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Navigating CSRD: Guidance for US Companies

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This week, Climate Decoded had the chance to speak with Dr. Kerstin Lopatta, Professor of Accounting, Auditing, and Sustainability at University of Hamburg. Dr. Lopatta shares her experience shaping the European Sustainability Reporting Standards (ESRS), her advice to US and EU companies preparing for the Corporate Sustainability Reporting Directive (CSRD), and her recommendations on what companies need to have on their agendas moving forward.  Dr. Lopatta recently served as the Acting Chair of the Sustainability Reporting Board (SRB) of the European Financial Reporting Advisory Group (EFRAG), where she led in delivering the ESRS to the European Commission to shape the CSRD. She is currently the vice chair of the SRB.

Q: Dr. Lopatta, you served as Acting Chair of EFRAG during a pivotal period in its drafting of the standards to implement the CSRD. What was that like? How did you find yourself in that role?

A: When I think about that I have to smile because I am a scientist and then I was suddenly in the role of a standards setter which was totally different from what I did before. I applied for the sustainability reporting board of EFRAG in 2022. The board is a new pillar of EFRAG that was set up in April 2022. I was appointed acting Chair when EFRAG needed someone with a neutral opinion and a deep knowledge in sustainability in practice and research. As a scientist, I follow the scientific process in standard setting and of course EFRAG’s goals of supporting the transformation in sustainable finance.

The SRB delivered the first set of standards to the European Commission on November 22nd. It was a great experience because there were so many board members coming from different angles with deep sustainability knowledge. For me, I spend a lot of time with data so being around different perspectives, opinions, and solutions was both exciting and hard work. It worked very well, the SRB has been very generous with their time as everyone on the board is volunteering. They all dedicated so much time alongside their day jobs. I learned a lot and I gained so many new research questions along the way. 

Q: Obviously, the CSRD is a European directive, so companies in Europe are very focused on it. How should US companies be thinking about the CSRD?

A: Though we have not yet finalized the ESRS, we are on our way to develop more standards e.g. for small and medium sized enterprises. The objective is to apply these standards also for companies that are headquartered in the US but have a branch or business in Europe. It will basically be a reduced set of standards in comparison to the ESRS that are on the way from the EU commission. The data vendor Refinitiv has estimated that roughly 10,000 foreign companies will have to report based on the scope of the CSRD. Also, if US companies are in the value chain of an EU company they will be asked to report e.g. their scope 3 emissions. This will be phased in for FY2028 in 2029. 

Q: Is the CSRD something US companies should wait and see about or begin to act on now?

A: US companies have to be aware that large EU companies and public interest companies are beginning to officially report in 2024. Large EU companies may ask their US partners e.g. for their GHG information if they are a part of their value chain. The first report will be ready in 2025 so this will come up soon for them. US companies need to know how to extract their data. For GHG emissions, Persefoni could help them. 

Q: Given your experience with the EFRAG, what kind of information should companies be collecting in order to prepare for compliance with the ESRS that shape the CSRD? 

A: The ESRS cover a range of ESG topics. Companies should look to the standards that are publicly available for specific metrics and data asks. To gain an understanding of what to report, companies should start with a materiality assessment. This will include identifying what the material items of all the standards for the respective company are. 

Q: Will all reporter's information be subject to assurance? 

A: That’s a very good question. First, the CSRD calls for limited assurance from an auditor and could extend to reasonable assurance in the future to make sure the assurance of sustainability reporting is comparable to financial reporting. We do not yet have (international) standards of auditing for sustainability reporting, but that is on its way. 

Q: The climate change disclosure standard (ESRS E1) as proposed, is subject to a double materiality assessment. EFRAG had proposed that it would be mandatory for all CSRD reporters, but that had been changed in the initial release of the ESRS. How do you think this will affect climate reporting, and do you expect this to stay in the final iteration of the CSRD? 

A: When I was the Acting Chair, we discussed this issue for a long time [whether to make E1 mandatory or not]. In the end, we concluded that climate is something everybody is aware of and have already been reporting on, so making E1 mandatory is the right thing. Furthermore, the CSRD is asking for a couple of data points regarding climate. We were all very disappointed when we saw this was taken back and is now subject to materiality assessment. But we project it might not change companies’ decision to report about climate because it's very hard to argue  “climate is not material.” 

My hope is that the EU might reconsider making E1 mandatory before they issue the final standards. Companies should be well prepared to answer why climate might not be a material topic.

Q: What do you think the role of the International Sustainability Standards Board (ISSB) will be in driving harmonization of reporting around the world? How does EFRAG view the ISSB’s role?

A: We discussed the general requirements as well as climate many times with the ISSB, especially with Sue Lloyd and her team, because we knew that they were preparing the IFRS IFRS S1 General Requirements for the Disclosure of Sustainability-related Financial Information and the IFRS S2 Climate-related Disclosures. The ISSB has an “investors only” focus (also known as single materiality + financial materiality). EFRAG focuses on all stakeholders e.g. investors, society, academics, etc. (also known as double materiality = financial materiality). We had a very intense process of interoperability and I have to say that we are very close to be aligned.

Q: When will the final ESRS standards be published in the EU? 

A: The European commission is working hard and will publish the ESRS on July 28. The EU published the final standards for another comment period last month and received roughly 600 comment letters. 

Q: What role do you see technology like Persefoni’s playing in climate disclosure reporting around the world?

A: I think climate is the most urgent issue, and companies definitely need IT support to fulfill the various reporting requirements. Persefoni can be a huge advantage in gathering and calculating the necessary GHG data. Persefoni also delivers the analysis that we need to understand the integration of a company's decarbonization path into its ongoing strategy. There are many ways to put together your GHG footprint, but software in particular presents a different pathway. Software equips companies with the abilities to show their work, which is important for EU reporting. The ability to show how you got to your conclusion is important because that is what auditors will look at.

Q: If you had one message for US companies in getting prepared for EU reporting, what would that be?

A: Get familiar with the materiality assessment. It is the heart and the start of all sustainability reporting. GHG emissions reporting will come sooner than expected, so get prepared now. 

Climate & ESG News Roundup

Amazon’s supply chain will be asked to report emissions

According to Amazon’s recent environmental and social initiatives report, the company will begin requiring companies in their supply chain to report their GHG emissions and set goals in line with updated standards set to be released in 2024. Kara Hurst, the company’s vice president of worldwide sustainability, published a blog with her nine key takeaways from the report, in which she states that Amazon will provide their suppliers with “products and tools that will help them reach their goals - whether those are transitioning to renewable energy or increasing access to sustainable materials.” 

This proposed policy is sure to have a widespread impact considering the vastness of the company’s supply chain, however details have not yet been released, including whether or not the policy will provide an exemption for small businesses. According to Hurst, however, Amazon is committed to helping their suppliers and using this as an opportunity to keep up with competitors like Walmart, while improving their environmental impact. 

With this proposal, they outline two main objectives. First, they aim to help businesses with decarbonization commitments and provide “products and tools to both track emissions and help decrease them.” They will also also help some suppliers in transitioning to carbon-free electricity. Second, they will prioritize business opportunities with partners who have innovative products that can help Amazon to reach its decarbonization goals.

SBTi issues guidance for engage supply chains on science-based targets

Last week, the Science Based Targets initiative (SBTi) published new guidance with the goal of helping companies to engage their supply chains in setting science-based targets for decarbonization. Since supply chain emissions are significantly larger than direct emissions for most companies, it is crucial to enact broad decarbonization efforts across the supply chain in the transition to a net-zero economy.

The guidance introduces supplier engagement targets as one of the methods for companies to set scope 3 targets. These targets specify the proportion of a company's emissions covered by suppliers committing to science-based emission reduction goals in the near future. To meet SBTi criteria, companies must set scope 3 targets covering at least 67% of total scope 3 emissions, provided these emissions account for over 40% of their overall scope 1, 2, and 3 emissions.

The document offers a step-by-step process for companies to evaluate, develop, and set supplier engagement targets. It emphasizes the importance of supplier engagement in creating a reinforcing feedback mechanism, driving progress on climate action within the supply chain. By addressing supply chain emissions and encouraging supplier engagement, companies can enhance efficiency, transparency, and resilience across their value chains, leading to increased credibility among stakeholders and meeting climate change expectations from investors, customers, and employees.

International Organization of Securities Commissions (IOSCO) Endorses ISSB Standards

In a pivotal development for global sustainability disclosure, the International Organization of Securities Commissions (IOSCO) has officially endorsed the ISSB’s Standards. Comprising 130 member jurisdictions, IOSCO is the key coordinating body for securities regulators who together regulate over 95% of the world's financial markets. This endorsement is a significant step towards promoting consistency and comparability of sustainability-related disclosures worldwide, and solidifies the role of the ISSB Standards as the new global norm for the disclosure of sustainability-related information for capital markets.

In the endorsement, IOSCO officially "calls on members to consider ways in which they might adopt, apply or otherwise be informed by the ISSB Standards within the context of their jurisdictional arrangements, in a way that promotes consistent and comparable climate- related and other sustainability-related disclosures for investors." IOSCO's support signals its trust in the ISSB Standards' efficacy, encouraging its member jurisdictions to incorporate them into their regulatory frameworks. By doing so, capital market authorities can ensure a cohesive approach to sustainability disclosure, fostering trust and transparency within the global financial community. The endorsement is expected to resonate not only with established markets but also with growth and emerging markets, which together make up 75% of IOSCO's membership.

The significance of this endorsement is reminiscent of IOSCO's backing of the International Financial Reporting Standards (IFRS) Accounting Standards over two decades ago, which helped establish IFRS as the globally accepted language of accounting. With this recent endorsement, the ISSB is poised to follow a similar trajectory, becoming the new global norm for sustainability disclosure. The move aligns with the growing global focus on sustainability and climate-related issues, encouraging regulators and companies to adopt comprehensive and standardized reporting practices. 

UK Moves Forward on Path to Potential Endorsement of ISSB Standards

In the aftermath of the June 26th launch of the ISSB’s inaugural sustainability disclosures standards, the UK has begun evaluating endorsement of the ISSB standards in earnest.

On July 19th, the UK Financial Reporting Council (FRC) issued a ‘call for evidence’ to gather opinions on whether the UK should incorporate the ISSB standards into its own disclosure regime. Considerations for the FRC include whether the ISSB standards promote disclosures that are understandable, relevant, reliable, comparable, and technically feasible.

The UK’s move to consider endorsing the ISSB standards follows other jurisdictions, including Hong Kong and Singapore, that have recently proposed adopting ISSB-aligned climate-related disclosure standards.

The FRC is accepting responses until October 11. 

Proposal for Global Sustainability Assurance Standard to be Issued on August 2nd

The International Auditing and Assurance Standards Board (IAASB) announced that its proposal for a global sustainability assurance standard will be released on August 2nd. This standard will be critical to helping ensure that sustainability information published across the globe is reliable.

The IAASB’s standard, formally called the International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, will be a broad piece of guidance, relevant to a wide range of sustainability information and frameworks. The standard will cover both limited and reasonable assurance.

The proposal was prepared in consultation with a number of global organizations, including the ISSB, which launched inaugural global sustainability disclosure standards on June 26th. IAASB has also coordinated with the International Organization of Securities Commissions, Financial Stability Board, the International Ethics Standards Board for Accountants, and Global Reporting Initiative.

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