Interoperability: The Fundamental Success Factor For The Future Of Voluntary Sustainability Reporting

Interoperability: The Fundamental Success Factor For The Future Of Voluntary Sustainability Reporting

The past two decades have witnessed a radical shift in the sustainability reporting landscape. Marketing-style sustainability reporting has transitioned to voluntary frameworks such as the CDP (Carbon Disclosure Project) and the Global Reporting Initiative (GRI). Investor requests are being formalized into regulated disclosures to produce consistent ESG data to meet shareholder – and stakeholder – needs. The number of ESG reporting provisions issued by governmental bodies has grown by 74% over the last four years, according to research by Carrot and Sticks.

While it is encouraging to see increased disclosure of sustainability information, standards are often underpinned by different definitions, calculation methodologies and materiality approaches. In practice, complying with multiple reporting frameworks provides a challenge to those chief sustainability officers (CSOs) without sufficient software capabilities, and contributes to reporting fatigue.

Despite increased reporting regulations, voluntary reporting remains a key priority for corporates

The Verdantix Global Corporate Survey 2022: ESG & Sustainability Budgets, Priorities And Tech Preferences found that voluntary reporting is still a high priority for firms in terms of funding improvements over the next two years. In the survey, 16% of firms selected voluntary reporting as the ‘most important’, and 53% as a ‘high’ priority for process funding over the next two years. In our 2023 survey in the field now, we’re continuing to see signs that voluntary reporting is on the rise.

Interoperability aims to overcome the challenges of using multiple frameworks, and involves establishing compatibility and harmonization between standards. With corporates continuing to juggle voluntary and mandatory disclosures for the foreseeable future, interoperability between voluntary and mandatory standards becomes the key success factor. Two major authorities are driving interoperability: the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB). The ISSB’s objective is to harmonize and streamline international ESG and sustainability reporting, and create a global baseline, in the same way as for financial disclosures – starting first with climate-related disclosures.

Interoperability can reduce the financial costs of compliance

Both the ISSB and the European Financial Reporting Advisory Group (EFRAG) – the technical advisory group tasked with developing the European Sustainability Reporting Standards (ESRS) underpinning the Corporate Sustainability Reporting Directive (CSRD) – view interoperability as a key objective to reduce the risk of double reporting and its associated costs. Both entities are working together to create an interoperability table to highlight key areas of intersectionality between the two sets of standards. EFRAG estimates that the additional costs due to the introduction of the CSRD are in the region of €320,000 per year for an average undertaking listed under the EU’s Non-Financial Reporting Directive (NFRD), after all requirements have been phased in. Similarly, in the US, the Securities and Exchange Commission (SEC) estimates costs in the first year of compliance with its climate disclosure rule to be around $640,000 and annual costs in subsequent years to be $530,000 for larger firms.

The TCFD is playing an equally important role in promoting interoperability between climate disclosures, serving as the core architecture to create a common link between voluntary and mandatory reporting frameworks. Looking to the future, ISSB Chair Emmanuel Faber has signalled the Board’s intention to draw on the nature-related risk management and disclosure approach of the Task Force on Nature-related Financial Disclosures (TNFD), thereby playing an important role in creating a global baseline for nature and biodiversity-related disclosures. With the CSRD, ISSB and SEC all aligning their core principles around TCFD recommendations, a firm reporting in multiple jurisdictions can streamline both its costs and the resources associated with compliance.

To gain a deeper understanding of the future of voluntary sustainability reporting, look out for the upcoming Verdantix Strategic Focus report on this topic.