The rising tide of sustainability reporting: navigating the new era of corporate transparency

Businesses have a crucial role to play in driving meaningful change for a sustainable future, and that starts with transparency. As sustainability becomes more integrated into corporate reporting, driven by heightened regulatory scrutiny and increasing stakeholder pressure for accountability, businesses can increasingly measure and mitigate their impact in key sustainability domains.

In the first of a series of three blogs, we will explore the growing importance of robust sustainability reporting. From navigating evolving regulatory frameworks to obtaining assurance, ensuring data quality and mitigating data risks - we'll delve into some of the challenges and opportunities facing businesses in this new era of sustainable corporate responsibility.

The changing reporting landscape
 

One of the most significant developments in recent years has been the evolution of sustainability reporting from voluntary disclosures to mandatory requirements. In the UK, listed companies are required to disclose a statement of consistency with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Initially applying to premium listed businesses and subsequently for all listed companies, this marked a turning point in the UK sustainability reporting landscape.

The European Union's Corporate Sustainability Reporting Directive (CSRD), which is being phased in this year for reporters meeting the scoping requirements, represents an even more significant development. The CSRD requires in-scope entities to report in line with the European Sustainability Reporting Standards (ESRS), mandating a double materiality assessment and comprehensive reporting on material topics. The scope of this goes well beyond climate, covering topics from gender equality and human rights to pollution and biodiversity. Importantly, these disclosures are subject to mandatory assurance, raising the bar for data accuracy and reliability.

Looking ahead, sustainability reporting will continue to evolve, with additional standards and frameworks being developed at the global and jurisdictional level. The International Sustainability Standards Board (ISSB) is developing a global baseline for sustainability reporting, the first two standards on general requirements and climate-related disclosures are already published, with future plans to publish further standards on additional themes and industries. The UK government have committed to adopting ISSB standards and is expected to endorse these in the UK from Q1 2025, subject to consultation. Meanwhile, the US Securities and Exchange Commission (SEC) and State of California are also set to introduce their own sustainability disclosure rules.

Building a foundation of trust and transparency
 

This changing regulatory landscape coupled with growing stakeholder demand for transparency has placed sustainability data quality firmly in the spotlight.

The quality of sustainability metrics reporting varies, for example greenhouse gas (GHG) reporting has been mandated in the UK for a number of years as part of the Streamlined Energy & Carbon Reporting (SECR) requirements, so there is some level of maturity in the data collection and estimation methods for companies in scope of these requirements. However, the wider domains of sustainability reporting are much less mature, especially when compared to traditional financial reporting which dates back hundreds of years underpinned by robust regulation, processes, and controls.

Our recent analysis found that 46 of the FTSE 100 companies restated at least one sustainability metric in the past year, highlighting the widespread challenge of reporting this information. 89% of restatements related to GHG emissions even though it is arguably, comparatively to other sustainability information, the most mature area of sustainability reporting. While restatements are often permitted for a variety of reasons, for example the Greenhouse Gas Protocol permits restatements due to a change in methodology or measurement approach, the analysis revealed that errors caused 29% of these restatements so there is still room for improvement.

Whilst the sustainability reporting environment is rapidly developing with considerable improvements year on year, the prevalence of restatements due to errors highlights the importance of building a foundation of data quality for reliable and consistent reporting. Stakeholders should consider this context when interpreting sustainability data.

As sustainability reporting requirements become more stringent and stakeholder expectations rise, ensuring good data quality is no longer optional - it's essential. Once published, sustainability reporting can be collected at scale by technology-enabled solutions. Data aggregators, ratings agencies and regulators ingest this information, to be used and presented alongside traditional financial reporting. When presented together the implicit assumption for some users could be that this information is subject to the same level of rigour as financial reporting, but this is not the case. In the UK, there are currently no mandatory sustainability reporting assurance requirements, although many companies do obtain assurance on a voluntary basis. Where sustainability data is assured, the majority of companies opt for limited assurance on sustainability reporting, compared to reasonable assurance, which is provided in the statutory audit of financial information.

Narrative information is presented alongside metrics and this is key to understanding a company’s impact, risks and opportunities through a sustainability lens. The basis of preparation informs the users how a company has produced its reporting and should be read in conjunction with the qualitative narrative and quantitative metrics disclosed. Increasingly, unstructured qualitative information is also being collected and used by companies, adding another dimension to the challenge of reporting on sustainability topics.

Companies with robust sustainability data management practices are better positioned to not only meet regulatory reporting obligations but also meet assurance requirements over their sustainability disclosures. A foundation of reliable sustainability data then empowers businesses to make informed strategic decisions and drive meaningful progress on sustainability.

In our next blog we will explore some of the factors leading to poor sustainability data quality and discuss best practices to build a foundation for sustainability reporting.