Corporate Sustainability Reporting faces major changes

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Corporate Sustainability Reports should be standardized to be more comparable.
Source: Melinda Nagy / AdobeStock

About 500 German undertakings are obliged to include sustainability-related information in their annual reports. According to the plans of the EU Commission more undertakings shall report in the future and apply uniform reporting standards. A study on behalf of UBA recommends precise requirements for reporting on targets, actions and performance indicators and corporate greenhouse gas neutrality.

Since 2017 certain large undertakings in Germany and the EU are subject to sustainability reporting obligations. The underlying Non-financial Reporting Directive (2014/95/EU) is currently under revision and will be superseded by the „Corporate Sustainability Reporting Directive (CSRD)”, for which the EU Commission presented a proposal in April 2021. In the future about 15.000 German and 50.000 European companies could face requirements to increase transparency on sustainability-related impacts, risks and opportunities. To ensure credibility and better comparability of the reported information, the EU Commission plans to adopt binding European Sustainability Reporting Standards. The „European Financial Reporting Advisory Group” (EFRAG) is mandated to prepare the standards. A Project Task Force at EFRAG - with the participation of the German Environment Agency (UBA) - is currently developing first drafts.

Proposals for the standard setter to support meaningful reporting on environmental matters

The study “Recommendations for the design of sustainability reporting standards under the Corporate Sustainability Reporting Directive (CSRD )” on behalf of the German Environment Agency (UBA) contains targeted recommendations for the standard setter to support meaningful reporting on environmental matters. The authors from the Institute for Ecological Economy Research (IÖW), Arqum and the Fair Finance Institute (FaFin) identify three important levers that EFRAG should consider in the standard setting process:

  1. Increase coherence between environmental targets, actions and performance indicators
    The authors propose specific reporting requirements for these elements and emphasize that their interconnection is crucial for a good report. Reported actions should enable readers to understand target achievement and performance indicators should be suitable to track progress over time. The authors find that this still is a shortcoming in many mandatory reports.
  2. Avoid greenwashing regarding corporate greenhouse gas neutrality
    Current reporting practice on corporate greenhouse gas neutrality is lacking transparency. The emissions included in neutrality targets and the role of voluntary compensation of CO2-emissions to achieve them are often unclear. The authors recommend to closely orient reporting requirements on the „Corporate Net Zero Standard“ of the Science-based target initiative (SBTi). The SBTi-Standard focuses on the rapid and extensive reduction of a company’s GHG emissions across the whole value chain. Offsetting of emissions with certificates from voluntary compensation is not allowed to reach the net zero target.
  3. Seek compatibility with the disclosure requirements of the financial sector
    The Sustainable Finance Disclosure Regulation (SFDR) (EU) 2019/2088 requires financial market participants to report on their sustainability-related risks and impacts. A Regulatory Technical Standard specifies, among others, mandatory principal adverse environmental impact indicators. To ensure that financial market participants are provided with the necessary information to fulfil their own reporting obligations, the authors recommend the SFDR indicators as a starting point for the reporting standards. The SFDR indicators should not be subject to the principle of “comply or explain”.

The recommendations are based on a comprehensive empirical study on the climate and environmental reporting of German companies. The study assessed the reporting practice of all capital market-oriented German undertakings subject to the Non-financial Reporting Directive for the years 2018 and 2019. In addition, the authors considered other relevant studies and conducted interviews with selected experts.

Major changes in the sustainability reporting landscape are currently also occurring at the international level. On November 3rd 2021, the International Financial Reporting Standards (IFRS) Foundation announced the establishment of an International Sustainability Standards Board (ISSB) and published prototypes on “climate-related disclosure requirements” and “general requirements for disclosure of sustainability-related financial information”. The standards of the future ISSB will be focused on sustainability-related information that is material from a financial perspective. The reporting standards developed under the European CSRD follow the “double materiality” principle. They will in addition also require transparency on the material impacts of a company on the environment and people.