Lecture 5
The objectives of the various sustainability standards are multifaceted, aiming to address specific needs for ... (3) in sustainability reporting
transparency, comparability, and reliability
Three objectives of different standards
1. EU taxonomy
2. Corporate Sustainability Reporting Directive (CSRD)
3. IFRS Foundation's ISSB Standards
Definition EU taxonomy
The EU Taxonomy aims to create a science-based classification system for sustainable economic activities. It helps companies and investors identify activities that significantly contribute to environmental goals
CSRD definition
It ensures that companies disclose comprehensive and comparable information on their sustainability practices, policies, and impacts.
IFRS Foundation's ISSB Standards
The standards aim to provide a global baseline for sustainability reporting, ensuring that the information is relevant, comparable, and reliable for investors and other stakeholders.
European Securities and Markets Authority (ESMA)
It issues guidelines for the supervision of sustainability reporting, ensuring compliance and addressing any infringements.
The debate around sustainability reporting is dynamic and influenced by various factors:
1. Global and Regional Regulatory Developments
2. Stakeholder Expectations and Greenwashing
3. Integration with Financial Reporting
Sustainability reporting is build on 4 pillars:
1. Economic / Environment forces
2. Institutional forces
3. Private forces
sustainability reporting quality
Some stakeholders expect to become ...
beter informed about the firm's risks and opportunities
Some stakeholders want to drive change via better sustainability information, such as:
1. consumers
2. impact investors
3. NGO's
4. Politicians
According to double materiality, companies must ...
report both on how their business is impacted by sustainability issues (“outside-in”) and how their activities impact society and the environment (“inside-out”)
Price mechanism to induce change:
1. Company
2. Sustainability information
3. Stakeholder
price
Demand for sustainability standards by ... (7)
1. Investors
2. Corporate sector
3. Central Banks
4. Market regulators
5. Public policy makers
6. Audit firms
7. NGO's
What are the problems with current sustainability reporting according to Pucker? (6)
1. No mandatory standards / audits
2. Environmental goals aspirations, not targets
3. Opaque supply chains
4. Complexity of measurement
5. Reference points for ESG information
6. Inattention to developing countries
Which actors will propel the sustainable transformation? We have four categories of actors:
1. Global goals and principles
2. Reporting frameworks
3. ESG ratings and indices
4. Sustainability regulation
Which three forms of materiality belong to nested sustainability information?
1. Financial materiality
2. Investor materiality
3. Society materiality
What does nested sustainable information mean?
society materiality can impact the cash flows of the company and therefore impact the financial materiality
New role for sustainability – what are good sustainability standards?
1. Standards are developed in the public interest
2. Extensive consultation of all relevant stakeholders
3. Basis is an independent due process
4. Are mandatory
5. Public authorities can exercise oversight
6. Principle-based with consistent application, auditability and enforceability
The IFRS S2 Climate-related disclosures standard was developed in response to calls from users of general-purpose financial reporting for ...
more consistent, complete, comparable, and verifiable information, consistent metrics and standardize disclosures.
Why do we need this regulation which applies to large, listed companies and public interest companies (banks, insurance)?
1. It creates a frame of reference for investors and companies
2. It supports companies on their efforts to paln and finance their transition
3. It protects against greenwashing practices
4. It helps accelerate financing of those projects that are already sustainable and those needed in transition
EU Taxonomy for sustainable activities. 3 KPIs that are reported to be eligible and aligned:
1. Revenues
2. OPEX
3. CAPEX
Two objectives of IIRC reports:
1. Improving information to outside capital providers (long term investors)
2. Supporting integrated thinking in the company (connectivity, stakeholder engagement, materiality)
What are the channels through which integrated reporting affects firm value?
1. Capital Market Channel: relates to improved information for external investors and other providers of capital
2. Real effects chanel: this channel pertains to better internal decision-making within the firm