Why Now?
CSRD/ESRS Sustainability Regulations
The new requirements are wide-ranging with deadlines fast-approaching. Much of our client’s work in emissions reporting to date has focused on voluntary initiatives. For example, our team does a lot of work helping companies to prepare to have their emissions targets approved by organizations running voluntary programs such as SBTi. But global regulators have recently stepped into the void and made clear that emissions reporting will be mandatory in the near future.
Exhibit 1: EU regulations take effect from 2024
EU Regulatory Timeframe
Source: Oliver Wyman analysis
New regulation in Europe and the US will require companies to prepare detailed disclosures of the material sustainability risks (and opportunities) they are facing, their plans to transition, along with detailed statistics on their environmental impact. For the first time, companies are required to not only report the emissions that occur within their operations (Scope 1) and those that are associated with their electricity and heat supply (Scope 2), but also those linked to their upstream supply chain and customers (Scope 3). Sustainability data will be also subject to assurance.
The European Union
In November 2022, the Corporate Sustainability Reporting Directive (CSRD) was formally adopted by the European Parliament. Starting in fiscal year 2024, the CSRD requires listed EU companies with more than 500 employees, banks, and insurance companies to start disclosing detailed ESG information in accordance with the European Sustainability Reporting Standards (ESRS). In fiscal year 2025, this requirement will be extended to large EU-based companies that exceed two of the following three criteria: 250 employees, €40 million net turnover, €20 million balance sheet total. By fiscal year 2026, listed SMEs will follow though they will be subject to proportionate, less stringent ESRS disclosure rules and can opt-out until fiscal year 2028.

Eventually, the CSRD will also apply to all non-EU companies that are either listed in EU regulated markets, have a net turnover of €150 million in the EU, or at least one EU subsidiary or branch. This provision is expected to begin in fiscal year 2028. At the outset, the sustainability disclosures mandated by CSRD will be subject to "limited assurance”, but after a few years, that assurance is elevated to a "reasonable assurance." The difference between the two assurance levels is the degree to which auditors scrutinize the numbers. Limited assurance involves less stringent checks with the conclusion: “Based on the procedures performed, nothing came to our attention to indicate that the management assertion on is materially misstated. Reasonable assurance is the same standard used for financial reporting: "Based on the procedures performed, in our opinion, the management assertion is reasonably stated."
Exhibit 2: EU regulatory scope
EU Regulatory Scope
Source: Oliver Wyman analysis
The United States
The Securities and Exchange Commission (SEC) has proposed mandatory climate disclosure rules that would apply to all companies listed on US stock exchanges, including non-US based companies. The proposal includes quantifying the impact of climate-related risks on financial statements and disclosure of Scope 3 emissions, which has generated court challenges and a politicization of the debate. But even if the SEC backs off for now, many companies will still be forced to comply regardless of where their headquarters are if they want to be listed or operate in the EU. This is also true for Asian companies which are so far not required to disclose detailed ESG information.
Standard-setting organizations
The International Sustainability Standards Board (ISSB), launched by the IFRS Foundation during COP26, is finalizing standards that would make mandatory climate risk scenario analysis and emissions reporting for Scopes 1, 2 and 3. While the ISSB has no authority to enforce such a rule, it is expected to heavily influence legislation around the world. A number of countries, including the UK, have already signaled that they will adopt ISSB once the rules have been finalized around the first quarter of 2023. An endorsement by the International Organization of Securities Commission (IOSCO), which represents most of the world’s securities and futures markets regulators, seems likely and would send a strong signal to regulators globally to adopt ISSB. The IOSCO board chair has previously stated that he “firmly believed” the ISSB was “the most credible mechanism for creating a baseline for climate disclosure standards”.

Detailed disclosures on ESG risks and impact, including Scope 3 GHG emissions data, are going to become as valuable as corporate profit and loss statements for regulators, investors, and financial institutions, which will eventually incorporate the information into formal risk assessments. Notwithstanding regulatory requirements, there will be demands for granular sustainability data either from other companies in the value chain or from banks and insurers. The absence of the information is likely to lead to increased costs of doing business as a charge against the unknown risk.
EFRAG, the European Financial Reporting Advisory Group, approved its first set of standards in November 2022. EFRAG was mandated by the European Commission to develop the European Sustainability Reporting Standards (ESRS) specifying the requirements laid out in the Corporate Sustainability Reporting Directive (CSRD). This contains 10 topical standards in the areas of Environment, Social and Governance, the first set covered cross-cutting rules on general reporting principles and disclosure requirements that apply to all topical areas and sectors. In 2023, sector-specific rules as well as "lighter" SME standards will follow.

The concept of “double materiality” sits at the very core of ESRS. All material information regarding impacts, risks, and opportunities of ESG matters must be disclosed, enabling the understanding of the company’s impact on those ESG matters, as well as how those impact the company’s financial development, performance and position. Crucially, in doing so, companies need to consider not only their own operations but must also take into account the full value chain, from upstream suppliers to downstream product usage, waste and disposal. In their reporting, companies have to comply with clearly defined qualitative characteristics, such as faithful presentation, verifiability, relevance, comparability, and understandability of provided information.

The general disclosure requirements, fully mandatory for all topical areas and sectors, are structured around the four pillars of the Task Force on Climate-related Financial Disclosures (TCFD): governance, strategy, impact, risks and opportunities management, as well as metrics and targets.

Sustainability governance:
  • Oversight of material impacts, risks and opportunities through board and management
  • Integration of sustainability-related performance in incentives schemes
  • Process of conducting sustainability due diligence
  • Risk management and internal control system in relation to sustainability reporting
  • Material sustainability impacts, risks and opportunities and their effect on the business model, strategy, cash flow, access to finance and cost of capital
  • Current and committed investment plans (Capex, M&A, JVs, new business areas) and the planned sources of funding
  • Strategy and business model resilience to address material impacts and risks and pursue material opportunities
Impact and Risk management:
  • Action plans and resources, allocated or planned, to address material impacts, risks and opportunities
  • Process to identify impacts, risks and opportunities and to assess which ones are material
  • Policies in place to identify, assess, manage or remediate material sustainability matters
Metrics and targets:
  • How targets relate to policy objectives and progress made over time
  • Metrics are defined in topical ESRS and sector-specific ESRS
Data and infrastructure. Although not part of the ESRS framework, meeting the reporting requirements depend on a robust approach to data gathering and analysis. Scope 3 in particular places a high demand on a supplier engagement strategy, with the appropriate infrastructure to collect and aggregate data flows from across the company and value chains, conduct the scenario modelling and tracking of KPIs.
The International Sustainability Standards Board (ISSB), created in November 2021 by the International Financial Reporting Standards Foundation (IFRS), aims to develop a global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with transparent, reliable and comparable information.

By June 2023, the ISSB is expected to finalize its first set of standards, covering general reporting requirements as well as climate-related disclosure rules, ready for adoption by regulators in the 2024 fiscal year reporting cycle. Subsequently, the ISSB will look into developing additional standards on biodiversity, water and "just transition".

Similarly to the ESRS, the ISSB draft standards are built upon the TCFD framework, structured around the four pillars governance, strategy, risk management, and metrics and targets. In line with the ESRS, the ISSB also mandates the assessment of physical and transition climate risks on the business model, strategy, profitability, funding, and cost of capital. It also requires disclosure on corporate transition plans and scope 3 GHG emissions.

The key difference to ESRS, however, is the ISSB's focus on financial materiality only, in line with the primary audience being investors and capital market stakeholders.
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