Progress and challenges in sustainability reporting 

The broader implications of ESG reporting extend beyond sustainability. It influences capital markets, supports foreign and local investment, and shapes value creation. 

Recent discussions among industry professionals and thought leaders have highlighted key challenges and opportunities in this area. Below, we explore themes and their implications for advancing sustainability reporting. 

Interoperability 

One of the most significant concerns in sustainability reporting is the need for interoperability in standards. Firms operating across borders, as is the case for many banks and insurers, face substantial costs and complexity when required to implement multiple frameworks tailored to jurisdictional preferences. For example, those firms who operate both in Europe and the UK will need to consider the reporting requirements of European Sustainability Reporting Standards and any equivalent UK standards, such as IFRS S1 and S2, which have recently been recommended for endorsement in the UK by the UK Sustainability Disclosure Technical Advisory Committee.  

Materiality and reporting 

Materiality is a complex issue, particularly in the context of the EU’s impact materiality framework under CSRD, which leans more towards a compliance based approach. This contrasts with a focus on investor-centered materiality seen in other frameworks such as IFRS S1 and S2. 

Reporting 

Disclosures are becoming increasingly fragmented, with financially material information often integrated into financial statements or strategic reports, while broader sustainability disclosures are relegated to non-financial reports. This bifurcation can obscure the interconnectedness of transition and adaptation risks, limiting stakeholders’ ability to assess a firm's overall strategy. 

To improve coherence, there is a growing need for best practice that drives greater coherence in narrative across financial and non-financial reporting.  

Scope 3 financed emissions 

Scope 3 finance emissions play a critical role in assessing climate-related risks and opportunities within firms’ supply chains, particularly for banks and insurers. However, practical challenges associated with this form of reporting are significant. Data from third parties is often incomplete, inaccurate, or outdated, leading to inconsistencies and requiring frequent revisions. 

One notable concern is the risk of double and triple counting emissions, particularly when firms hold multiple exposures, such as sovereign bonds alongside other investments. Investments in high-carbon-emitting sectors exacerbate this issue. 

Methodological discrepancies further compound these challenges. Banks and insurers often value assets differently, driving inconsistencies and volatility in reported figures. Stakeholders, including audit committees, are increasingly wary of the reputational risks posed by reporting inflated emissions figures. 

To address these challenges there is an argument that disclosures and transition plans should not overly rely on aggregated measures of scope 3 financed emissions. Instead presenting them alongside other metrics that capture firms efforts to decarbonise.

For example carbon intensity metrics, such as emissions per square meter for housing or per mile for transportation, which adjust for other factors, for example, business growth. These metrics offer a more practical measure of a firm's transition to net-zero and align disclosures with decision-useful information. Revisions vs. Restatements  The evolving nature of sustainability data and methodologies introduces challenges in distinguishing revisions from restatements. Revisions often reflect updated estimates as new information becomes available, while restatements typically signal prior errors. A better understanding and industry agreement as to the distinction is essential as sustainability reporting matures. 

Measuring financial effects 

Sustainability reporting often requires forward-looking disclosures, posing challenges distinct from traditional financial reporting, which are often anchored in past events. Estimating financial impacts across short, medium, and long-term horizons remains difficult, particularly for assets not yet on balance sheets, such as future loans or investments. Further, science based evidence that indicates the severity and timing of impacts of climate risks are still in development. 

For banks, expected credit losses (ECL) models incorporated as part of IFRS 9 reporting are used as a starting point for capturing climate risks. In contrast, insurers rely on climate risk being accurately priced into market values as their assets are typically measured at fair value. Insurers also price for risk, including climate risk, as a matter of course in insurance underwriting. However in both cases the methodologies and evidence that would enable climate risk to be separated out from other risks remains limited at this stage.  

Assurance challenges  

The immaturity of sustainability reporting frameworks presents significant hurdles for assurance engagements. Data quality, coupled with underdeveloped internal control systems, complicates the assurance process. 

The debate around limited versus reasonable assurance continues, with differing expectations these approaches create among stakeholders. Assuring qualitative narratives, such as transition plans and risks, is particularly challenging compared to quantitative metrics. 

A phased approach to mandatory assurance requirements may be needed. Firms must first develop robust controls and improve data accuracy, supporting the gradual maturation of sustainability reporting.  

Conclusion

Sustainability reporting is a dynamic and a complex field. From interoperability and Scope 3 emissions to assurance and materiality, the challenges are significant but not insurmountable. Balancing consistency with flexibility, ensuring decision-useful disclosures, and fostering best practice in emerging areas will be crucial.