Sustainability disclosures – definitely no longer a “nice to have”
In the 2020s, sustainability disclosures have become a key focus of regulators globally as they intend to create better comparable data and information on the sustainability performance of companies. This will help the assessments by investors and other stakeholders, though the continued divergence of regulations will remain a hindrance to full comparability.
By Christian Leitz
A (very) brief sustainability disclosure journey
2008 was a pivotal moment in the evolution of UBS’s sustainability disclosures. For that financial year, we applied – for the first time – a reporting framework (the Global Reporting Initiative) to our sustainability disclosures and had them audited by an external, independent party. On our way to today’s sustainability disclosures, 2017 proved to be a next major milestone: we commenced applying the recommendations of the then Task Force on Climate-related Disclosures (the TCFD, now incorporated into the ISSB/International Sustainability Standards Board) and, for the same financial year, were first required to apply the EU’s Non-Financial Reporting Directive (the NFRD) to our disclosures. The combination was telling for the 2010s in that much of the sustainability disclosures space was still voluntary. Yet, regulatory requirements started to come to the fore.
In the 2020s, the landscape of sustainability reporting requirements has rapidly evolved into what is now a key suite of content in corporate disclosures, including the EU’s Corporate Sustainability Reporting Directive (the CSRD). The CSRD with its European Sustainability Reporting Standards (the ESRS) is a good indicator of a general move in the direction of standardized reporting frameworks, as is the ISSB. At the same time, both are indicators of the continued (regional) divergence of the sustainability disclosures (regulatory) landscape. Not surprisingly, this gives rise to challenges and raises questions amongst stakeholders on the value of this enhanced, but divergent, granularity in disclosures. Still, while the waters have been further muddied by geopolitical developments, stakeholder appetite for sustainability-related data to support decisionmaking is expected to remain of high importance.
Cui bono?
Clearly, the content of disclosures has both evolved and grown – and it appears to continue to do so, despite recent announcements such as the EU’s Omnibus package of measures. However, the question that some may indeed ask is cui bono? – to whom or what is this of benefit?
“Clear, transparent and thorough sustainability reporting builds trust amongst stakeholders.”
Recent disclosure developments are in large part due to actions by governments and regulators wanting to, in the words of the EU, help “investors, civil society organizations, consumers and other stakeholders to evaluate the sustainability performance of companies”. So, it is, in essence, about better transparency to allow better assessments of companies’ sustainability performance – to the benefit of a range of stakeholders. And transparency is indeed critical to stakeholders, including also to those not explicitly included in the quote above. Take employees, who frequently take a keen interest in the environmental and/or societal performance of the company they work for.
Meanwhile for investors, while a company’s financial returns are top of mind, so-called non-financial matters (to employ the language of both the Swiss Code of Obligations Art. 964 and the aforementioned NFRD) matter. Better availability of standardized and measurable information, as well as understanding how a company delivers on its stated ambitions, is the central prerequisite for successfully and effectively implementing sustainability criteria in the investment process.
Investors also often draw part of their investment decision-making process from ESG ratings, e.g., MSCI ESG or Sustainalytics, to name a few. And here transparency is equally the central factor, as ratings do not reflect mere declarations of intent, but companies are evaluated on the basis of verifiable and published sustainability facts.
Rating agencies in themselves represent a stakeholder group which relies on detailed public disclosures from corporates across a broad swath of topics – from statistics on hiring and identification of sustainable financing opportunities to quantification of climate-related risks – in order to produce scores using their own proprietary methodologies and approaches. They can also move faster than regulation, amending annual questionnaires regularly, and often include detailed asks on items that are also reflected in regulatory agendas.
Other societal participants like non-governmental organizations (NGOs) also play a role in the reporting conversation as their activities draw attention to relevant issues and their representatives may often engage with the regulators mentioned earlier, exerting their influence on a national and potentially global level.
As the old adage goes...
“... you can only manage what you can measure.” And even though we’ve all heard it, it does not make it any less true. It is in the interest of all stakeholder groups that companies can demonstrate progress toward a solid management of sustainability topics through clear, and wherever possible, quantified information. To begin, sustainability reporting itself must follow a clear process starting with a materiality assessment of topics, which supports the measurement and management of impacts and issues. Making progress on the management of non-financial risks and opportunities is thus best possible, with comparable data points – something which corporate disclosure regulation aims to enhance (though note my earlier comment about the ongoing challenges due to regulatory divergence). In turn, inaccurate or unreliable reporting can be an issue, and one which is likely to be further exacerbated as AI use cases are applied in corporate environments.
The way forward
Effective sustainability reporting that is clear, transparent and thorough can help drive value creation by building trust amongst stakeholders. Transparency comes with an emphasis on materiality, standardizatio and measurability, and including also clarity on key factors that influenced the disclosures.
To give an example, UBS – in its 2024 sustainability disclosures – explains its updated climate targets three-fold, i.e., aligning with upcoming regulatory requirements and market standards; ongoing macrodevelopments in public policy and climate science projections; and a review of the combined organization, reflecting the current state of planning within our firm, following the acquisition and ongoing integration of Credit Suisse by UBS. The latter demonstrates the fact that exceptional developments are naturally reflected in the disclosures.
So, where to from here? Clearly, the 2020s have seen a firm embedding of sustainability disclosures in regulation. For now, such sustainability disclosure regulations will, to name a few key points, continue to:
I. grow, with e.g., various jurisdictions having already announced the adoption or use of the ISSB Standards (and with others currently consulting on it);
II. lead to more divergence of the regulatory regimes, including also on such important matters as materiality (single “vs” double);
III. increase the number of companies required to disclose; and
IV. result in a greater availability of (material) corporate sustainability data (though the jury is out on whether, in light of ii) above, e.g., comparability will also improve) – and thus improve conversations with shareholders and other stakeholders.
The first half of the 2020s has seen a heightened focus on regulating sustainability disclosures. This is expected to continue in the second half of the decade. While the underlying objective of achieving better transparency and better comparability for the benefit of investors and other stakeholders is valuable, both the growing number of requirements and continued regulatory divergence have the potential of limiting the actual benefits.
Further Information
UBS Sustainability Reporting: www.ubs.com/sustainability-reporting
Dr. Christian Leitz
has been with UBS since 2003, focusing on corporate responsibility, sustainability and corporate history. In his role, he oversees the sustainability disclosures of the firm and key stakeholder engagement activities. He is also secretary to one of the five UBS Group BoD committees.
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