How financial institutions can move sustainability reporting to real-world application

Mon 11 Dec 2023

The increased demand for sustainable finance shows that awareness of environmental, social and governance (ESG) issues is generally high among financial institutions. Indeed, for many of the larger players subject to the EU’s Non-Financial Reporting Directive (NFRD), there has been a requirement to include ESG information in annual reports for some time. Others have incorporated ESG information based on reporting standards developed by the Sustainability Accounting Standard Boards (SASB). What is new is the move to mandatory sustainability reporting. 

While jurisdictions worldwide are looking at how to formally incorporate ESG issues as part of financial reporting, the EU is at the forefront with the introduction of the Corporate Sustainability Reporting Directive (CSRD) and the Sustainability Reporting Standards (ESRS). With the first CSRD-compliant annual report for large firms in the EU to be published in 2025, the main priority is understandably navigating the complexities of more stringent reporting requirements and meeting timescales. 

Even for financial firms already reporting on ESG issues, standardised sets of disclosures included in mandatory regulations such as CSRD and ESRS now demand a fresh approach. For those firms at the start or initial phase of their sustainability journey, the regulations present a new set of challenges they must now prepare to navigate on an international scale. 

Yet it’s often focusing on the details of challenges that prevent firms from seeing the bigger picture and from having a more positive approach to sustainability that regulators are trying to encourage. As mandatory reporting requirements become more familiar, the next step is understanding the regulatory direction underpinning the pragmatic approach needed to move sustainability reporting from an entity-focused reporting exercise to a real-world application. 

Consider what sustainability disclosures say about you

Financial institutions should take stock of how investors and stakeholders understand sustainability disclosures. Are they meaningful in a way that helps relevant stakeholders to understand the organisation’s sustainability goals? Are disclosures well-articulated and aligned with the firm’s stated investment strategy? By focusing on fulfilling all reporting requirements, firms risk ending up with a lot of detailed information that is unhelpful to those reading the report. From a regulator’s viewpoint, including information or data not supported by a clear strategy or explanation can be a greenwashing red flag.  Regulators understand that, as a relatively new discipline, sourcing sustainability data presents a huge challenge. If data or proxy data are unavailable, explaining why and how you plan to rectify gaps in the future says more about your willingness to improve than simply ticking a box. A more considered approach to reporting on disclosures relevant to the organisation’s ethos and strategy helps give a more precise understanding to report readers of your sustainability ambitions.

From an entity perspective, setting targets to decarbonise operations says little about your sustainable ambitions without information on tangible actions to support those targets. Details on the operational and financial resources allocated to meeting those actions and being open on progress show a clear willingness to improve. Having a credible transition plan is paramount as it reduces uncertainty and outlines what everyone is expected to accomplish.

Don’t let a lack of harmonisation sidetrack reporting efforts

While the global harmonisation of sustainability reporting remains an ambition, we are not there yet. For entities based or operating in the EU, the CSRD and ESRS offer standardised sets of sustainability reporting disclosures and guidelines to follow. But for financial institutions operating across a wide range of markets with different sustainability regulations in place, it’s essential to understand why those regulations are in force and how they impact your reporting requirements. 

In this respect, taxonomies can provide much needed help. As a classification system that defines criteria for economic activities aligned to net zero, they give legitimacy to actions. However, with a growing number of taxonomies now in place around the world, it’s crucial to understand how each one impacts financial decisions for disclosure purposes. Each economy is unique and taxonomies reflect this. What counts as brown in developed countries will generally not be the case in emerging or smaller economies. What’s important is not to get bogged down with international comparisons but to make sure that your disclosures are harmonised in a way that investors, stakeholders and regulators clearly understand how different shades of brown and green are making an impact.

Does reporting show how you are helping the transition to a sustainable economy?

Sustainability reporting should be less about where you are now and more about the transition from point A to point B. Importantly, for financial services firms, regulators want to understand how your sustainable finance actions are helping the transition to a more sustainable global economy. For example, a finance project in Africa, where the transition to clean energy may be behind the curve, will potentially result in different sustainability outcomes than a similar project in Europe. 

Equally, it’s important to understand that the regulators are not looking for what’s good, bad, right or wrong. They want to see information that shows financial decisions are improving the transition to a more sustainable economy, even from a low base. It’s about recognising your starting point and how your actions are helping move the sustainability dial. Each reporting journey is unique and should be reflected in the type of disclosures made.

Using trust and assurance to achieve a competitive advantage

While the assurance of sustainability reporting will only be mandatory for large firms initially, eventually all firms will be subject to assurance. Assurance is an important step in providing credibility and trust in the information reported. However, it should not result in removing the value and purpose sustainability reporting relies on by reverting to a pure reporting mindset. By reflecting and embedding ESG values into disclosures, understanding the impact of different jurisdictional regulations on reporting and being clear on your starting point in transitioning to a more sustainable economy, organisations can improve confidence in making more meaningful statements and disclosures.

Support in navigating a broader range of sustainability challenges

As the gateway to sustainable finance, financial institutions are uniquely positioned to impact global sustainability goals and ambitions positively. However, there is little doubt that significant challenges exist in navigating mandatory sustainability reporting requirements. Not least, the make-up and broad diversity of the financial sector make it more challenging to capture disclosures, particularly in the Scope 3 category that includes global investments and finance projects.

Working with trusted partners can ease the process. To be effective, support needs to have regulatory expertise and auditing and assurance capabilities at a global level. The ability to guide financial institutions to capture strategic vision on sustainability ambitions is also increasingly important.

At Mazars we recognise that there is no one size fits all when it comes to sustainability reporting. As an integrated international partnership, Mazars can help navigate a broader range of sustainability challenges unique to financial institutions and give higher levels of comfort and credibility in meeting reporting obligations. Our guidance and support includes:

• The ability to help clients formulate disclosures whereby the sustainable objectives and strategy are clearly represented and understood in reports.

• Specific support teams comprising sustainability specialists, financial and non-financial auditing experts, and former regulators to translate public policy expectations.

• International experts can alert and report on international sustainability standards as they are released. Operating in over 95 countries and territories around the world, we can draw on the expertise of more than 47,000 professionals.

• The ability to apply an auditing mindset to check methodologies and assumptions that underpin disclosures and improve credibility.

• Insights into a different approach to capturing sustainable elements of funds.

• Help in navigating data challenges that best match your sustainable strategy.

• The confidence to step in at any stage of your sustainability journey and add value.

In the sometimes overcrowded world of sustainability requirements, support in navigating a broader range of sustainability challenges is more important than ever.

Finally, as regulations evolve, financial institutions that take the next step and translate the true spirit of sustainability into the real-world application of reporting will be in a prime position to gain the trust of stakeholders and achieve a competitive advantage.