Produced by Tiger Sniff ESG Group
Author: Chen Yuli
Header image: Visual China
This article is the 079th article in the #ESG Progress Watch# series
Europe's ESG disclosure requirements have taken a new direction.
On 2 May, the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) published a new "ESRS-ISSB Standard Interoperability Guide".
According to a press release issued by IFRS, the introduction of this guide will help companies adopt both the ISSB and ESRS to reduce the cost of complex decision-making and improve the effectiveness of disclosure, and on the other hand, the guide will also align the ISSB and ESRS to help companies understand the differences between the two sets of standards and how to write compliant ESG disclosure reports.
Indeed, there was a high degree of overlap in the previous ESG reporting disclosures of European companies, with almost all climate-related disclosures in the ISSB being included in the ESRS.
Comparing the two standards, the ESRS focuses more on disclosures that have a significant impact on companies, people and the planet. For example, the European Sustainability Reporting Standard 1 – General Requirements (ESRS 1) states that the information about the reporting entity in the sustainability report should be extended to the upstream and downstream of the company, and the company needs to use the results of due diligence and materiality assessment, combined with the specific requirements of other ESRS, to disclose the material impacts, risks and opportunities for upstream and downstream activities, such as Scope 3 (greenhouse gas emissions in the upstream and downstream industry chains of the company).
The ISSB, on the other hand, focuses more on the needs of corporate investors for ESG information disclosure, that is, ESG information disclosure in finance. According to the S2 version of the International Financial Reporting Sustainability Disclosure Standards (IFRS) issued by the ISSB, corporate reporting entities are required to disclose a description of the current and expected impact of climate-related risks and opportunities on the entity's business model and its value chain, as well as a description of the areas in which climate-related risks and opportunities are concentrated in the entity's business model and value chain (such as geographic regions, facilities and asset types), requiring more focused data details.
In the past few years, with the increasing global attention to climate change and sustainability issues, European companies have made certain achievements in ESG development, but due to the difficulty in unifying and quantifying the standards of disclosure items, some companies have confusion and duplication of ESG information disclosure.
The launch of the "ESRS-ISSB Standard Interoperability Guide" means that European companies can use it to write sustainability reports under the two sets of standards, which is more "targeted".
Global ESG information disclosure is heading to the "deep waters"
Let's take a look at the main structure of this guide, which is divided into 4 sections:
Section 1 discusses the general reporting requirements in the ISSB Standards and ESRS, and explains the extent to which these Standards are compatible with each other in terms of importance, presentation and disclosure of non-climate-related sustainability topics.
Section 2 provides a tabular interpretation of climate-related disclosure requirements under the ISSB and ESRS standards.
Section 3 lists the matters that may require additional disclosures under the ESRS standards in order to comply with the climate-related disclosure requirements of the ISSB standards.
Section 4 sets out the matters that may require additional disclosures under IFRS standards in order to comply with the climate-related disclosure requirements in the ESRS.
Commenting on the launch of the guide, ISSB President Emmanuel Faber said: "Our aim is to inform investors' capital allocation decisions by ensuring that they have access to globally comparable, targeted and useful information disclosures. Thanks to our in-depth collaboration with EFRAG, businesses can use our joint guidance as a module to provide a global benchmark, while also providing the incremental disclosures required within the EU. ”
Indeed, after reading the report, the author found that in addition to "pulling through the alignment", this guide also requires disclosers to conduct a consistent and detailed analysis of climate issues under the two standards, which means that more detailed qualitative and quantitative analysis is required for "greenhouse gas emissions" and other issues, not only to incorporate grand environmental issues into corporate statements, but also to disclose more transparently the resources, action plans, costs and expenditures allocated by enterprises in terms of ESG.
As Jeanne Aing, Head of Regulatory Expectations at BNP Paribas CIB, said: "The new guidance represents a paradigm shift in sustainable investing, which will provide investors with reliable ESG data and encourage businesses to embrace sustainability." Although there are significant challenges in terms of implementation. ”
Obviously, the development of global ESG is entering the "deep water area" under the leadership of Europe, and in the foreseeable future, it is no longer meaningful to just publish a simple ESG report, and enterprises need to quit the mentality of "passing through the blinds" and implement the principles of "science, transparency and accountability".
China is also on the way
Domestic requirements for ESG disclosure are also rapidly becoming "scientific and transparent".
On April 12, under the guidance of the China Securities Regulatory Commission, the three major stock exchanges in Shanghai, Shenzhen and Beijing officially issued the "Guidelines for Sustainability Reporting of Listed Companies (Trial)" (hereinafter referred to as the "Guidelines") to guide and regulate the issuance of "Sustainability Reports" (also known as "ESG Reports") by listed companies.
The Guidelines will come into effect on 1 May 2024 and make mandatory disclosure requirements for sample companies in major market indices such as SSE 180, STAR 50, SZSE 100 and ChiNext Index, as well as companies listed both domestically and overseas, to disclose their 2025 Sustainability Report for the first time by 2026 at the latest.
In terms of specific topics, the Guidelines set up 21 topics such as climate change, pollutant emissions, ecosystem and biodiversity conservation, rural revitalization, innovation-driven, and employees, and set differentiated disclosure requirements for different topics through a combination of qualitative and quantitative, mandatory and encouraging.
Undoubtedly, this move will enhance the comprehensiveness and integrity of the environmental, social and governance (ESG) information disclosure of listed companies, and the standardized and comprehensive ESG indicators will more accurately reflect the ESG governance level of Chinese listed companies. At the same time, for those companies that often "put satellites", the future will be even more difficult.
In summary, whether it is the EU's new "ESRS-ISSB Standard Interoperability Guidelines" or the "Guidelines" implemented at the beginning of this May Day, they are sounding the "alarm bell" for Chinese companies that are "duplicitous", and we need to recognize the importance and challenges of implementing ESG.
The importance will not be talked about here. In terms of challenges, there are indeed some shortcomings in domestic enterprises that need to be filled:
First, most enterprises in mainland China have not yet established an ESG organizational structure with the board of directors as the core, so how to establish an ESG work system with the board of directors as the core, and clarify the functional division and implementation process at all levels in the process of ESG strategy formulation, ESG decision-making and implementation, and ESG risk management, which is a point that needs to be overcome.
At present, most domestic enterprises have not yet cultivated and established a sound ability and mechanism to measure the impact of climate risks on corporate cash flow, and how to establish a disclosure process and system is a challenge for most Chinese enterprises.
As Song Zhiping of the China Association of Public Companies said at the parallel forum on "ESG Empowers Global Sustainable Development" at the 2024 Zhongguancun Forum Annual Conference, "For listed companies, the preparation and publication of sustainable development reports is not only an issue of information disclosure, but also a systematic project from strategy to governance to the practice of specific issues. ”
At present, ESG disclosure has entered a stage of accelerated development, and is changing from "optional questions" to "required questions". In the future, the requirements for ESG disclosure will only get higher and higher, and the data will become more and more detailed. In such a general trend, business owners need to "plan ahead".
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