With sustainability at the pinnacle of regulatory focus around the world, how can companies caught by the myriad of disclosure regimes maintain confidence when it comes to compliance? Particularly where there is variation in the standards themselves, is the end goal for corporates the highest common denominator? Maybe so.
Corporates everywhere are under increased scrutiny as investors, lenders and other market participants seek to integrate ESG considerations into decision-making processes. In response to this demand, and in a push for greater transparency, governments and regulators around the world have introduced, or have committed to introduce, extensive sustainability-related disclosure requirements for certain businesses. Perhaps unavoidably, this has brought about the emergence of several distinct yet overlapping disclosure regimes, with corporates that operate within and across international lines potentially exposed to concurrent and divergent disclosure obligations.
In this note, we draw high-level comparisons between the following three notable sustainability disclosure standards:
- The first set of European Sustainability Reporting Standards (ESRS) adopted by Delegated Act by the European Commission on 31 July 2023. (See the August edition of our ESG newsletter for an update.)
- The first two sustainability disclosure standards published by the International Sustainability Standards Board (ISSB), IFRS S1 and IFRS S2, published on 26 June 2023.
- The climate disclosure rules proposed by the US Securities and Exchange Commission (SEC) on 21 March 2022 (yet to be finalised/adopted).
Sustainability disclosure standards
Depending on where they operate and where their securities are traded, companies may soon be required to make sustainability and/or climate-related disclosures in accordance with one or more of the following:
- ESRS: Set out in Annex I to the Delegated Act under the EU Corporate Sustainability Reporting Directive (CSRD), the ESRS consist of:
- cross-cutting standards, which establish general requirements for reporting and reporting procedures (ESRS 1) and mandatory disclosure obligations for all reporting companies (ESRS 2);
- topical standards, which set out specific disclosures companies are expected to make in respect of environmental, social and governance (ESG) matters (see table below). It is not mandatory for companies to report against all topical standards but rather companies must select and report against those relevant to them on the basis of a materiality assessment; and
- sector-specific standards, which are yet to be published by the European Commission but are expected to set out specific disclosures companies operating in specified sectors may be required to make in respect of material sustainability matters.
Given the CSRD's extraterritorial effect, the ESRS will impact both EU and non-EU companies (see our CSRD snapshot here and our briefing on the Commission's Draft Delegated Act here).
- ISSB standards: Set up under the umbrella of the International Financial Reporting Standards (IFRS) Foundation, the ISSB seeks to establish a global baseline for sustainability disclosures. IFRS S1 creates a general framework and conceptual foundation for disclosing sustainability-related risks and opportunities faced by companies and how these might reasonably be expected to impact their business. IFRS S2 establishes specific requirements in relation to climate-related disclosures. The standards are currently voluntary but are expected to be incorporated into domestic reporting regimes in the UK,[1] US, Australia and Japan, among others[2] (see our blog post here).
- SEC rules on climate-related disclosures: Proposed by way of amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934, if the rules are passed as currently drafted, publicly traded companies in the US will be required to disclose climate-related information, including the risks likely to have a material impact on business, governance arrangements, transition plans, metrics, and greenhouse gas (GHG) emissions.
Both the SEC rules and climate-specific ISSB standards are modelled to a large extent on the disclosure framework developed by the Task Force on Climate-related Financial Disclosures (TCFD).
Overlap and divergence between the standards
With the shared mandate of increasing transparency and requiring companies to make meaningful and comparable disclosures, it is unsurprising that a degree of overlap exists across the various standards. However, as the table below demonstrates, there are also several key areas of divergence, which companies should bear in mind when carrying out disclosures.
| ESRS (CSRD) | ISSB | SEC | |
| Who is/will be caught? | |||
| Large EU-incorporated companies.
EU parent companies of large groups. Issuers with transferable securities admitted to trading on an EU-regulated market, regardless of whether they are incorporated (including SME companies). EU subsidiary companies or branches with an ultimate parent company incorporated in a third-country that meet certain specified criteria (see our CSRD snapshot here). |
Any company, public or private, whatever its size (on the basis that the standards are currently voluntary).
National governments and/or regulators may narrow the scope of application if/when the standards are adopted.
|
Publicly traded companies in the US (if the rules are adopted as currently drafted). | |
| Content of disclosures | |||
| Environment | Disclosure in relation to climate change (ESRS E1), pollution (ESRS E2), water and marine resources (ESRS E3), biodiversity and ecosystems (ESRS E4) and ESRS E5 (resource use and circular economy), to the extent that these matters give rise to material impacts, risks and opportunities (IROs) (see our briefing here).
These specific disclosure requirements are intended to apply in conjunction with the general requirements under ESRS 1 and the mandatory disclosure obligations under ESRS 2. |
IFRS S1 sets out the sustainability-related information companies should disclose as well as guiding principles for disclosing such information (i.e., make fair representation, disclose material as well as connected information).
IFRS S2, which is designed to be read alongside IFRS S1, sets out specific disclosures related to climate-related risks and opportunities (see our blog here). A further IFRS S3 is also in contemplation, which would capture nature and biodiversity to extend environmental considerations beyond the more limited scope of climate change alone. This has not yet been released but is expected. |
Climate-related disclosures, including disclosure of scopes 1 and 2 GHG emissions (subject to limited assurance), and scope 3 if material (or included in targets). |
| Social | Disclosure in relation to own workforce (ESRS S1), workforce in value chain (ESRS S2), affected communities (ESRS S3) and consumers and end-users (ESRS S4), to the extent that these matters give rise to material IROs.
These specific disclosure requirements are intended to apply in conjunction with the general requirements under ESRS 1 and the mandatory disclosure obligations under ESRS 2. |
Unlike climate change (which is dealt with expressly by IFRS S2), there are no prescribed social disclosures in the ISSB standards.
However, the ISSB standards take a wide approach to the definition of "sustainability-related risks and opportunities", a key recurring concept in IFRS S1. This states that companies should consider which risks and opportunities are most relevant to them (aided, among other things, by the SASB Industry Guidance). In this context, it is highly likely that various social risks such as workforce, human rights and interactions with local populations (including, if relevant, indigenous groups) would be relevant to a large number of companies. Therefore, the expectation is that these are read-in to IFRS S1. The ISSB is also contemplating the development of standards on human capital and human rights. |
Out of scope. |
| Governance | Disclosure of corporate strategy, approach and governance processes in respect of business conduct that gives rise to material IROs (ESRS G1).
This specific disclosure requirement is intended to apply in conjunction with the general requirements under ESRS 1 and the mandatory disclosure obligations under ESRS 2. |
Disclosure of governance processes, controls and procedures a company uses to monitor and manage sustainability and climate-related risks and opportunities. This is a core thematic component of IFRS S1 and S2, together with disclosure on strategy, risk-management and metrics and targets. | Disclosure of governance of climate-related risks. |
| Key concepts | |||
| Materiality | Double materiality (i.e., financial and impact). A matter is material if it triggers either or both the criteria for impact materiality and/or financial materiality.
"Impact materiality" is defined as any matter that may trigger actual or potential impacts on people or the environment. "Financial materiality" is defined as any matter that may trigger financial effects and is considered through the perspective of what could influence the decisions of "primary users of general purpose financial reports" (which in the case of the ESRS are existing and potential investors, lenders and other creditors, including asset managers, credit institutions, insurance undertakings) as well as a broader set of other users not caught but the ISSB standards (including the company's business partners, trade unions, social partners, civil society and NGOs, governments, analysis and academics). |
Investor-focused financial materiality.
Materiality is considered through the perspective of what could influence the decisions of "primary users of general purpose financial reports" (which in the case of the ISSB standards are existing and potential investors, lenders and other creditors). |
Investor-focused financial materiality.
Materiality is considered through the perspective of a " reasonable investor". |
| Impacts, risks & opportunities | Disclosure of material sustainability-related IROs.
Impacts are understood as being the actual or potential, positive or negative impacts created by the company, on people or the environment. |
Disclosure of sustainability-related risks and opportunities.
Impacts only disclosable to the extent that they give rise to a relevant risk and/or opportunity for the company. |
Disclosure of climate-related risks, opportunities and impacts.
Impacts understood as being the actual or potential impact of the risk and/or opportunity on the company. |
| Reporting entity | The sustainability statement shall be for the same reporting company as the financial statements. For example, if the reporting company is a group and if the parent company is required to prepare consolidated financial statements, the consolidated financial and sustainability statements will be for the parent and its subsidiaries.
The reporting company must disclose whether the sustainability statement has been prepared on a consolidated or individual basis and, for a consolidated sustainability statement, confirm that the scope of consolidation is the same as for the financial statement. The topical standards set out additional requirements relating to specific data points. |
The default position is that sustainability reporting should be prepared on the same basis as financial reporting, save as required by particular (i.e., topical) standards.
However, the basis of reporting on climate-related metrics should be in line with the GHG Protocol (noting that this is subject to transitional relief in certain instances). |
The current proposal contemplates that the climate-related disclosures should be included in annual reports that are subject to the Exchange Act. As such, the expectation is that this would be prepared on the same basis and covering the same entity or entities covered by the annual report. |
| Inclusion of information on the value chain | Detailed disclosures in respect of the value chain, requiring the disclosing company to also look outward and consider material impacts that its value chain has onto people and the environment as filtered through the lens of impact materiality (i.e., what has material impacts on people and the environment). Noting the complexities of capturing this information, the ESRS offers transitional relief for certain value chain information, but this is limited to the first three reporting years. | Limited disclosures of effects of sustainability-related risks onto the value chain as filtered through the lens of financial materiality (i.e., what is financially material for the company).
|
Limited disclosures of effects of climate-related risks onto the value chain as filtered through the lens of financial materiality (i.e., what is financially material for the company).
|
| Timeframes | Short (up to one year), medium (one to five years) and long (over five years) terms (save that reporting companies may determine the relevant timeframes in certain circumstances). | Short, medium and long term as determined by the disclosing company. | Short, medium and long term (definition currently under review). |
| Technical requirements | |||
| Where? | Company's annual financial report, in the management report. | Company's annual financial report. Companies that comply in full should include a statement of compliance. | Separate section of a company's annual financial report. Financial impact of extreme weather and transition activities specifically required. |
| When? | The Delegated Act will apply from as early as 2025 for financial years starting on or after 1 January 2024 for companies within the scope of the first phase of reporting under the CSRD (i.e., companies already reporting under the Non-Financial Reporting Directive). But first, the CSRD must be implemented into national law by EU Member States.
Publication of sector-specific ESRS was expected in June 2023 but has since been delayed. |
Standards are ready for use for annual reporting periods beginning on or after 1 January 2024. Regulatory requirements will kick in following implementation into local law. | Final rules were expected to be adopted by the end of 2022 with a phase-in period between 2023-2026; however, implementation has since been delayed. |
[1] On 19 July 2023, the UK Financial Reporting Council issued a call for evidence to inform the proposed endorsement of the ISSB standards in the UK.
[2] On 25 July 2023, the International Organisation of Securities Commissions (IOSCO) announced its endorsement of the ISSB standards, inviting its 130 member jurisdictions to consider how they can incorporate the standards into their respective reporting frameworks.
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