The Race Begins 1/1/24: Get Ready for the New Age of Sustainability Risk
In 2024, the landscape of sustainability risk disclosures is set for a significant transformation. We are witnessing the simultaneous implementation of the International Financial Reporting Standards (IFRS) Foundation's takeover of the Task Force on Climate-related Financial Disclosures (TCFD) responsibilities, the recent launch of IFRS S1 and S2, and the adoption of the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD). The United States Securities and Exchange Commission (US SEC) is also gradually adjusting its stance toward this trend with its climate-related disclosure rules. As the founder and CEO of Wheelhouse Advisors, I am deeply involved in understanding these developments and their implications for businesses and risk management professionals worldwide.
A Shift in Responsibility: TCFD to IFRS
The IFRS Foundation’s takeover of the TCFD responsibilities from January 1, 2024, heralds an evolution in the global push for standardized, transparent, and high-quality sustainability-related disclosures. The launch of the ISSB Standards, IFRS S1 and S2 encapsulates the work of the TCFD by adopting its recommendations and establishing a new universal baseline for sustainability-related disclosures.
CSRD and EFRAG ESRS: Europe’s Green Push
Simultaneously, the EU is enforcing its CSRD, impacting roughly 50,000 companies. According to a recent article in The Wall Street Journal, the EU sustainability rules are expected to affect over 10,000 foreign companies operating in Europe. The CSRD, a vital component of the European Green Deal, seeks to enhance transparency and reliability around companies’ impacts on sustainability matters. The CSRD necessitates companies to align their disclosures with the European Sustainability Reporting Standards (ESRS), following a “double materiality” approach. It’s worth noting that the timeline for implementing IFRS's ISSB standards and TCFD’s shift aligns with the CSRDs. The first reports under these frameworks are expected for financial years beginning on or after January 1, 2024.
January 1, 2024: A Crucial Timeline
It’s worth noting that the timeline for implementing IFRS's ISSB standards and TCFD’s shift aligns with the CSRD and ESRS reporting requirements becoming effective. The first reports under these frameworks are expected for financial years beginning on or after January 1, 2024.
The Interplay between Different Frameworks
Understanding the interplay and distinction between different reporting frameworks is crucial. Unlike the TCFD’s climate-related focus, the ESRS covers a broader range of sustainability topics. While CSRD and ESRS are expected to work compatibly with other sustainability reporting frameworks like IFRS S1 and S2, they may demand additional disclosures.
US SEC's Stepped-Up Activity
The US SEC has recently been signaling an increased focus on climate-related disclosures to align more closely with global standards. The SEC is anticipated to advance comprehensive requirements akin to the IFRS and TCFD guidance, promoting transparency in the US market and facilitating cross-border comparability. However, the SEC's path has been marked with delays and controversies, pushing back its climate change disclosure rulemaking several times, most recently in June 2023. With about 15,000 comment letters submitted and needing to revise parts of the proposal deemed burdensome, the SEC expects to finalize climate rules by October 2023. Companies must remain vigilant for new rules requiring increased detail in climate-related financial disclosures.
The Assurance Requirement
The CSRD has introduced a requirement for independent assurance of reported sustainability information, aligning it with financial data. Companies must secure limited assurance of compliance with sustainability reporting standards, materiality assessment processes, and specific reported indicators. The assurance report must be publicly disclosed alongside the annual financial report.
Meeting these elevated transparency demands may require in-depth internal audits, improvements in data gathering, and investments in new technologies to monitor and manage environmental impacts. While this could lead to increased compliance costs in the short term, it also presents a chance for companies to demonstrate their commitment to sustainability and climate change mitigation to their stakeholders, which include investors, employees, and customers.
Preparation is Key
These imminent changes signify a new era in sustainability reporting and risk management. Companies must act promptly to navigate these requirements, particularly those who must report for financial years starting on or after January 1, 2024. This may involve reassessing sustainability topics, evaluating data processes and controls, and conducting gap analyses or assurance readiness assessments.
As we navigate this evolving landscape, businesses and risk management professionals must stay informed and adapt quickly. These changes will foster greater transparency, accountability, and progress toward global sustainability goals. Although challenging, it’s an exciting journey ahead, and we at Wheelhouse Advisors are eager to guide you through it. For more insights, visit www.wheelhouseadvisors.com.
