Insight

From compliance to competitive advantage: non-financial reporting

24th September 2024

Sustainability reporting has evolved into a complex landscape filled with numerous frameworks, guidelines, standards, and initiatives. While this has enabled organisations to publish non-financial data, it has also resulted in ambiguity. Sustainability reporting has often been viewed as a bolt-on to financial reporting. However, with upcoming EU regulation, the two schools of thought will have to become integrated and treated with equal weight. Now more than ever, these risks and opportunities will have to be linked to financial performance.

The goal of the Corporate Sustainability Reporting Directive (CSRD) is to bring sustainability reporting on par with financial reporting. The CSRD revises the Non-Financial Reporting Directive (NFRD) and the Accounting Directive, aiming to ensure that sustainability data is comparable, relevant, and reliable. It has a global effect requiring public and private companies of a certain size operating in the EU to report sustainability information which, for the first time, will be specified through the European Sustainability Reporting Standards (ESRS). These standards aim to illustrate a company’s impacts on sustainability matters (impact materiality) and how sustainability matters affect a company’s development, performance and position (financial materiality).

The ESRS disclosures are required to sit in the annual ‘management’ report in the format of sustainability statements rather than in a separate report. The disclosures will also be required to be digitally tagged in the machine readable XBRL format. This makes them on a par with financial statements, thus underlining their importance. The statements are required to have limited assurance, providing more reliability of sustainability data than previously.

Preparing to communicate for CSRD compliant regulatory reports should begin as soon as possible. For example, if you’re a US headquartered multinational in scope, you now need to start thinking about the scale of resources and time management to publish digitally tagged reports in time for annual reporting deadlines. There is extensive disclosure and narrative that is required to be ‘clear and concise’ as per the ESRS Delegated Act. However, as seen from early reporters of CSRD, the disclosures are complex and difficult to present in a concise manner, leading to these statements amounting to over 100 pages.

In its latest report, the International Corporate Governance Network highlights that investors expect sustainability reporting to be prepared “with the same rigor and ethical approach as financial statements”, criticising the current disparity between the extent of board-level oversight in sustainability reporting and assurance. Although there was the hope that CSRD would require CFOs to have more active involvement in sustainability reporting, this yet to be evidenced at the scale required. Therefore, there is not yet an equivalent of internal controls and governance arrangements for sustainability disclosures as there is for financial disclosures.

For example, this month Deloitte published analysis which looked at the disclosures in the most recently published annual and/or sustainability reports as of 31 December 2023. This analysis found that 46 of the FTSE 100 made restatements on their sustainability metrics this year. Most of these related to changes in methodology (44%), but over a quarter (29%) related to errors. The restatements could indicate that CSRD has brought a new quality and rigor to non-financial reporting, however, it also indicates the volatility of ESG reporting and gap in previous data credibility.

In addition, PWC, in their 2024 CSRD survey, found that 90% of survey respondents say they are using, or planning to use, spreadsheets for sustainability reporting. This is a far higher percentage than are leveraging technology such as disclosure management solutions and carbon calculation tools. The requirements of CSRD will require investments, internal controls and adequate data collection and management, much like financial reporting.

The data requirements are a complex maze of disclosures with over 1,000 data points to report on. For example, if you’re a private retailer in scope, you will have to implement robust data collection and management systems along the whole supply chain incorporating material sourcing to online deliveries. This data should be collected in such a way that allows for limited assurance.

While the CSRD marks a transformative moment in corporate sustainability reporting, companies must ensure the proper governance and management systems are in place to accurately disclose data and provide investors with the credible information to make clear judgements. By doing this, investors will have a much fuller picture to make the decisions they need.

Turning standalone reports into an integrated annual version with financial accounts is a communications challenge. But it also has the opportunity of developing your strategy through a clear narrative that will be easily understood. Developing this integrated approach presents an opportunity for companies to form their own narrative in a changing global landscape.