting entities when applying IFRS S1. There are approximately 650 non-climate related metrics, and from these, 220 metrics are impacted by these revisions.
These amendments are effective for annual reporting periods beginning on or after 1 January 2025, with early application being permitted. This means the impact of the amendments will be initially seen in 2026 for reporting entities applying the Standards to their 31 December 2025 reporting cycles.
We are anticipating sustainability-related developments, particularly in relation to the implementation of new requirements, will continue to accelerate in 2024. There is a joint meeting scheduled between the ISSB and the IASB in January 2024 where the ISSB will provide feedback on its agenda consultation that it underwent in 2023. The ISSB is aiming to finalise its work plan in the first half of 2024.
The first wave of companies will start to apply the ESRS Standards for the first time in 2024. We are expecting implementation guidance from EFRAG to be issued (currently in draft) in relation to materiality assessment, value chain and ESRS datapoints to assist companies in implementing these Standards.
Additionally, we are awaiting an announcement on a final sustainability-related reporting framework from the U.S. Securities and Exchange Commission (SEC).
This will likely be a big year and we will be publishing articles as new developments occur. Keep an eye on our sustainability insights to stay on top of the 2024 sustainability-related news.
