ESG reporting and disclosure

There’s a lot happening. In the past year, regulators around the world have developed and proposed new requirements for environmental, social, and governance (ESG) reporting, including the Canadian Securities Administrators, the US Securities and Exchange Commission, and the European Commission. Financial regulators, like Canada’s Office of the Superintendent of Financial Institutions, are doing their part too, with incremental requirements for regulated financial institutions (both public and private). And, in November 2021, the IFRS Foundation established the International Sustainability Standards Board to develop a single set of globally applicable sustainability-related financial reporting standards, the first two drafts of which have already been issued.

It’s more complicated than it seems. It would be easy to think that Canadian companies only need to worry about Canadian reporting requirements. But those with operations in other jurisdictions (e.g. Europe) could also be required to comply with additional ESG regulations, like European Commission proposals that are not required in Canada or may be on different timelines.

Expectations about reporting have already changed. ESG reporting remains voluntary for companies—but their investors, consumers, and other stakeholders expect it. In particular, stakeholders are looking beyond financial returns to understand the broader impact of companies’ ESG activities and thus better inform their decisions about how to engage with those organizations. For instance, carbon intensity values could drive pricing and accessibility of capital or influence potential customers from buying. For these reasons, companies must evolve their metrics and data collection, regardless of mandates.

It’s important to get it right today. As the number of stakeholders relying on ESG reporting to make decisions increases, so too does the risk associated with errors in reporting. To address this, many organizations are looking to their finance functions to determine what existing controls, processes, and governance that can be extended to ESG data, calculations, and reporting. While not all proposed regulations call for it, more and more companies are beginning to seek independent assurance for ESG reporting.

Financial reporting can be impacted, too. There’s a link between financial estimates and ESG disclosures. For instance, climate scenarios and commitments could affect how businesses are likely to grow and thus affect forward-looking financial measurements, such as goodwill impairment assessments. In some cases, securities regulators have already begun to ask questions about these connections.

Three things every company should do today

1. Assess stakeholder needs and identify a target state:

• Determine key stakeholders (investors, lenders, customers, suppliers, regulators etc.
• Identify all requirements that could apply if operating in multiple jurisdictions (e.g., foreign subsidiaries)
• Understand how ESG will affect decision-making
• Develop an ideal future state that includes the objective of its ESG reporting (e.g., compliance-only, best in class, or somewhere in between)

2. Develop a gap assessment and implementation plan, including:

• Key activities (identify sources of data and develop models for measurement, processes, governance, systems, internal controls, etc.)
• Ensuring stakeholder representation from all affected areas across the organization
• Timelines that meet both required go-live reporting and the testing and validation required for it
  

3. Clarify short-term needs and areas likely to evolve to identify where to   start today, how often to monitor progress, and to be prepared to pivot as things invariably unfold.