Preparing for sustainability reports

This is just one example of why the International Sustainability Standards Board’s (ISSB) sustainability disclosure standards could be game-changing. They shift not just how we talk about sustainability, but how we understand it.

Why ISSB standards matter

Unlike earlier frameworks, the ISSB’s standards help companies and investors grasp the strategic implications of environmental and social issues on a business. These standards can bring a huge improvement over current reporting because they:

• speak the language of business. They use terminology from IFRS Accounting Standards and focus on what matters for a company’s core business purpose. They focus on a company’s ‘prospects’ – its ability to generate cashflows, its access to finance and its cost of capital – now and over time. Boards and investors can understand and act on this language
• standardise disclosures. They bring transparency, consistency and comparability across companies, industries and borders. This helps companies compete for capital more effectively because they can see the risks and opportunities they face and take action. They know what to report rather than guessing what stakeholders want to know. This helps investors assess expected risk-adjusted returns across the market and allocate resources accordingly
• encourage accountability. Users, both external and internal, can see clearly how a company is performing, with sustainability information directly linked to its financial statements. They have better information to make decisions and to see how those decisions pan out over time.

Missing the mark

However, if the aim of sustainability reporting is to give credible, meaningful information for decision making, it’s falling short. As someone who analyses and advises on sustainability reporting for a living, I constantly find myself trying to understand a story that doesn’t add up.

Most reports describe activities that have little, if any, resemblance to what the company says its business is about, leaving readers puzzled and companies wondering why nobody seems to read their sustainability reports or ask about them.

Two main issues contribute to this. One is that companies can choose what they report, when they report it, which parts of the group to include, what timeframe to cover and what to get assured – and change this whenever they want. This bespoke approach doesn’t set a high bar for reporting quality and can result in cherry-picking, undermining the reliability and usefulness of the information.

Another is that sustainability reports are often produced with little, if any, collaboration across teams. Even when sustainability information is included in annual reports, it usually tells a different story and presents numbers that don’t mean anything when looked at alongside the KPIs or financial statements. This misalignment makes sustainability disclosures look like wishful thinking at best and certainly not useful for decision making.

The consequence is clear – sustainability reporting isn’t doing its part to inform the market about which issues matter and how they can affect businesses. The lack of interest from my pharma analyst friend highlights the low value the market currently places on sustainability information. Today’s reporting also isn’t helping boards make strategic decisions, whether in the short, medium or long term.

Preparing for endorsement

When local regulators endorse the ISSB’s sustainability disclosure standards, they will enable effective decision making using transparent, high-quality information that leads to stronger accountability. As these standards get adopted around the world in the next few years, there are a few things SMEs can do now to start getting ready:

• Build the right team. The ISSB’s standards require disclosures that combine strategy, risk management and financial implications, and are likely to be subject to third-party assurance. This will need to involve a reporting team with expertise not only in sustainability, but also in operations, finance, strategy and risk. It also requires robust systems for data collection, processing and oversight, and having the seniority needed to get the attention of boards and executives.
• Assess what’s needed for the new climate disclosures. In some jurisdictions, the ISSB’s requirements might be stricter than those set out in other frameworks that SMEs are using today, such as the Task Force on Climate-related Financial Disclosures (TCFD). The new standards focus on how climate issues affect strategy and performance, and how climate risks are assessed and managed. This is likely to require changes in policies and processes, including data collection and measurement practices.
• Identify other sustainability-related risks and opportunities. Many countries are using a ‘climate first’ approach to give companies time to prepare for reporting on other sustainability topics. Reporting beyond climate rests on identifying relevant sustainability-related risks and opportunities, using criteria that assess how they could affect cashflows, access to finance and cost of capital. Some issues currently reported may not be required – or even allowed – going forward and it’s a good idea to find that out early. Be brave and open-minded when deciding what to (or not to) report.

Although endorsement is a few years away for SMEs in some jurisdictions, taking some early steps can highlight the scope and scale of the changes needed, and help secure internal buy-in and budgets. SMEs can start to align their reporting to local requirements before they come into force, ensuring a smoother transition by building their understanding now of the issues that really matter for their business.

Disclaimer: The author is a member of the UK Sustainability Disclosure Technical Advisory Committee (TAC), which is the body tasked with conducting technical reviews of IFRS Sustainability Disclosure Standards to make recommendations to the UK government about their endorsement for use by UK companies. More information about the TAC’s remit and activities is available here.