Changes to the ESG Alphabet Soup This Summer

CRSD & the ESRS

Final version of ESRS approved by EU on July 31, 2023

• The much-anticipated European Sustainability Reporting Standards (ESRS) received approval from the EU on July 31, 2023. These standards, integral to the Corporate Sustainability Reporting Directive (CSRD), represent a pivotal move to standardize and enhance corporate environmental reporting. 
• The ESRS now await further scrutiny from the European Parliament and the Council over the next two to four months. While they have the authority to reject the ESRS, amendments are not permissible, and the likelihood of rejection is minimal. Once adopted by the European Parliament, the directive will be in effect from January 1, 2024.
• Historically, ESG reporting has been inconsistent, complicating comparisons and questioning the reliability of data. With the ESRS, companies can present their sustainability performance more uniformly, promoting easier access to sustainable financing.
• Since its near-finalization in November 2022, the ESRS has undergone numerous revisions, juggling alignment with the US IFRS and deliberations over the role of double materiality. In the final rendition, a double materiality assessment is retained, permitting entities to omit specific topics, deemed non-mandatory, if they prove non-materiality.
• However, some concessions, such as allowing companies to determine materiality, have raised eyebrows. The “comply or explain” stance primarily centers on voluntary disclosures, leading to debates on whether the ESRS might not fully achieve the desired transparency in ESG risk management.
• Key Takeaways:
  • Climate-related non-materiality needs justification, making climate concerns applicable for most firms.
  • Double materiality remains — assessing risks both to and by companies.
  • Although reporting along the value chain is required, some provisions offer flexibility.
  • EU states are expected to adopt the ESRS by 2023’s end, making CSRD reporting mandatory in 2024.
  • Disclosures are designed to be verifiable. 
  • For a deeper dive into the ESRS and related documents, [click here]

ISSB

On June 26, 2023, the International Sustainability Standards Board (ISSB) finalized its pioneering global sustainability disclosure standards, signifying a major leap towards establishing a standardized global framework for sustainability reporting.

• The inception of these standards – IFRS S1 for General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 for Climate-related Disclosures – aims to address the long-standing challenges of inconsistent and opaque sustainability reports, ensuring transparency and comparability.
• Previously, the landscape of sustainability reporting was often fragmented and ambiguous, making it challenging for investors and cumbersome for businesses. With the introduction of ISSB’s standards, a uniform language in sustainability reporting is established, facilitating the mobilization of capital towards sustainable investments. This harmonization empowers companies globally to convert their sustainability actions into tangible benefits and competitive advantages.
• ISSB developed these standards post extensive consultations with various stakeholders, ensuring they are tailored to be relevant across multiple jurisdictions. While IFRS S1 provides a robust framework for companies to outline their sustainability-related financial disclosures, IFRS S2 delves deeper into the specifics of climate-related risks and opportunities, enhancing the comprehensive approach set by IFRS S1.

Interoperability Between Standards

The European Commission, EFRAG, and ISSB have confirmed a high degree of climate disclosure alignment and commitment to interoperability. 

• This work has successfully led to a very high degree of alignment, reduced complexity, and duplication for entities wishing to apply both the ISSB Standards and ESRS. ESRS and ISSB Standards have been developed within their respective mandates, with some differences in impact materiality beyond an investor’s perspective and coverage of the range of ESG matters in separate standards. However, the work undertaken on interoperability enables an entity to efficiently apply both sets of climate-related standards with minimized duplication of effort.

• Read GRI’s alignment announcement here:
• Read the ISSB’s confirmation of alignment here:
• SASB is now part of the ISSB where its industry-specific standards are playing an important role in the great work the ISSB is doing.

TCFD

ISSB will take over responsibility for monitoring progress on corporate climate disclosures from the Task Force on Climate-related Financial Disclosures (TCFD) next year.

• Established by the Financial Stability Board in December 2015, following the Paris Agreement of COP 21, the Task-force on Climate-related Financial Disclosures (TCFD) has played a pivotal role in advancing the transparency of climate-related financial risks. Since its inception, TCFD’s recommendations have seen rapid voluntary adoption by numerous organizations and have now found a permanent place in global standards like the IFRS Sustainability Disclosure Standard S2 and the European Sustainability Reporting Standards (ESRS) E1.
• Originally set up to offer guidance for consistent company disclosures, the TCFD has made strides in its mission, laying a robust foundation for climate-related financial transparency since its first set of recommendations in 2017. Key to this framework are its four pillars: governance, strategy, risk management, and metrics and targets. Organizations familiar with the TCFD recommendations or the Sustainability Accounting Standards Board standards are well-equipped to transition to the ISSB standards, which further develop these pre-existing frameworks.
• In a significant announcement on July 13, the Financial Stability Board (FSB) – a consortium of global financial entities advocating for global financial stability – formally expressed gratitude to the TCFD for its groundbreaking work. Furthermore, the FSB heralded the transition of responsibilities, effectively “passing the baton” from TCFD to ISSB. This marks the beginning of the ISSB’s journey as the central global entity for climate disclosure, building on and continuing the impactful legacy initiated by the TCFD.

CDP

• Starting in 2024, CDP, the non-profit global environmental disclosure platform, will integrate the ISSB’s climate-related disclosure standard. Companies associated with CDP are in a favorable position for the impending corporate reporting standards, with nearly 18,700 companies (constituting about 75% of European market capitalization) already reporting to CDP. Notably, over 18,000 of these organizations have board-level oversight in place, and approximately half actively evaluate climate-related risks and opportunities.
• Even though a significant number of companies reporting through CDP are aligned with ESRS facets like governance, strategy, and risk assessment, the true test awaits in 2024 when these demanding standards become operational. It will be insightful to observe the performance of businesses, both within Europe and globally, as they navigate this new landscape.

Broader Trends and Developments in Environmental Disclosure:

• EU’s Extraterritorial Reach:
  • U.S. companies operating in the EU will find themselves under stringent EU regulations. An estimated 3,000 US companies will be directly influenced by the CSRD.
• California’s Pioneering Legislation:
  • California is making strides with The Climate Corporate Data Accountability Act and The Climate-Related Risk Disclosure Act, which could reshape reporting standards across the U.S.
• ISSB’s Global Influence:
  • ISSB’s upcoming standards are set to dictate new global norms, potentially serving as the foundation for regulations across various jurisdictions, including the UK. 
• Rising Tides of ESG Litigation:
  • With the uptick in “greenwashing” lawsuits and SEC’s growing scrutiny, companies need to be exceptionally diligent in their ESG communication. 
  • The US Securities and Exchange Commission has recently sent subpoenas to several asset managers over their ESG marketing.

About WatchWire

WatchWire is a market-leading, energy and sustainability data management platform that uses cloud-based software to collect, automize, and analyze utility, energy, and sustainability data metrics. WatchWire streamlines, automates, and standardizes your sustainability reporting process by integrating directly and/or providing reporting exports to ENERGY STAR Portfolio Manager, LEED Arc, GRESB, CDP, SASB, GRI, and more. The platform provides customizable dashboards, which allow asset managers, sustainability managers, engineers, and more to monitor individual key performance indicators (KPIs) and create custom views for specific use cases. WatchWire provides:

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