Sustainability is becoming more important for all businesses across all sectors and in all countries. Investors, governments and other stakeholders are driving up demand for more transparent, consistent, comparable and reliable sustainability reporting on how a company affects society, the planet and the economy – and how such factors affect a company’s value and prospects.

This trend has grown over decades: guidelines for the first global framework for sustainability reporting were published in 2000. Since then, the world of sustainability reporting has become a busy place, where it can be difficult to keep track of what is going on, let alone understand it. Even the most widely used terms of reference can obfuscate.

Burning questions

What is sustainability? What is sustainability reporting? With both used as umbrella terms, their meanings range widely and can be influenced by context. What’s the difference between sustainability reporting and its close companion, environmental, social and governance (ESG) reporting? To some, ESG and sustainability mean very different things, with the former centred on risk and returns, while the latter also focuses on supporting and protecting the planet for future generations; often, the two terms are used interchangeably.
Then there is climate-related reporting to consider: it is a prominent facet of both ESG and sustainability reporting – and prompts its own questions. Where do the vast array of climate-related frameworks and reports fit in? How should climate-related risks be reflected in financial statements? What about the Task Force on Climate-related Financial Disclosures, or TCFD as it is more widely known?

Some readers will already have answers. Auditors increasingly need to consider companies’ exposure to climate risks and opportunities – such as weather events and the challenges of transitioning to net zero – which may have a material impact on financial statements. Recently introduced UK reporting requirements will increase TCFD-aligned disclosures – and the auditor’s exposure to them.

Materiality matters

Some sustainability reporting brings fresh variations on familiar concepts, such as ‘materiality’ in the context of financial statements. As well as ‘financial materiality’, you may need to grapple with ‘impact materiality’, ‘double materiality’, ‘dynamic materiality’, and differences of opinion on what they potentially deliver, particularly in terms of accountability. Future articles will explore this further.

Such incongruities are among many things that can make sustainability reporting complex and confusing. But there are signs of growing urgency and willingness to work more collaboratively and cohesively to advance sustainability reporting.

New global standards

After some time in the making, the establishment of the International Sustainability Standards Board (ISSB), a new standard-setting body, was announced by the International Financial Reporting Standards (IFRS) Foundation at the UN Climate Change Conference (COP26) in November 2021. On 31 March 2022, the ISSB published Exposure Drafts of its first two proposed IFRS sustainability disclosure standards for public consultation and comment:

• IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and
• IFRS S2 Climate-related Disclosures.

Each Exposure Draft is accompanied by a ‘Basis for Conclusions’ and ‘Illustrative Guidance’ document. A high-level summary of the proposed requirements.

The ISSB brings together a number of organisations that aimed to advance sustainability reporting, namely the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF). The VRF was itself the result of a 2021 merger between the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC).

IFRS S1 and S2 consolidate context from the TCFD, CDSB and SASB.

Learn more about the standards (and the ISSB).

The Financial Reporting Faculty offers an introduction and simple Q&A on the ISSB with links to other useful resources.

New regional standards

Time will tell whether the sustainability disclosure standards of the ISSB lead to the sort of global harmonisation that has been delivered by the IFRS Foundation’s International Financial Reporting Standards. In the European Union, European Sustainability Reporting Standards (ESRS) are being developed for the European Commission (EC) by the European Financial Reporting Advisory Group (EFRAG).

In EFRAG’s work to develop these standards and the associated governance/standard-setting structure, the advisory group is formally cooperating with long-established sustainability standards organisation the Global Reporting Initiative (GRI), thinktank Shift and the World Intellectual Capital/Assets Initiative. EFRAG is also expanding and over recent months it has attracted more than a dozen new member organisations with an interest in sustainability reporting.

You can learn more about EFRAG’s roadmap for ESRS.

An ICAEW Insights article providing an overview of sustainability reporting developments at EFRAG.

In April 2021, the EC adopted a legislative proposal for a Corporate Sustainability Reporting Directive (CSRD), which would oblige ‘in scope’ companies to report in compliance with ESRS. The CSRD would amend existing reporting requirements in the EU Non-Financial Reporting Directive (NFRD), which lays down rules on disclosure of non-financial and diversity information by companies.

In March 2022, MEPs voted in favour of a ‘common text’ on CSRD, including provisions requiring companies within scope to employ a statutory auditor to express an opinion on sustainability reports. This paves the way for ESRS being developed by EFRAG.

An ICAEW Insights article considers these developments in Europe.

You can learn more from the EC about corporate sustainability reporting and how the CSRD and NFRD would interact.

Publication of public consultation drafts is imminent, so by the time you read this article they may already be available.

There are national initiatives with different requirements to consider, too. On 21 March 2022, for example, the US Securities and Exchange Commission proposed rule changes. These would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.

Learn more about these here.

Looking forward

So, during 2022 there are at least two new sets of standards on sustainability reporting on the horizon. How much and how soon auditors will need to know more about each set of these will vary widely because of the differences between audited entities and within and across jurisdictions.

Dr Nigel Sleigh-Johnson, ICAEW’s Director of Audit and Corporate Reporting, says: “ICAEW is closely monitoring debate over these important proposals. The publication by businesses of consistent, high-quality information on sustainability-related issues and – importantly – the provision of appropriate assurance over that information, is a key element of the drive towards a net-zero economy.”

How things play out remains to be seen. Will any of the proposed standards result in ‘auditable’ information? Will they meet the characteristics of ‘suitable criteria’ as required under assurance standards? Will they result in information that is capable of being subject to evidence-gathering procedures? Then there is the very big question: why does any of this matter to financial auditors?

It will be important for auditors to understand the increasing convergence of reporting. It affects what they consider – in relation to risks, impairment triggers, estimates and so on – on their audits. How they interact with other assurance practitioners will also be influenced, as financial information and sustainability information becomes more integrated.
In such a fast-changing area, it is not possible to predict the future with any degree of accuracy. But it does seem likely that auditors will have to keep sight of more abbreviations, acronyms, frameworks, standards and other moving parts. ICAEW will continue working to keep you informed of developments, so watch this space.

In addition to the resource links elsewhere in this article, more information and support resources are available from ICAEW through:

• ICAEW's Climate hub;
• the Sustainability and Climate Change Community, which is free to join;
• sustainability and climate news from ICAEW Insights;
• an ESG webinar series from the Financial Services faculty; and
• a sustainability-themed edition of By All Accounts from the Financial Reporting Faculty

What’s expected of auditors

Climate reporting is just one facet of sustainability reporting, but it’s an important area for auditors to consider, as it has the potential to affect all companies directly or indirectly, through assets, customers and supply chains. It’s so far- reaching that, to some extent, all companies are vulnerable to issues presented by climate change and there are many associated risks for companies and their auditors to consider. It’s increasingly a focus for standard-setters and regulators.

In October 2020, the International Auditing and Assurance Standards Board issued a Staff Audit Practice Alert, The Consideration of Climate-Related Risks in an Audit of Financial Statement (at iaasb.org/publications/consideration-climate-related-risks-audit-financial-statement). It outlines what exists in International Standards on Auditing (ISAs) and how this relates to auditors’ considerations of climate-related risks, highlighting areas of focus for auditors by considering various ISAs.

In November 2020, the UK Financial Reporting Council (FRC) published a Climate Thematic summarising findings of its review of climate-related considerations by boards, companies, auditors, professional bodies and investors (available as a PDF at frc.org.uk/getattachment/ab63c220-6e2b-47e6-924e-8f369512e0a6/Summary-FINAL.pdf).

The Climate Thematic suggested what more could be done by companies, auditors, professional bodies and investors, and offered some examples of best practice. In July 2021, a faculty webinar (at icaew.com/technical/audit-and-assurance/faculty/webcasts/climate-risk-in-the-statutory-audit) explored this and offered practical hints and tips for improving auditing in this area, as did a subsequent article in Audit & Beyond (at icaew.com/technical/audit-and-assurance/faculty/audit-and-beyond/audit-and-beyond-2021/audit-and-beyond-october-2021/climate-change-and-financial-statements).

New requirements

The auditor’s focus on climate reporting will increase going forward and this will happen sooner for some than for others, particularly in the UK.

Some auditors will be aware that Financial Conduct Authority (FCA) rules require all UK premium-listed companies to state in their annual financial report whether their climate-related disclosures are consistent with the TCFD recommendations, or to explain why not, for accounting periods beginning on or after 1 January 2021. For periods beginning on or after 1 January 2022, a similar requirement will apply to standard listed companies.

The FRC has published Staff Guidance on this. Auditor responsibilities under ISA (UK) 720 in respect of climate-related reporting by companies required by the Financial Conduct Authority sets out information for auditors that may assist them in determining their responsibilities in relation to TCFD reporting (including a brief reminder of auditor’s responsibilities under ISA (UK) 720 in respect of the company’s Streamlined Energy and Carbon Reporting (SECR) disclosures).

The scope of mandatory climate-related reporting in the UK is extended by the ‘Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022’ and the ‘Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022’, which affect more than 1,300 of the largest UK-registered companies and financial institutions.

For financial years beginning on or after 6 April 2022, those in scope must disclose climate-related financial information, aligned with the TCFD recommendations. Included are many of the UK’s largest traded companies, as well as private companies with more than 500 employees and £500m in turnover. The disclosures should be included in the Non-Financial and Sustainability Information Statement in the Strategic Report.

Help and support

A Financial Reporting Faculty webinar ‘Introducing the climate-related financial disclosure regulations’ is available, along with support resources.

Q&A-style guidance from the Department of Business, Energy and Industrial Strategy (BEIS), to help publicly quoted companies, large private companies and limited liability partnerships (LLPs) understand how to meet new mandatory climate-related financial disclosure requirements, is available for download. Auditors of affected entities will also find it useful.

An ICAEW Insights article outlines key aspects of the BEIS Q&A and points readers at related ICAEW material.