24 May 2023
In our article ESG and climate-related disclosures - why now? we looked at how getting a head start on environmental, social and governance (ESG) disclosures can benefit the business. As we continue to explore the most recent changes in this rapidly developing area, we take a deeper dive into the structure and content of these disclosures.
A recap on the current landscape and legal requirements
The ESG landscape is a fast-evolving field and remains an area of opportunities and challenges.
The International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) have released a number of exposure drafts on sustainability disclosures.
The ISSB continues to discuss the unprecedented 1,300 plus comment letters it received on the exposure drafts, and we are expecting amended standards to be released in June 2023.
The EFRAG has released a set of exposure drafts on sustainability disclosures which is in its final phase of approval. Interestingly, the U.S. Securities Exchange Commission (SEC) also released a proposed rule on climate-related risks.
Whilst there are no new legal requirements for UK companies relating to ESG disclosures, one existing requirement that is perhaps not so well known is the FCA listing rule. With effect from years commencing on or after 1 January 2022, all standard listed companies, in addition to premium listed companies, must provide Task Force on Climate-Related Financial Disclosures (TCFD) aligned disclosures.
Understanding what disclosures to include
Even where a company has little or no legal requirement to provide ESG disclosures, we recommend that organisations should still carefully consider the benefits of including them. We explored why you might want to do so in our previous article. Let’s now take a closer look at what form the disclosures can take.
The ISSB’s draft standards follow a structure identical to that pioneered by the Task Force on Climate-Related Financial Disclosures and this is a very good structure on which to build any ESG disclosure.
The structure consists of giving disclosures about the company’s ESG:
- risk management; and
- metrics and targets.
The governance disclosure is all about affirming that the board of directors maintains ultimate oversight of all ESG matters. However, the disclosure should also indicate the involvement of committees and the levels of management in assessing and managing ESG matters.
Top tip: A reader must be able to understand how your company ensures that ESG matters are appropriately assessed and managed.
The strategy disclosures explain how the board incorporates the assessed ESG matters into the company’s overarching strategy. This includes the process for identifying ESG risks and opportunities, prioritising them (usually according to appropriate short, medium, and long-term timeframes), and assessing the company’s resilience to these risks and opportunities.
The strategy disclosures should encompass the processes for incorporating ESG risks and opportunities in your business, strategy and financial planning processes. This includes the ultimate impact of these ESG risks and opportunities.
Resilience is the more complicated disclosure and often involves scenario analysis. The goal of resilience disclosure is to illustrate your company’s ability to withstand and absorb shocks resulting from ESG risks, for example recovering from having your facilities flooded.
Top tip: A reader must be able to understand the impact of ESG matters and how you manage those impacts, including your ability to overcome unforeseen or worse-than-expected ESG-related scenarios.
The risk management disclosure is closely linked to and often intertwined with the strategy disclosures.
Risk management disclosures go into greater depth regarding the ESG risks that you identify and how you incorporate these risks into your overall risk management process.
This disclosure includes greater detail on the processes for the identification, assessment, and management of ESG risks. These processes will likely include unique features for ESG risks as compared to those for general business risks.
Top tip: A reader must understand how your risk management process applies to ESG risks from identification to mitigation.
Metrics and targets
The metrics and targets disclosures are precisely that – what metrics do you use to measure performance and what targets have you set? These disclosures ensure that there is some objectivity to measuring your progress towards ESG-related goals.
The ability to measure progress is critical in holding those tasked with governance responsible. It also allows you to identify the areas of pride for the company, as well as those areas requiring more focus!
Top tip: A reader must understand how you measure ESG-related performance, as well as your progress towards pre-defined goals.
Where to from here?
Good ESG disclosures provide readers with an insight into your ability to identify and respond to sustainability matters, manage the risks, and leverage the opportunities. It enables them to have comfort over your governance structures and to determine the company’s progress in this very important area.
Providing these disclosures can be more difficult than financial reporting as the area is in constant flux. We are here to assist in paving the way for ESG disclosures that are relevant, reliable, and useful.
Our experts continue to stay abreast of the current developments and cover both first-time adopters and those requiring some fine-tuning. In addition to our insight articles, you can discover more through our dedicated narrative reporting and ESG commentary and guidance.
For more information, please get in touch with Danielle Stewart OBE, or your usual RSM contact to discuss your ESG needs.