One thing leads to another

“At Least 10,000 Foreign Companies to Be Hit by EU Sustainability Rules”

This is the title of a recent Wall Street Journal article , citing an analysis from Refinitiv (that I unfortunately could not find). This analysis underlines that the new disclosure regulations in the European Union are going to affect not only the 50,000 or so European companies we already knew about, but many more non-European companies, creating a global ripple effect in corporate reporting practices even in jurisdictions that may not have regulations. How is that possible? Because the companies in scope for the Corporate Sustainability Reporting Directive (CSRD) include any company that has:

• listed securities on an EU exchange (could be a bond, not just shares)
• annual EU revenue > €150 million and an EU branch with revenue > €40 million
• an EU subsidiary that meets at least two of these three criteria: EU-based employees > 250 ; assets >?€20 million; EU revenue > €40 million

These additional 10,000 companies come mainly from the US (31% or 3,100), Canada (13% or 1,300), and the UK (11%). Given that the total number of publicly listed companies in the US is estimated at 4,266, and that the total number of companies listed on the TSX, Canada’ main exchange stands at 1,640, that either means virtually all publicly listed US and Canadian companies could be subject to these disclosure rules or that many private companies in these markets will be needing to prepare for mandatory sustainability reporting. If you’re curious, the World Federation of Exchanges (WFE) estimates at 58,200 the total number of publicly listed companied globally. All this to say, corporate sustainability reporting will not be confined to this relatively small subset of the corporate constituency. Good to know.

EFRAG to support companies in adopting ESRS

The European Commission recently called on the European Financial Reporting Advisory Group (EFRAG) to focus its efforts on developing guidance to help companies with the difficult task of implementing the new European Sustainability Reporting Standards (ESRS), which could mean delaying work on European sector standards. EFRAG responded by announcing it will create an ‘ESRS implementation support function’ that will focus on three key areas: materiality assessments, value chains, and inventory of datapoints. (I am especially looking forward to this last one!) EFRAG said it will continue working on a set of lighter standards for publicly listed small and medium enterprises, as a well voluntary standards for private small and medium enterprises – yet another indication that corporate sustainability reporting is coming for many, many companies.

(Note: the links above are free to access, you just need to sign in.)

IFRS to complement its package of transitional reliefs for companies applying its SDS

It seems corporate calls for help are being heard everywhere, as the IFRS Foundation recently announced it was changing the implementation requirements of its Sustainability Disclosure Standards (SDS). As a result, companies wishing to apply the IFRS SDS do not need to do the following the first year they use the standards:

• provide disclosures about sustainability-related risks and opportunities beyond climate related information;
• provide annual sustainability-related disclosures at the same time as the related financial statements;
• provide comparative information;
• disclose Scope 3 greenhouse gas emissions (as previously announced); and
• use the GHG Protocol to measure emissions if they are currently using a different approach.

Needless to say, I find this extremely disappointing, for a few reasons. One is that sustainability is so much more than climate change and we are literally in a race against time to effect large scale transformation of the primary function of companies, which is how we produce our goods and services (and perhaps even what we produce). Another is that while investors are calling for more information, they’re also calling for better information – i.e., comparable and reliable. This will happen when a majority of companies adopts common standards. The ‘relief’ provided by the ISSB only delays this further. Not to mention that even one year hence, implementation of the standards will be far from perfect – which is not even the goal – and there will likely be several years of adaptation and improvement needed – which is OK. In any event, since the standards are not mandatory in and of themselves, companies are under no obligation to adopt them, and they’re also under no obligation to adopt only parts of them; in other words, there’s nothing stopping companies from fully implementing the IFRS SDS S1 and S2 from the start. I expect that true corporate leaders will do just that, cutting a path and showing the way, even if imperfectly. This will also give time for securities regulators to incorporate the IFRS SDS into their respective disclosure regimes – hopefully without any relief this time.

IOSCO Board Priorities - Work Program 2023-2024

Speaking of securities regulators, the International Organization of Securities Regulators (IOSCO)’s recently published Board Work Program for 2023-2024 contains additional details on the work of its Sustainable Finance Taskforce (STF [sic]), including that it will conclude its analysis of the IFRS SDS standards “with a consideration of whether they are in line with the IOSCO criteria for endorsement” early in the second half of 2023.

Also, IOSCO recently published as promised its report on International Work to Develop Assurance Standards over Sustainability-related Corporate Reporting . This refers to the work of the International Auditing and Assurance Standards Board (IAASB) in developing an overarching standard for assurance on sustainability-related reporting and the International Ethics Standards Board for Accountants (IESBA) in developing ethics (including independence) standards to support trustworthy assurance over sustainability-related information. Both standard setters aim to issue exposure drafts by the end of 2023 (September 2023 for the IAASB and December 2023 for the IESBA), with a view to finalizing their standards by late 2024. Not only does IOSCO support this work to develop profession-agnostic assurance and ethics standards for external assurance of sustainability-related corporate reporting, but in this report it elaborates on the priority areas for standard setters to take into account and on considerations for other stakeholders across the reporting ecosystem, including reporting issuers. It makes for a very interesting, stock-taking read on the corporate sustainability reporting assurance landscape.

COSO Releases New (ICSR) Supplemental Guidance

Since successful external assurance is predicated on proper internal controls, the release of the Committee of Sponsoring Organizations of the Treadway Commission (COSO )’s Achieving Effective Internal Control over Sustainability Reporting (ICSR): Building Trust and Confidence through the COSO Internal Control―Integrated Framework could not come at a better time.

For those who follow the topic, this report references and expands on the 2017 “Leveraging the?COSO Internal Control—Integrated Framework?to Improve Confidence in Sustainability Performance Data”.?I have not finished unpacking it, but it’s definitely a very useful resource for corporate sustainability practitioners. Most importantly, internal control is defined as “a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance”. So, this is not only about data or information or reporting, but about management, and therefore very broad in its applicability throughout an organization.

Final TNFD beta framework draft

The Taskforce on Nature-related Financial Disclosures (TNFD) has released the fourth and final draft of the TNFD beta framework, offering the first opportunity to view the framework and recommendations in full.?There is no doubt that this represents an astounding body of work. The website does a great job of vulgarizing the information and making it easier to understand, however it’s a bit complicated to navigate – I suggest you enter from here , or start by going through the executive summary by clicking through all the +. You can also find the PDF versions of the framework here . The scope of this framework is too great to unpack here, but perhaps of greatest interest is the work done by the taskforce to identify specific nature-related performance metrics. The TNFD has identified seven design features for its metrics approach:

• A distinction between Assessment metrics (used internally by report preparers to inform management decisions) and Disclosure metrics (used in disclosures on a comply or explain basis);
• A distinction between cross-sector metrics and sector- and biome-specific metrics;
• A set of Core global metrics that cover all sectors and Core sector-specific metrics;
• Inclusion of indicators and metrics that allow assessment of both positive and negative impacts on nature;
• Alignment with the phases of the LEAP (Locate, Evaluate, Assess, Prepare) approach to support end-to-end nature-related risk assessment, management and disclosure;
• A periodic review mechanism to ensure the measurement architecture remains fit for purpose as knowledge and tools evolve;
• Alignment with emerging policies, regulations, and frameworks, such as the Global Biodiversity Framework (GBF), the GRI, IFRS, and ESRS standards, and the Science Based Targets Network (SBTN).

All the disclosure metrics can be found here .

The TNFD also brilliantly defines an indicator as “a quantitative or qualitative factor or variable that provides a simple and reliable means to measure performance” and a metric as “a system or standard of measurement”. Indicators and metrics may be at the level of: Direct operations (site, project, or corporate level); Upstream; Downstream; and Financed (portfolio level). Where possible, they should include an absolute metric, the rate of change, intensity/efficiency, and prevalence (see image below).

This last beta version will be open for consultation until 1 June 2023 and the final recommendations are expected to be published in September 2023, at which point the TNFD will turn its attention to working with standard-setting organizations including the IFRS and GRI on the translation of the TNFD’s recommendations into voluntary standards and for sustainability reporting, and engaging with government policy makers and regulators following their commitment to implement nature-related corporate reporting as per Target 15 in the Global Biodiversity Framework. It will also continue to evolve the framework over time based on market experience and further evolution in the underlying science and new technologies that will make data and analytics easier.