Another week of more

Chinese stock exchange guidelines on corporate sustainability disclosures

The three major stock exchanges in China have apparently each released guidelines on corporate sustainability disclosures for consultation. It seems that reporting on sustainability will be required for companies included in the Shanghai Stock Exchange SSE 180, Shenzhen Stock Exchange SZSE 100, STAR 50, and ChiNext indices, as well as for companies listed both at home and abroad. Reporting on sustainability will be voluntary for companies listed on the Beijing Stock Exchange (source). The disclosure requirements are expected to apply to more than 450 companies, representing 51% of market capitalizations (source). Companies will have until 30 April 2026 to produce a sustainability report for their 2025 reporting period. I haven’t been able to find the actual guidelines yet, but they are said to include disclosures on biodiversity, climate impact (including Scope 3 emissions), corporate governance, and sustainability practices, and to apply the principle of double materiality, i.e., both impact materiality and financial materiality (source). This will be an interesting development to follow in the global convergence on sustainability reporting, especially because China seems to be taking aspects of both dominant reporting models of the IFRS Sustainability Disclosure Standards and the Corporate Sustainability Reporting Directive (CSRD).

Proposed EU regulation on ESG ratings activities moves forward

The European Council and Parliament have reached a provisional agreement on the proposed regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities. This provisional agreement is subject to approval by the Council and the Parliament before going through the formal adoption procedure. The regulation will start applying 18 months after its entry into force. It’s good to see this piece of legislation moving forward. After all, EU securities regulators started calling for ESG ratings to be regulated in 2020 and the proposed regulation was first published in June 2023.

In essence, the proposal requires that ESG rating providers offering services to investors and companies in the EU be regulated and supervised by the European Securities and Markets Authority (ESMA). It also requires these rating providers to implement comprehensive governance structures and disclose adequate information about their products and methodologies.There are provisions for smaller ESG ratings firms, as well as non-EU ratings providers wishing to operate in the EU.

As I have mentioned before, perhaps most noteworthy is Article 15: Separation of business and activities, which stipulates that ESG rating providers shall not provide: (a) consulting activities to investors or undertakings; (b) the issuance and sale of credit ratings; (c) the development of benchmarks; (d) investment activities; (e) audit activities; (f) banking, insurance, or reinsurance activities. It will be interesting to see how this unfolds in the real world. Also noteworthy is that in relation to the obligation for ESG rating providers to disclose methodologies, models, and key rating assumptions, ESMA has been tasked with developing regulatory technical standards to specify further the elements that are to be disclosed in accordance with this regulation (Article 21). Furthermore, ESG rating providers that infringe on this regulation may be subject to fines of 10% of annual revenues.

ESRS draft XBRL Taxonomy

The European Financial Reporting Advisory Group (EFRAG) has launched the public consultation on the draft XBRL Taxonomy for the first set of European Sustainability Reporting Standards (ESRS Set 1). This taxonomy enables the digital tagging of ‘ESRS statements’ (aka disclosures) by providing XBRL elements (or 'tags') for every datapoint and dimensional disaggregation defined in the ESRS disclosure requirements.? As the press release states,“the taxonomy released by EFRAG following this consultation represents the correct digital transposition of the human-readable ESRS Set 1”. Reporting entities will need an XBRL software for processing the XBRL taxonomy. An XBRL viewing software is also necessary for humans to see the XBRL tags in an HTML document (many of which are available for free).?

Of course, digitized and XBRL-tagged disclosures are one of the four main components of the Corporate Sustainability Reporting Directive (CSRD) to make mandatory sustainability disclosures not only available, comparable, and reliable, but also easily shareable and discoverable. Using a digital tagging system to identify the same piece of data in different company reports will make comparative analysis and benchmarking much easier, and more importantly, much more accurate (yes, more accurate than AI-generated comps), and therefore more informative. The fact that XBRL tagging will be subject to external assurance under the CSRD should not be underestimated.

As part of this exercise, EFRAG has also released a draft XBRL Taxonomy for disclosure requirements under the EU Taxonomy, referred throughout the texts as “Article 8” in order to reduce confusion around the use of the term ‘taxonomy’. Good idea. Note that EFRAG was not involved in developing the EU Taxonomy regulation, however it has been asked to develop the XBRL taxonomy for the related disclosures, which must be included in the ESRS statements that companies will produce pursuant to the CSRD. Complicated? Yes. Coherent? Also yes.

All sustainability reporting XBRL taxonomies documents can be accessed on this page.

And for anyone just getting started on their XBRL journey, this article offers a good baseline understanding.

ESRS technical Explanations

The European Financial Reporting Advisory Group (EFRAG) has released the first set of technical Explanations to assist stakeholders in the implementation of the European Sustainability Reporting Standards (ESRS). You will recall that EFRAG had launched its ESRS Q&A Platform at the end of 2023 to collect and answer technical questions. Answers may take the form of Implementation Guidance, which is exposed to public feedback before being finalized, or Explanations, which are not exposed to public feedback. Both are non-authoritative in nature and they are final once released. The document just released makes for an easy read, providing both the standard references and a plain English answer to the questions posed.

We can expect many more of these Explanation documents…

“Out of the 258 questions received as of 31 January 2024, 127 are expected to result in either an Explanation (106) or an Implementation Guidance (21) and 17 are still under preliminary analysis. The remaining questions are considered to be either not technical in nature (30) or already addressed in other questions or in existing guidance (45) or non-conclusive/out of scope (39). Most of the Explanations are already under drafting process.”?

There’s no doubt these Explanations will prove helpful to companies that have started to grapple with the significant greater disclosure requirements brought about by the CSRD.

GRI Mining Standard

The Global Reporting Initiative (GRI) has released its fourth Sector Standard, GRI 14: Mining Sector 2024. Sector standards are very valuable in two respects, which holds especially true for the mining industry. The first is in determining materiality of topics, which is the basis for reporting. In this case, the standard identifies 25 topics likely to be material to this sector.. if you were looking for proof that sustainability considerations are critical to resource extraction activities, this is it! The second is in streamlining various separate industry initiatives. In this case, GRI 14 incorporates expectations from responsible mining guidance and standards such as the Extractive Industry Transparency Initiative (EITI), the Initiative for Responsible Mining Assurance (IRMA), the International Council on Mining and Metals (ICMM), Copper Mark, the OECD, and the Global Industry Standard on Tailings Management (GISTM).

GRI 14 applies to all organizations engaged in mining and quarrying, including exploration and extraction, primary processing, and related support services (with the exception of coal, oil and gas, for which there is already a GRI Sector Standard). Technically, the new standard formally comes into effect on 1 January 2026, although companies are free to start using it now. To be clear, the application of GRI Standards remains voluntary for companies (they are not mandatory).?

CSSB public consultation

The Canadian Sustainability Standards Board (CSSB) has announced that it’s “gearing up” for a public consultation on its first set of standards, the Canadian Sustainability Disclosure Standards (CSDS) 1 and 2. The consultation is expected to launch in March and last until June 2024.

CSDS 1 and 2 are expected to align with IFRS Sustainability Disclosure Standards S1 and S2 – “but with Canadian-specific modifications suggested. Proposed modifications will include a Canadian-specific effective date and transition relief proposals to help with eventual implementation of the standards.”?

While this is excellent news for Canadian capital markets, it seems a little premature… the announcement created a lot of buzz, but the actual standards will only be released in March. So, there’s nothing to look at. There’s also no timeframe as to the adoption of final standards, and no details about the regulatory uptake of these standards by the Canadian Securities Regulators, who have so far indicated “welcoming” the IFRS SDS and “looking forward to engaging and collaborating with the CSSB with respect to the ISSB standards”. To be continued.

ISSB Climate-related disclosure checklist

EY is making available an ISSB climate-related disclosure checklist. As stated in the document, it is intended to provide a summary of required climate-related disclosures set out in the IFRS Sustainability Disclosure Standards (IFRS SDS) and related guidance. Note the focus on climate disclosures, not all sustainability-related disclosures to be covered, at least in principle, by IFRS S1.

To be clear, this is a compliance tick-the-box checklist tool, nothing more. While it serves a purpose, companies should be aware that this is not a tool to help them understand how to apply the IFRS SDS in producing their report. It is a gap assessment that will tell them the extent to which they are [not] compliant, by identifying which specific disclosure are made (“Yes = Disclosure has been made”) or not made (“No = Disclosure is applicable but has not been made”) or not applicable (“N/A = The question is not applicable to the entity”). The real compliance work will begin when they start closing the gaps.

Recommended Reading - I could not have said it better!

The Gap in Sustainable Value Creation

Two very high-profile thought leaders in corporate sustainability, Robert Eccles and Alison Taylor , have penned a research paper called The Gap in Sustainable Value Creation. Their insights will probably come as no surprise to mid-level corporate sustainability professionals, but it always helps to put some numbers to these insights to drive the points home. This paper helps to explain why companies may not have been seeing the benefits of what they [thought they] are doing in terms of sustainability-related practices. It identifies four clear gaps in current corporate thinking/doing:

• The capital gap: Despite high importance, capital is limited, i.e., management is not allocating enough money and resources to what it says is important
• The implementation gap: Sustainability is seen as creating value mainly through reputation, not operations, i.e., management is focused on how it looks, not what it does
• The integration gap: Low collaboration limits progress, i.e., departments are still working in silos
• The data gap: Poor data quality on sustainability performance hinders value creation, i.e., management does not have enough quality, decision-useful data as inputs to managing issues

All of these reflect a disconnect between what companies are saying and doing. Boards and executives would do well to address these gaps to reduce the very real (and increasingly regulated) reputational and legal risk of greenwashing, and more importantly create tangible benefits for the company and the ecosystem it depends on.