Written by James Bryne, Founder at Beyond Words
Despite ongoing – and often political challenges, the concept of ESG is more relevant than ever, as nations all over the globe continue to grapple with complex socio-economic issues as well as more numerous, varied and extreme environmental challenges.
Social, ethical and environmental action is increasingly recognised in sustainability reporting as being fundamental to businesses licence to operate, and for long term value creation.
Far-reaching legislation and guidance means that ESG reporting can no longer be a footnote to an annual report. With a continuing backlash against greenwashing and greenhushing ESG reports will increasingly need to use assured data, clearly and concisely. This is how companies can not only report better but also have a better shot at winning the climate transition.
Reporting regulation Glossary ‘at a glance’
There are already over 2,400 ESG regulations globally, and according to PWC, 2024 and 2025 will bring major sustainability reporting legislation changes across the globe. Here are some active and soon to be active disclosure related requirements:
International standards
- The International Sustainability Standards Board (ISSB). The ISSB reporting standard which came into effect in January 2024 ISSB aims for a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. These standards put ESG information on par with financial information. The ISSB swallows a number of already existing standards including the International Integrated Reporting Framework. The UK’s new Sustainability Disclosure Standard borrows heavily from the ISSB standard. (see below)
- Double materiality focus. According to CISL, double materiality “seeks to broaden corporate sustainability reporting from its former investor-centric focus – on how sustainability factors impact a company and its financial prospects (single “materiality” or “financial materiality”) – to an equal emphasis on how the firm is impacting society and the environment (“impact materiality”)”.
EU standards
- The EU Taxonomy. This is a classification system to help channel capital into economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate. It aims to assist in scope organisations to set, achieve, and communicate clear, measurable sustainability goals. Its requirements apply from January 2024. The Taxonomy provides clarity on what are sustainable investments and activities to assist companies that disclose under the SFDR and CSRD.
Leading from the EU taxonomy
- The EU Corporate Sustainability Reporting Directive (CSRD) aims to increase transparency by helping companies report on sustainable impacts and performance, using EU Taxonomy metrics. Reporting to CSRD started for many companies for FY2024. The Directive applies to over 50,000 in scope companies. The CSRD falls under the upcoming EU Sustainability Reporting Standards (ESRS), and will apply to large EU companies and non-EU companies operating in the EU. ESRS offers detailed reporting topics and guidance for sustainability reporting.
- The EU Sustainable Finance Disclosure Regulation (SFDR) is designed to elevate transparency in the sustainable investment landscape, in the context of the European Green Deal. This means financial market participants must disclose how they manage sustainability related risks and adverse impacts. From 2025 financial entities must include EU Taxonomy alignment in their non-financial statements as per CSRD regulations.
Key UK developments
- The UK Sustainable Disclosure Regulation and Standard (SDR & SDS) includes requirements for asset managers and comes into force from 2024. The UK Transition Plan Taskforce (TPT) outputs will also be published this year. SDR is essentially an adapted UK version of the CSRD with TPT offering a ‘gold standard’ for private sector Climate Transition Plans, reported under SDS.
- The UK Corporate Governance Reform (the ‘Code’) proposals: These will apply from periods beginning 1st of January 2026. The provision means Board’s must sign off on and declare all internal controls for non-financial reporting (as well as financial reporting, putting sustainable value front and centre of corporate reporting, similar to the CSRD.
How to report:
Since 2021, the Sustainable Finance Disclosure Regulation (SFDR) in the EU has required financial market participants to disclose ESG-related information. Under CSRD these links between economic activity and environmental/social outcomes have gone mainstream. According to a recent IR magazine survey this change compels more companies to shift toward ‘integrated reporting’ when it comes to annual and sustainability reporting.
For instance, the CSRD builds on the Non-Financial Reporting Directive (NFRD), by introducing more detailed reporting requirements including mandatory disclosure of greenhouse gas emissions. CSRD utilises four key themes: Information quality, double materiality, time horizon and boundaries/value chain. These four themes impact an entities business model & strategy, risk reporting, and climate reporting.
A Governance focus:
SDS, ISSB and CSRD all fundamentally change the way an annual report should communicate the creation and enhancement of value, putting greater weight on clear detailed governance communication.
In terms of curating reports, the CSRD extends the collective responsibility of the administrative, managerial, and supervisory bodies for creating financial statements and management reports, and to the ESG information contained within them. This information must be derived from the concept of double materiality. CSRD also requires a greater focus on future focused targets. Companies must communicate how targets will be achieved under different scenarios (especially climate related scenarios). These scenarios could be communicated through entity specific climate transition reports and/or referenced within the annual report as part of a discussion of risk management.
In the UK: who is impacted, and what do they need to disclose?
Introduced in 2023, the new Sustainable Disclosure Standard (SDS), forms part of the UK’s Sustainable Disclosures Requirements (SDR). This in turn includes the Green Taxonomy and a requirement for certain companies to publish climate transition plans. In August 2023, the Department for Business and Trade published its initial guidance on the UK SDS, which represents an adapted version of the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB) in June 2023. This will mean UK companies will need to report on risks and opportunities relating to sustainability matters, including risks and opportunities arising from climate change.
As part of the UK Sustainability Disclosure Requirements (SDR) and Green Taxonomy, UK based companies with over 500 employees (and that meet other caveats) must align with TCFD recommendations and Streamlined Energy and Carbon Reporting (SECR) policies. These regulations emphasize energy consumption and emissions reporting to drive sustainability efforts. With UK legislation closely emulating international standards (e.g. CSRD and EU Taxonomy) companies will need to use a double materiality lens to identify key sustainability impacts, risks, and opportunities for their operations.
The ESG reporting zeitgeist:
Deloitte Research has found that 35% of executives currently list data quality as their top ESG data reporting challenge. 92% of the respondents in Deloitte’s 2022 Sustainability Action Report state that their organisations need to invest more in technology, talent and investor relations to address demand for “consistent and reliable ESG measurement, reporting and disclosures”. It is no understatement to say that 2024 heralds a new era of reporting, which many dub as the ‘4th wave of sustainability’.
ESG reporting excellence is both an important moving target, and an ongoing opportunity for businesses to carve out a path to sustainable success. But the path will not be straightforward as the priorities of policymakers, investors, customers and the planet collide.
You can download our free eBook ‘Future-proofing business: The media’s evolving relationship with ESG’ here.