Sustainability Reporting: No Longer Optional

Sustainability Reporting: No Longer Optional

Sustainability reports have gone from being a nice-to-have to a must-have. Read below how far sustainability reporting has evolved and who is affected by the recent regulatory changes in the European Union. Spoiler alert! – they also apply to companies outside the EU.

Many companies give themselves a pat on the back when it comes to sustainability, boasting that they have been doing business considerately, responsibly, and in dialogue with employees and societal stakeholders and in accordance with ecological principles for decades already. And, in fact, that’s true in many cases, in part because companies have no other option anymore. Businesses today have to fulfill an array of social and environmental obligations, particularly in the European context. But let’s take a brief look back at times before the legislative and regulatory changes.

When Sustainability Reporting Was Nice to Have

Many companies have voluntarily been publishing sustainability reports for quite some time now. In the past, however, some of them did not exercise the necessary prudence in how they worded their disclosures. Moreover, internal sustainability reporting processes and a regulatory framework with clearly defined rules were still in an embryonic stage of development. Consequently, some companies disclosed ambitious sustainability targets that they then failed to meet. They afterwards simply stopped mentioning them in their reporting or stealthily adjusted the targets without any further notification.

The Peril of Greenwashing

When companies tout their business activities or products as being ecologically sustainable when in fact on closer observation they are nothing of the sort, this practice is called greenwashing. In many cases, though, greenwashing or social washing (making exaggerated claims about being socially responsible-minded) isn’t intentional, but is attributable to inadvertent and undetected mistakes. The media, NGOs, investors, and consumers have played an important part in exposing these errors. Public awareness about greenwashing has grown in the meantime while legislation and regulations have since become more sophisticated. Both of these factors have contributed to inducing companies to report ever more accurately and extensively these days.

EU Green Deal and EU Taxonomy

Demands on companies around the world and particularly in the European Union have increased immensely over the last 20 years or so. One of the drivers behind this is the EU Green Deal, through which the EU aims to make Europe the world’s first climate-neutral continent. The EU Taxonomy is the primary tool of the EU Green Deal. It regulates what qualifies as being sustainable and aims to establish a uniform understanding of sustainability and, in so doing, to create comparability.

Sustainability Reporting Standards

The EU has already required entities of public interest, particularly large companies listed on stock exchanges, to disclose sustainability reports since 2014. Sustainability reporting has become compulsory in Switzerland starting in fiscal year 2023. But unlike in the area of financial reporting, heretofore there had been no mandatory regulatory standards in the EU and Switzerland on exactly how to produce sustainability disclosures. Out of the panoply of voluntary standards, the Global Reporting Initiative (GRI) emerged as the leading set of standards for sustainability reporting. Many companies continue to follow the GRI standards. Applied correctly, the GRI standards meet the provisions of the regulatory framework that Switzerland, for example, now prescribes. They facilitate the disclosure of information on all relevant sustainability issues.

What Is the GRI?

The GRI is one of the most widely used sustainability reporting frameworks. The GRI published its first set of standards in 2002. At the same time, it has also continually provided recommended approaches on how enterprises can specifically develop and manage sustainability-related themes because most companies have constantly had to build up new know-how for this purpose as well. Many large-scale companies these days have hired sustainability specialists to set up and professionalize CO2 accounting, for example, and to implement specific CO2-cutting measures.

Who Do the Sustainability Reporting Requirements Affect?

The EU has now overhauled reporting obligations through the Corporate Sustainability Reporting Directive (CSRD), which will enter into force in all EU member states starting in 2024. It will be introduced in stages and will gradually also affect small and medium-sized enterprises (SMEs). This has multiple implications even for all companies outside the EU that do business with EU firms subject to the reporting requirements. Many SMEs in Switzerland that supply or import goods to or from the EU may soon also be compelled to provide their customers and suppliers in the EU with sustainability data because the latter collect this data along their entire value chain.

What’s Hidden in the Annex to the CSRD?

The EU’s CSRD also includes a more than 250-page annex that packs a punch because it contains first-ever binding guidelines specifying the standards and data sets that companies are to apply in their future reporting. These implementation rules accompanying the CSRD bear the name European Sustainability Reporting Standards (ESRS) and are often spoken of in the same breath as the CSRD. This harmonization further advances the oft-called-for standardization of data in the data sections of the reporting by individual companies within the EU.

Financial services providers in particular had been waiting for this to happen because they need standardized sets of data in order to be able to provide sustainable financial products under the EU regulatory framework.

This brings us back to the EU Taxonomy because the domain of the EU Taxonomy and the EU Sustainability Finance Agenda also includes the Sustainable Finance Disclosure Regulation (SFDR), which stipulates what conditions must be met in the future in order to be able to market financial products, including investment products for retail investors, as being sustainable.

On the Way to Integrated Reporting

The introduction of the CSRD also marks the start of the countdown to integrated reporting for corporations. Many companies already consolidate all of their reporting topics in a single report, but many others continue to publish their annual reports and financial statements separately from their sustainability reports. The CSRD mandates integrated reporting in the future. This means that disclosures on all aspects of corporate governance and financial disclosures must be merged into a single report. For instance, under the CSRD, the management report section of annual reports must also cover sustainability issues in the future. Sustainability-related financial risks and opportunities must be disclosed in financial statements, and the information provided in an integrated report’s section on specific sustainability issues will be subject to mandatory external audits in the future.