- David Ray
- Nordea Sustainable Finance Advisory
Since our October 2021 publication aimed at demystifying sustainability disclosures, there has been significant movement in the field. One development that has become increasingly clear is the emergence of a two-pillar structure focusing on financial and external impacts.
The two pillar structure
The Global Reporting Initiative (GRI) has long been a proponent of a two-pillar structure in sustainability disclosure, for financial and sustainability reporting, which is now beginning to crystalise. One pillar, targeted more at financial stakeholders, emphasises the financial materiality aspects of sustainability reporting. Represented by organisations such as the Sustainability Accounting Standards Board (SASB) and the International Sustainability Standards Board (ISSB), this approach focuses on defining the impact of sustainability-related issues on the enterprise value of the reporting organisation.
The other pillar lays out sustainability disclosure aimed at communicating both sustainability-related risks and the company’s impact on the environment to a broad stakeholder base. This approach is represented by organisations such as the GRI and the EU’s Non-financial Reporting Directive (NFDR)/Corporate Sustainability Reporting Directive (CSRD) and often goes hand in hand with the concept of double-materiality.
Increasingly, the market moved to distinguish between sustainability reporting in financial reports and broader reporting on the company’s impact, which has contributed to the increased harmonisation across pillars, such as through the foundation of the ISSB.
|Pillar 1||Pillar 2|
|Addressing financial considerations through a strengthened financial report, which includes sustainability disclosures in the context of enterprise value.||Concentrating on sustainability reporting focusing on all external impacts a company is having on society and the environment and thus their contributions towards the goal of sustainable development.|
|Financial materiality||Double materiality|
|1) Sustainability issues affecting enterprise value||1) Sustainability issues affecting enterprise value
2) Company’s impact on the environment
Harmonisation is increasing, particularly on the financial reporting pillar
Since our last article, the International Financial Reporting Standards (IFRS) Foundation has announced the launch of the ISSB. Through input from several key players, the standard is set to significantly harmonise sustainability reporting for financial materiality. Later this month, the ISSB is expected to publish its first set of draft standards.
The CSRD is becoming more tangible
The European Union continues to lead regulatory developments around sustainability disclosures. At the core of the European Union’s disclosure strategy, the European Commission’s CSRD is in the completion phase, with planned application from 1 January 2024 for the financial year 2023. The European Financial Reporting Advisory Group (EFRAG) will be tasked with developing the standards, with the first set of draft standards expected to be published in October 2022.
The application of double materiality features in an increasing number of reporting standards. Frameworks, such as the GRI, can help to prepare for this type of reporting and make the CSRD more accessible even prior to its application.
What are the takeaways?
- Determine the purpose and target audience of sustainability disclosures (i.e. investor-focused vs mainstream reporting) in order to design efficient processes for data collection, reporting and control. Understanding the purpose and audience will also help to inform the balance of reporting across the pillars of financial and wider stakeholder materiality.
- Capitalise on available voluntary standards, such as GRI and SASB, to build a solid foundation for upcoming mandatory disclosure through the CSRD. This can help identify data gaps early and ensure sustainability, governance and data collection processes are in place by the time reporting becomes mandatory.
- Do not overcommit to a single standard, particularly those in the draft phase. As the reporting landscape is still in development and lacks a consolidated, comprehensive standard, full alignment with any one standard alone may hinder flexibility and tailored reporting. Materiality should remain at the core of a viable sustainability strategy and meaningful disclosure.
- Lea Gamsjäger
- Nordea Sustainable Finance Advisory
Nordea Sustainable Finance Advisory
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