Enhanced sustainability reporting

A clear implication of the extensive changes made to non-financial disclosure requirements, aligning them with annual financial reporting cycles, is that finance teams must become more familiar with the subject matter and ensure compliance with overall reporting requirements. Starting by engaging closely with sustainability colleagues is crucial, and there are other avenues for building knowledge, such as obtaining the Sustainability Certificate for finance professionals provided by the ICAEW. The goal is to have sufficient mastery of the subject matter, to oversee the disclosure process and be able to respond, alongside sustainability professionals, to questions arising from the board, audit committee, and/or external auditors

Particularly when finance is being asked to oversee and steer all disclosures, it becomes essential for the team to assess and understand the capabilities of their sustainability colleagues in producing disclosures consistent with external standards. Sustainability teams are subject matter experts with regard to sustainability and climate change programmes and external reporting specifications, but they may lack the experience required to adequately document reporting processes from source through to final report.

This includes creating a robust audit trail and ensuring information can be challenged and, if necessary, replicated by an external third party. It is equally important to recognise where teams have limitations, and this can inform the separation of duties and assignment of responsibilities. Organisations may also decide that it is time to invest in systems to enable and control the reporting process more effectively.

While finance professionals may pride themselves on grasping materiality, new regulations like CSRD and associated IFRS standards introduce the concept of double materiality. In this context, materiality considers both the impact of environmental and social factors on the organisation, operationally and financially, as well as the organisation's impact on the broader environment and society. 

This is an important topic to grasp, as materiality assessments in this context can impact on the scope and depth of reporting. 

For example, CSRD is supported by 12 separate standards. Completion of a robust materiality assessment is key to defining the scope of required disclosures. Reporting entities must disclose against each standard which is considered material. It is therefore important that the materiality assessment itself is robust, as it will be subject to significant scrutiny, because of the requirement for independent external limited assurance review of these disclosures. 

In our view, completing the materiality assessment thoroughly and comprehensively is imperative. The process should be well-documented, demonstrating effective internal controls over the analysis. This ensures the maintenance of an adequate audit trail over stakeholder engagement and management judgments.

We have learned from working with international insurance groups of the importance of having an effective approach to policy management. An organisation needs to adopt a structured approach to managing and reporting on sustainability related policy and procedural documents.

For example, where a European holding company is reporting against CSRD on a consolidated basis and one or more stand-alone entities are also within the scope of the regulations, it would be expected that policies operate consistently across the holding company and all subsidiaries. How these are managed consistently over time and to allow for local regulatory interpretations needs careful thought. Being able to evidence consistent internal controls over these key non-financial controls on an ongoing basis, will increasingly become important to support these disclosure processes.

Organisations will need to decide if they can manage sustainability reporting manually, using Microsoft-suite type documents, or whether the time is approaching where they need to invest in more tailored solutions. A wide range of providers are coming to market with solutions tailored to specific reporting frameworks. Many organisations have started to use these for capturing and reporting Greenhouse Gas emission data, particularly where they are geographically diverse in terms of their operating footprint. These types of systems provide integration with other systems and strong audit trails and are starting to expand their scope to wider ESG reporting factors beyond carbon emission data.

It is worth taking a step back to consider the respective roles within the end-to-end sustainability reporting process. Although all organisations look for collaboration across team boundaries, the reality of boards expecting single point accountabilities alongside tight reporting deadlines, means that those in the frame for the final disclosure outcome will want to have oversight and control of their resources. For some organisations, they will want the finance function to manage and control the ‘last mile’ of all external disclosures, implying the need for sustainability reporting capability joining the financial controlling team. Other organisations will prefer to keep the sustainability capabilities centralised, implying a need to implanting disclosure and reporting disciplines within the wider sustainability team. 

Regardless of the final organisational design, boards and management, tasked with approving the robustness of the final deliverables, will find role clarity, adequate resources, and confidence in overall capability crucial.

Finance teams will need to support and coach sustainability teams involved in disclosure processes, to ensure that adequate internal controls and procedures are established and capable of supporting the disclosure of information to a standard consistent with disclosure requirements. This may take some time for organisations to establish and mature. It is a challenge for many firms – there remains a significant gap between financial and non-financial reporting in terms of levels of testing and assurance in place to protect the organisation against the risks of misstatement.

A good place to start is with an evaluation of existing controls, and how they compare to those of more established financial reporting. This should include ‘hard controls’ in relation to the collation and analysis of sustainability-related data, as well as ‘soft controls’ around report structure and presentation, explanation, and transparency in respect of limitations and measurement uncertainty.

The level of challenge involved in bringing non-financial teams up to the required standards, may determine what represents the most effective organisation design in some cases.

We strongly recommend that organisations complete a dry run exercise to assess their readiness to report in line with the new requirements impacting them. These new requirements will typically impact larger listed insurers first but are will eventually affect organisations of all sizes and complexity. Although, smaller private insurers have longer to respond, they may have considerably less resources available to them. This will also support you to improve incrementally toward assurance-ready reporting, especially for international groups, that are also responding to the implementation of IFRS or CSRD across multiple territories.