Jane Goodland
Amidst an abundance of regulatory change and uncertainty in the sphere of sustainability reporting, it’s easy to get drawn into the weeds, losing sight of the big picture and the many ways that sustainability reporting can add organisational value.
This is particularly true now as we find ourselves in a transitional phase, somewhere in between voluntary standards and mandatory reporting requirements. Since IFRS launched its first sustainability standards in 2023, governments around the world - around 30 at the last count - are in the process of reviewing and transposing the standards into national law. Meanwhile the European Commission has kicked off an exercise to simplify EU rules and boost competition which, among other things, proposes changes to the EU Corporate Sustainability Reporting Directive (CSRD). The first companies in scope for CSRD are reporting this year. The possible outcomes of the review could include delayed implementation and a reduced scope for the directive, so that it is focused on larger companies which are more likely to have the greatest sustainability impacts.
While we wait for more clarity around mandatory requirements, companies are likely to continue preparing for the new norms in reporting which are forthcoming and seek out value in sustainability reporting along the way. One can think about potential value drivers in three main categories:
From measurement to management: The first category is tactical, summed up by ‘what gets measured gets managed’, where sustainability and financial issues are often interwoven. The practice of identifying, measuring and reporting sustainability risks and opportunities can be of direct value to company management, providing new insights and intelligence. The most obvious example is that of energy consumption. Greater scrutiny of an organisation’s energy use can identify energy efficiency opportunities which not only reduce greenhouse gas emissions but also lower operating costs. On human resource matters, measurement of workforce metrics such as key dependencies on specific skills, employee turnover or sickness absence, can help companies to take measures that reduce risks and increase resilience. And this level of oversight also helps companies to adhere to sustainability regulation, thereby avoiding any financial consequences associated with non-compliance.
Informing business strategy: The next area where value can be derived from sustainability reporting is more strategic, aligned with the company’s business strategy and model. Under future reporting requirements companies will be required to disclose information about sustainability-related risks and opportunities that could reasonably be expected to affect the company’s cash flows and prospects over the short, medium and long term. Uncovering information which helps management to identify and assess these will help them determine whether and how their business strategy may need to evolve in light of these risks, and crucially where value creation opportunities might exist.
Access to capital: Finally, sustainability reporting can be a source of value with respect to a company’s access to finance and cost of capital. For decades, international accounting standards have enabled investors to compare and contrast the financial performance of prospective investee companies. As sustainability decisions continue to shape economies, it’s vital that investors also have access to comparable, consistent and high-quality sustainability information which can inform their view of a company’s performance and prospects, thereby influencing their capital allocation decisions. Many companies recognise that sustainability reporting is a tool that helps strategic engagement with the financial markets, and as such are upgrading their reporting, focusing on material sustainability-related risks and opportunities, enhancing the quality of quantitative metrics, and being transparent and balanced about their sustainability performance.
The creation of international standards for sustainability reporting is a crucial step towards widespread availability of comparable investment grade sustainability data. We need a universal language that companies and investors can use to enrich analysis and strategic engagement on companies’ long-term prospects in the transition to a lower carbon economy in the decades to come.
At LSEG, we welcome the IFRS sustainability standards and have called for their widespread adoption in jurisdictions where it is feasible, which would enable both investors and companies to more effectively manage sustainability risks and opportunities relevant to long term value.
You can find out more about LSEG’s approach to sustainable finance and our commitment to be a strategic enabler of sustainable growth in our 2024 Sustainability Report.
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