wind turbine and mountains

Plotting a path: managing increasing sustainability regulatory reporting complexity

Alex Hindson, Partner, Risk Consulting and Head of Sustainability and Dan Spreckley, Senior Manager, Risk Consulting
12/02/2024
wind turbine and mountains
The external environment for sustainability and climate risk reporting has evolved significantly in the last 12 months. We can see the implications of the launch of a number of new standards including Taskforce on Nature-related Financial Disclosures (TNFD), Corporate Sustainability Reporting Directive (CSRD), International Financial Reporting Standards (IFRS) and the Transition Plan Taskforce (TPT) recommendations on the reporting landscape today. At the same time, expectations of insurance regulators including the Bermuda Monetary Authority continue to tighten.

In this article, we explain how insurance organisations, and asset and wealth management organisations more broadly, can begin preparing for these changes and get on top of their reporting agenda.

In recent months, many organisations have been getting on top of the regulations and standards that apply to their organisations. For international groups, this has included understanding how operating companies in different jurisdictions may be impacted at different times, by an expanding set of requirements.

Until recently, this was a challenge restricted to larger, publicly listed entities. But with the introduction of CSRD and the tightening of regulatory expectations, a much bigger number of organisations are now in scope of sustainability reporting requirements, including smaller listed entities and private companies. This is of particular interest to entities with private equity capital support who may have significant strategy events within their planning horizon – an initial public offering or debt restructuring, for example.

Considerations for insurers

Based on our client interactions, we’ve identified four key implications requiring careful consideration.

Debt providers, including banks and private equity providers, are also increasingly interested in understanding the sustainability credentials of the organisations they partner with. In some instances, they will themselves require access to performance information in order to meet their own reporting requirements.

1. Understanding the landscape and timelines

An obvious but crucial step for organisations is to engage with the various regulatory and reporting standards that may impact their organisation. Spending time understanding the landscape will also enable a sense of control over what can at first appear a daunting or confusing set of standards.

Firms should focus on the criteria for determining application, including employee headcount, revenue, assets under management (AUM), or status (e.g., publicly listed), as well as the timeline and phasing of implementation – many incoming standards and regulation have adopted a phased approach, either through specific transition arrangements, or extended implementation period for private or smaller entities.

The output should enable the clear communication of timelines and dependencies to management and board members as necessary, and facilitate subsequent analysis and planning (see Figure 1. for example).

Figure 1 – regulatory route map example

2. Scoping and communicating what needs to be done

The next stage is to break down the requirements of relevant standards and regulation, and to plan the necessary activity. Where they exist, companies should build on processes and reporting in place, to meet existing standards such as TCFD, identifying where system or process enhancements may be required to capture additional data, for example (e.g., within the business or from critical suppliers).

3. Implications of legal entity structures

We’ve learned from client engagements that the legal entity structure within international groups plays a crucial role in understanding both current and future reporting requirements. In several cases, regulations like CSRD apply on a consolidated basis as well as at a single entity level. The implications of not only having to disclose sustainability information but have it subject to limited assurance review by external auditors is starting to dawn on firms across Europe. It is therefore worth acknowledging the implications, and factoring this into wider corporate strategic planning.

In a post-Brexit environment, several (re)insurance groups have UK entities blended into EU legal entity structures, with sometimes a UK subsidiary under an EU holding company, possibly in Ireland. These types of arrangements potentially draw these UK insurers into wider group reporting processes and to meet higher levels of disclosure controls, than would otherwise be needed. We have also noted that some international groups consolidate their Asian or Latin American entities through an EU holding company, and hence would also be caught. Often sustainability practices within these markets are less mature, which could cause additional challenges.

4. Implications for corporate strategy

Additional sustainability reporting requirements are rarely being integrated into a static business. Significant corporate activity in the form of acquisitions, mergers, initial public offerings, or debt refinancing is often discussed and planned for over a two-three year horizon. It is therefore important to maintain a clear link between sustainability requirements and corporate strategy and objectives to avoid interference or disruption to company plans.

Debt providers, including banks and private equity providers, are also increasingly interested in understanding the sustainability credentials of the organisations they partner with. In some instances, they will themselves require access to performance information in order to meet their own reporting requirements.

Building capability incrementally

We recommend companies take advantage of the time available through 2024 prior to many of these new requirements coming into full effect. This will help ensure that the appropriate infrastructure and capability is in place. We recommend focusing initially on the following four areas:

1. Understand the impact on resources

Complete an impact assessment to understanding how new requirements will be met, and where resource or skills gaps may exist. Organisations should take a holistic view of requirements to identify opportunities to simplify processes and remove duplication.

Organisations will need to decide if they can manage sustainability reporting manually using Microsoft-suite type documents or whether it’s time to invest in more tailored solutions. These types of systems provide integration with other systems and strong audit trails and are starting to expand their scope to wider Environmental, social and governance (ESG) reporting factors beyond carbon emission data.

2. Think about organisation design

Once the firm is clear on what needs to be done, it pays in our experience to take a step back and 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. In some cases, this will mean that management 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. However, other organisations will prefer to keep the sustainability capabilities centralised, implying a need to implanting disclosure and reporting disciplines within the wider sustainability team.

Firms should also consider the overall structure of their reporting approach. Ensuring roles and responsibilities are clearly defined, and that mechanisms in place for collaboration and coordination across functions and, where relevant, entities, are appropriate and fit for purpose. There is no ‘one size fits all’ approach, so companies should think about what works best for them.

3. Strengthen controls and reporting processes

As new regulations are integrated, there will be a need to revisit existing disclosure processes to ensure that adequate internal controls and procedures are established, that can support the disclosure of information to a standard consistent with requirements, in particular respect of external. This remains a significant challenge for many firms, and 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.

4. Prepare effectively and complete a dry run

We strongly recommend firms use the available time before new regulations come into force to complete a dry run exercise to assess their readiness to report. This will also support you to improve incrementally toward assurance-ready reporting, especially for international groups that are also responding to the implementation of CSRD or IFRS in other jurisdictions.

Determining how to respond to the increasingly challenging sustainability reporting environment is a growing issue for many organisations. At Crowe, we support our clients’ sustainability reporting journey by:

  • providing an overview of the existing frameworks and initiatives in the context their businesses, as well as providing relevant market and industry insights
  • helping determine how to adapt existing climate risk and sustainability process to integrate new and evolving requirements
  • reviewing clients’ draft disclosures and providing informal and/or formal feedback.

Please contact Alex Hindson, Dan Spreckley or your usual Crowe contact for more information.

 

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Alex Hindson
Alex Hindson
Partner, Head of Sustainability
London