Monthly Corporate Sustainability Briefing
June's milestones included reporting standards from the ISSB and EU, and new rules for carbon offsets
There are only a few days left to respond to the proposed European Sustainability Reporting Standards (ESRS).
Published in June, the 12 standards cover climate change, pollution, water, natural capital, resource use, employees, value-chain workforce, stakeholder communities, consumers and business conduct, plus two sets of more general guidelines. If they make it through the political process, they’ll underpin reporting under the Corporate Sustainability Reporting Directive (CSRD).
The European Commission has based the ESRS on recommendations from its advisory body, EFRAG, but has diverged significantly in certain key areas to make it easier for companies, and to give the standards more chance of getting the green light from the EU Parliament and Council.
Most controversially, while EFRAG wanted reporting on climate change to be mandatory, the proposals give companies permission to choose whether most of the topics - including climate - are material enough to warrant disclosure.
The Commission has also pared down expectations around when certain reporting has to happen, and how data-driven it needs to be. For example, in the first year, companies would be allowed to omit details about how they expect climate and the environment to impact their financial performance, and how they’re doing on workforce-related issues. It will be another three years before firms have to use data to back up most of their explanations. And firms with under 750 staff will initially have looser requirements.
Europe’s biggest firms will have to start using the standards from next year, ready for CSRD reports published in 2025. To make this deadline work, the Commission must get the ESRS adopted into law by the end of August. Parliament and Council then have until the end of the year to veto it if they aren’t happy.
Global reporting standards
The Commission said it had worked closely with other key bodies to ensure ESRS was compatible with nascent global standards - most importantly, those from the International Sustainability Standards Board (ISSB), which published its first two standards last week.
The first standard outlines how companies should disclose information to investors, and the second spells out how to do that specifically for climate, which is ISSB’s priority topic.
Everything in ISSB’s standards centres on helping investors assess how sustainability issues might impact companies’ future financial performance. For example, they require companies to identify the proportion of their assets exposed to climate risks and opportunities. The EU’s standards, on the other hand, ask entities to also explain the impact of their business activities on Europe’s environmental and social goals.
The hope is that ISSB will define global sustainability-related financial risks, and outline how companies should explain them using the same internationally-agreed formats and language they use to disclose traditional financial risks. Countries can then adopt those standards into regulation and bolt on other disclosure requirements - like the EU’s CSRD - to account for regional contexts or policy objectives.
Last week, Australia became the latest country to pledge to embed ISSB’s standards into upcoming disclosure rules, following in the footsteps of the UK. Some emerging markets have been less bullish, though, with China’s finance ministry warning last year that ISSB shouldn’t assume its position as a global baseline. The ministry said it was “committed to supporting” the body’s work in a statement at last week’s launch.
The other big development last week was the launch of the Voluntary Carbon Market Initiative’s (VCMI) rules for how companies should use carbon credits.
The Claims Code seeks to reduce greenwashing and reputational risks associated with buying carbon offsets (although the word ‘offset’ is barely mentioned in the report, replaced with the less-stigmatised ‘compensate’ at times) by offering a three-tier labelling system for credible practices.
VCMI states that credits should only be used by companies that have adopted a science-aligned net zero target. Emissions covered by that target are off the table for offsetting: firms have to decarbonise those directly, by reducing emissions in their own value chains.
But no net zero target requires a 100% reduction in carbon over the short term, and the emissions produced after a company has met its annual reduction target are in scope for carbon credits. VCMI wants those credits to align with definitions being developed by the Integrity Council for Voluntary Carbon Markets but, until they’ve been finalised, it says companies should use the aviation industry’s Corsia scheme.
Crucially, VCMI is toying with the idea of letting companies use carbon credits for a portion of the emissions covered by their net zero targets, too. It will announce its verdict in November, as well as deciding whether smaller companies and those in less-developed markets should be given more flexibility.