Sustainability reporting allows firms to share their performance and impacts across various sustainability aspects, covering environmental, social and governance parameters. This transparency facilitates companies in revealing the risks and opportunities they encounter, offering stakeholders deeper insights into performance beyond pure financials.

Fostering trust in businesses and governments is key to developing a sustainable global economy and a prosperous world. Everyday decisions made by businesses and governments significantly affect their stakeholders, including financial institutions, labour organisations, civil society and citizens. Trust plays a pivotal role in these relationships. These decisions often encompass more than just financial data and consider a mix of short and long-term risks and opportunities. Sustainability topics are becoming progressively more integrated into these decision-making processes.

As businesses globally are progressively adopting sustainability reporting, several standards have evolved to help various stakeholders evaluate and compare these reports more effectively. The Global Reporting Initiative Standards are the most extensively adopted framework, linking to other types of non-financial reporting, including triple bottom line reporting and corporate social responsibility (CSR) reporting. Stakeholders are pivotal in pinpointing non-financial risks and opportunities for organisations. The transparency attained by engaging diverse stakeholders in decision-making processes not only results in improved decisions, but also fosters trust in businesses.

Sustainability Reporting: The Main Drivers

Although, as noted below, companies are increasingly being required to produce and present such information, there are also a number of reasons that further move a company to engage in sustainability reporting. These include the following four drivers:

Improved Reputation: A 2011 corporate reputation survey highlighted transparency and promoting good actions as key to building public trust in businesses. A 2013 survey by the Boston College Center for Corporate Citizenship and EY found over 50% of businesses issuing sustainability reports believed this boosted their reputation.

Employee Expectations: Employees, crucial to sustainability reporting, value it, which may often boost retention and loyalty. This has a positive ripple effect on the workforce, enhancing overall company performance.

Enhanced Capital Access: Reporting firms score high on sustainability and have Kaplan-Zingales Index scores that are 0.6 lower, suggesting less capital constraints than lower-sustainability companies.

Efficiency and Waste Reduction: Sustainability reporting streamlines decision-making processes, mitigating supply chain risks. It also aids in waste reduction, leading to significant cost savings.

In addition to these main four drivers, there are certainly many other benefits of sustainability reporting. In brief, reporting:

  • Highlights the connection between fiscal and non-fiscal outcomes.
  • Enhances comprehension of risks and prospects.
  • Allows comparison of sustainability performance concerning legislation, norms, codes, performance standards and voluntary initiatives.
  • Facilitates internal performance comparison and between businesses and sectors.
  • Optimises processes, reduces expenditure and boosts efficiency.
  • Assists firms in avoiding publicised environmental, social and governance mishaps.
  • Impacts long-term management tactics, policies and business plans.
  • Reduces adverse environmental, social and governance impacts, enhancing brand reputation and loyalty.
  • Allows external stakeholders to comprehend the firm’s actual worth, including tangible and intangible assets.
  • Showcases how the organisation both impacts and is affected by sustainable development expectations.

New Rules on Corporate Sustainability Reporting

The Corporate Sustainability Reporting Directive (2023)

On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force in Europe. This new directive modernises and strengthens the rules concerning the social and environmental information that companies have to report. It aims to provide a more consistent, comparable and reliable picture of companies’ sustainability performances.

The new rules will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues. They will also create a culture of transparency about the impact of companies on people and the environment. Finally, reporting costs will be reduced for companies over the medium to long term by harmonising the information to be provided.

Some key standards that are likely to be enforced by the Directive include:

Expanded Scope: More businesses, including all large and all listed companies, regardless of their size, are required to adhere to the CSRD. This is likely to amount to approximately 50 000 companies in total.

Comprehensive Reporting: Companies are expected to report on their impact on people and the environment, as well as how sustainability issues affect their development, performance and position.

Alignment with International Standards: CSRD will be aligned with international reporting standards for better comparison and to avoid duplication of reporting efforts.

Mandatory Assurance: Companies will need to have their reported information independently assured, increasing reliability and user confidence.

Information Audit: Companies will be required to have their sustainability information independently audited. This mandatory assurance enhances the reliability and credibility of reported sustainability data, fostering confidence among investors and stakeholders. Information must be reported in a digital format, allowing easy access and analysis.

The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025. They will have to report according to European Sustainability Reporting Standards (ESRS). The draft standards are developed by the EFRAG, previously known as the European Financial Reporting Advisory Group, an independent body bringing together various different stakeholders. The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives.

Remaining in Force: The Non-Financial Reporting Directive

The rules introduced by the Non-Financial Reporting Directive (NFRD) will remain in force until companies have to apply the new rules of the CSRD. The Non-Financial Reporting Directive (Directive 2014/95/EU) requires large public-interest entities, including listed companies, banks, and insurance firms with over 500 employees, to disclose non-financial and diversity information. This covers approximately 11,700 large companies and groups across the EU, including listed companies, banks, insurance companies, and other companies designated by national authorities as public-interest entities.

This Directive aims to increase business transparency and encourage sustainable and responsible corporate behaviour. Entities must provide a non-financial statement within their annual report, outlining their policies on environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on boards of directors. They should include a description of the business model, the impact of the aforementioned policies, the outcomes, risks and risk management, and key performance indicators relevant to the business. The Directive allows flexibility in how companies report this information. The aim is to ensure companies effectively communicate their sustainable and ethical efforts, thereby informing investors, consumers, and society at large.

Embedding Sustainability

The Corporate Sustainability Reporting Directive (2023) is poised to profoundly influence business operations across the EU. Its introduction will ensure greater transparency and accountability in sustainability practices, leading to improved trust and reputation for organisations. By mandating consistent and comparable reporting, it’ll also empower stakeholders to make more informed decisions. Ultimately, this Directive is a significant step towards embedding sustainability at the core of corporate decision-making.