Corporate greenwashing may be endemic, but a lot of companies really don’t want to make false claims about their environmental and social credentials. Some skeptics want to demonstrate to consumers that they really matter when it comes to sustainability. Others want to face increased scrutiny from investors and other stakeholders.
But all businesses will need to persuade regulators and watchdogs. In particular, they need to ensure that their disclosures on environmental and social matters comply with a plethora of sustainability standards and directives. The trouble is, the recent proliferation of rules and regulatory frameworks can be confusing—with such abbreviations and initials that aren’t so much alphabet soup as alphabet monsoons. Proceed GRI, WRI, TCFD, SASB, SFDR, WBCSD, CSRD, WEF, CDSB, CDP, IIRC, VBA and GHG.
Glossaries and guides can help businesses understand the new regulatory framework, but sometimes the best way to avoid feeling overwhelmed by it all is to understand the context rather than the subtle details. What do all these standards really want to do? Why are there so many of them? How do they fit together? And why do they all have such confusing names? Seeing the big picture can give businesses the confidence to properly start their own compliance as voluntary sustainability reporting evolves into mandatory disclosure.
Businesses often lament over regulations so cumbersome as red tape. So, the first step is to understand how these new standards and frameworks can be helpful to businesses rather than a hindrance. Many companies that do not want to go greenwashing may welcome more regulation on environmental, social and governance (ESG) factors as it can provide clarity and level the playing field. If everyone must adhere to the same standards and definitions, there is less room for some companies to gain an unfair advantage over companies that are actually investing the effort and money to be more sustainable.
Common standards and reporting frameworks can also help other stakeholders assess and compare different businesses. Customers, employees and investors are all beginning to expect companies to meet today’s environmental and social challenges, and general criteria are needed to assess their relative performance.
But of course, if comparability is so important, why the plethora of different parameters, bodies and acronyms? Well, for one thing, assessing companies’ performance against environmental and social norms is still relatively new – and innovation isn’t just about responding to market trends, but a planetary emergency. The climate crisis and the sheer urgency of the transition to a clean energy economy mean that standards and regulations have to be drawn up at speed, and there has not always been time for greater coordination between different jurisdictions and oversight bodies. The standards are still evolving. Some are just being offered. In March, the US Securities and Exchange Commission unveiled its own climate disclosure proposal, which would expand US public company reporting rules to include climate-related disclosures in company filings. The European Union’s Corporate Sustainability Reporting Directive (CSRD) only came into effect (partially) in January.
However, there were once a myriad of national accounting standards for financial reporting, before they were widely converted into the widely used generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) frameworks today. Have become. So businesses need not be discouraged by the deluge of ESG standards and acronyms – globalized investment and trade are very likely to converge somewhat. Indeed, during last November’s COP26, the IFRS Foundation – which has been instrumental in the standardization of financial reporting – announced the formation of an International Sustainability Standards Board (ISSB) for sustainability reporting.
Furthermore, the plethora of different climate disclosure standards hide the fact that many of them are built on a common framework – the Task Force on Climate-Related Financial Disclosure (TCFD), which was established by the International Financial Stability Board in 2015 when It became clear that the climate crisis posed such serious economic and financial threats. The TCFD creates a framework for disclosure and reporting on emissions, governance, targets, metrics and risks – and it is specifically designed to help national regulators and watchdogs walk the ground when formulating their own standards So that they don’t need to spend years of consultation and wrangling which rules often take. Indeed, the TCFD framework has informed the UK, New Zealand, EU’s CSRD and other sustainability reporting standards, including the US Securities and Exchange Commission (SEC).
Similarly, individual companies can voluntarily adopt the TCFD framework for their self-disclosure to gain a strategic start before implementing national and local regulations.
As well as providing a common ground between various regulators and standards, the TCFD also helps bridge financial and non-financial factors so that climate risks can be viewed more easily in a financial context – thereby providing raw scientific evidence for the public. It becomes easier to compare the data. , say, a company’s carbon emissions.
The importance of finance as a key engine for tackling the climate crisis is also illustrated by another standard: the EU Sustainable Finance Disclosure Regulation (SFDR), which requires financial institutions such as banks and pension funds to monitor the sustainability of those companies. They are required to report what they invest. Curiously, these rules on investors applied prior to the CSRD rules, which required companies to disclose that information – so some businesses could be forgiven for thinking that, confusingly, the cart was in front of the horse. Was placed. (In addition, the EU introduced both these sets of disclosure requirements before this Establishing your green classification that defines what types of business and economic activity actually count as green or sustainable, and to what extent.)
Nevertheless, financial institutions have often proved to be very effective in pressuring the companies in which they invest to disclose more robust sustainability data before such disclosures become mandatory. So in this example, putting the cart before the horse has accelerated the efforts of some companies to try and deal with the climate emergency.
Meanwhile, the overall scope of sustainability reporting is expanding. Along with greenhouse gas emissions, world leaders at COP26 have also pledged to end deforestation by 2030. Recent measures have been taken to curb plastic pollution and promote the development of a circular economy such as the UK’s Plastic Packaging Tax (PPT).
But if standards are likely to evolve, converge and broaden in scope along with a plethora of standards, businesses may wonder why they must break a gut to comply with them? There are countless reasons for this: it is the right and ethical thing to do; It will help businesses to manage risk and make greater improvements in their strategic planning; This will make it easier to attract financial investment as well as help it retain conscientious employees and environmentally conscious consumers. And, of course, it is becoming more and more mandatory.
Find out more at sap.com/sustainability