Sustainability under the spotlight for businesses today and in the future

Aurel Constantin 06/05/2021 | 15:45

On 21 April 2021, the European Commission announced an ambitious and comprehensive package of measures intended to further promote sustainability, as part of the goal of making Europe climate neutral by 2050. One of the many steps outlined is a proposal for a Corporate Sustainability Reporting Directive (CSRD), the aim of which would be to improve the flow of sustainability information in the corporate world, making sustainability reporting by companies more consistent, so that firms, investors and the broader public can use comparable and reliable sustainability information in their decisions.

The CSRD would bring additional reporting requirements compared to the existing rules under the Non-Financial Reporting Directive (NFRD), with the aim that in the long term, sustainability reporting would be brought on a par with financial reporting. Moreover, the scope of non-financial reporting would be considerably extended, with nearly 50,000 companies across the EU expected to be subject to the new requirements compared to around 11,000 which are required to prepare non-financial reporting today. Sustainability reporting will include forward-looking and retrospective, qualitative and quantitative information. Standards will be set for large companies, with separate, proportionate standards for SMEs. The new reporting framework is planned to be fully in place starting from 2023 for large companies and starting from 2026 for listed SMEs on EU regulated markets.

Companies under the scope of the CSRD will have to publish the disclosure requirements in the Administrators’ Report in XHTML format in accordance with the ESEF Regulation, and the sustainability reporting will require an external independent limited level of assurance.

The legislative package published in April 2021 is an important milestone on the European Commission’s comprehensive policy agenda on sustainable finance. As part of this agenda, the EU Taxonomy Regulation  has enshrined in law a definition of an environmentally sustainable activity and the Sustainable Finance Disclosures Regulation has set up new ESG disclosure requirements for institutional investors. More legislation is on the way, including a Green Bond Standard and an EU Ecolabel for investment products.

In many other parts of the world too, sustainability is increasingly being seen as an integral part of the future development of the financial system and the private sector, with businesses expected to contribute to combatting climate change and being held accountable for their sustainability track record.

As Ramona Jurubiță, Country Managing Partner of KPMG in Romania, comments: “We strongly welcome these global trends towards making non-financial reporting, covering ESG matters, as important as traditional financial reporting. It is vital that sustainability should play a critical role in the future development of businesses and economies, and that one of the key objectives of businesses should be to capture and address the interests of all stakeholders, including the wider community, and even future generations. At KPMG, we have been focusing on sustainability for many years and the Romanian firm, in common with many KPMG member firms in other countries, issues periodic sustainability reports. Moreover, KPMG member firms are working together on the KPMG Impact initiative, which involves contributing to the development of the wider community by working together with the authorities, NGOs and other businesses to promote ESG initiatives.”

Increasingly, standards are being developed for sustainability reporting, often through building on the core principles of existing, traditional financial reporting standards. For example the trustees of the International Financial Reporting Standards (IFRS) Foundation have announced plans to establish a new board for setting sustainability reporting standards. It will focus on information that is material to the decisions of investors and other creditors, initially on climate-related matters, and will build on the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). The International Organization of Securities Commissions (IOSCO) will work together with the IFRS Foundation on this project.  The European Securities and Markets Authority (ESMA) has suggested that the IFRS standards should be based on the EU’s concept of “double materiality”, where companies disclose the impact of environment, social and governance (ESG) factors on financial performance of the company, alongside their impact on the environment and society.

As Cezar Furtună, Partner and Head of KPMG in Romania’s Audit Department comments: “The financial system will play a very important part in the development of a sustainable economy in years to come, and will be increasingly under scrutiny from governments, central banks and regulators. We can expect to see a significant strengthening of non-financial reporting requirements as sustainability becomes a key element of business models and the risk management framework. The annual audit will  include both financial and non-financial reporting.”

The drive towards a sustainable financial system is having a strong effect on banks, with central banks and regulatory authorities beginning to set new frameworks in which the financial sector will operate. For example, on 31 March 2021, the Network for Greening the Financial System (NGFS), which comprises central banks and banking supervisors, released an overview of sustainable finance market dynamics. It identifies disclosure, risk management and mobilisation of capital as the three main channels through which financial markets can help steer the transformation of the real economy towards higher levels of sustainability. The report provides examples of policies, regulations and guidance to market participants on these three topics, and a set of recommendations for policymakers.

Moreover, the Basel Committee on Banking Supervision (BCBS) will conduct a gap analysis to identify areas in the current Basel Framework where climate-related financial risks may not be adequately addressed or are not captured, and will explore practical solutions to address any identified gaps. The importance for the banking sector of taking action is highlighted in the preliminary findings of a climate stress test conducted by the European Central Bank (ESB) involving around four million companies worldwide and 2,000 banks. The survey looks 30 years ahead, and shows that in the absence of further climate policies, the costs to companies arising from extreme weather events would rise substantially and greatly increase their probability of default.

As Richard Perrin, Partner at KPMG in Romania and Head of Advisory, comments: “The extension of traditional financial reporting standards like IFRS to cover sustainability reporting is an inevitable and welcome development, and in future will become for many companies just as important as annual financial reporting. It is important to also reflect beyond the reporting requirements and to understand that companies that do not adapt to a sustainable business model, which includes net-zero emissions and reduced stress on ecosystems and natural resources, may see their continued existence threatened, either by the climate risk per se, or by the effect of competitive forces. On the other hand, firms that place implementation of and compliance with regulatory requirements within the context of a defined ESG company strategy and governance structure will likely perform better in the medium to longer term.”

As Ramona Jurubiță concludes: “ESG is becoming a critical part of the business model, and the successful companies of the future will be those which take ownership of it and integrate it fully into their business development planning. At the same time, there will be a need for cooperation between the authorities, businesses and the wider community in a coordinated effort to achieve a sustainable economy.”

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