Sustainability accounting is about capturing meaningful non-financial information for both internal decision-making and external reporting. Reliable and comparable data is the basis for accountability and it is fundamental to align the sustainability accounting with established frameworks and standards. It is important to follow reporting principles and conceptual foundations to build trust and comparability over time and within the industry.

Sustainability reporting is moving from a fragmented landscape of voluntary frameworks and standards (GRI, SASB, TCFD, CDP, IR, etc.) to mandatory reporting enforceable by law in the respective jurisdictions. To understand the current evolution and the role of the voluntary reporting frameworks in the emerging mandatory reporting landscape, we start with an overview of the most commonly used frameworks. For reference:

• GRI (Global Reporting Initiative) is one of the most applied and holistic ESG reporting frameworks. GRI provides good guidance on how to consider stakeholders and identify materiality topics (GRI 2: General Disclosures 2021, Section 5 - Stakeholder Engagement).
• SASB (Sustainability Accounting Standards Board) is now integrated under the International Sustainability Standards Board (ISSB). Their standards are also useful to start with, as they provide specific materiality maps by industry sector. Find your industry here.
• TCFD (Task Force on Climate-related Financial Disclosures) is now integrated under the International Sustainability Standards Board (ISSB). TCFD focuses on environmental topics with a financial materiality perspective. Their framework has been widely adopted in many jurisdictions and is based on 4 main pillars 1) Governance 2) Strategy 3) Risk Management 4) Metrics and Targets.

As sustainability reporting becomes mandatory in many parts of the world, preparing for compliance is critical for listed companies and SMEs alike as the latter are part of the scope 3 emissions of listed companies. Risks and opportunities identified by listed companies in relation to their value chain partners will need to be addressed.  

The new regulations outlined below build on the voluntary frameworks previously outlined and will be implemented with local adaptations in terms of effective dates, reporting relief, third party assurance requirements etc.

INTERNATIONAL: The International Sustainability Standards Board (ISSB) aims to meet investors' need for reliable and comparable information on financial materiality. It was established by International Financial Reporting Standards (IFRS) 2021, which creates a globally binding baseline that integrates non-financial information into financial reporting and standardises sustainability information. They published their sustainability standards IFRS S1 - General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures in July 2023. Many jurisdictions around the world have already committed to aligning their reporting requirements for listed companies and large private companies. Other standards are in development.

SINGAPORE: The Monetary Authority of Singapore (MAS), ACRA and SGx have announced that they will align with IFRS S1 and S2 for data, definitions and disclosures. At the beginning of 2024, the Singapore Exchange metrics consist of 27 core sustainability metrics based on GRI and TCFD, which listed companies are expected to report on a comply-or-explain basis. The communicated effective date for listed companies is FY2025 and for large private companies with a turnover > SGD1 billion, FY2027.

EUROPEAN UNION: The Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose their material impacts, risks and opportunities in relation to certain ESG issues. EFRAG was appointed as a technical advisor to the European Commission in developing the European Sustainability Reporting Standards (ESRS), which outline the reporting requirements in 12 standards. The standards cover 'double materiality' and draw heavily on the principles and framework of the Global Reporting Initiative (GRI). For effective dates and applicability thresholds, please consult the European Commission.

UNITED STATES: The US Security and Exchange Commission develops sustainability reporting requirements similar to ISSB. In the State of California, SB-253—Climate Corporate Data Accountability Act and SB-261—Greenhouse Gases: Climate-Related Financial Risk, will establish the first industry-agnostic US regulations requiring the corporate reporting of greenhouse gas (GHG) emissions and climate risk.

Materiality assessment is the basis for the company's sustainability strategy. A solid materiality analysis will help you understand the importance of different sustainability issues in your business.

The purpose of the exercise is to include the most relevant ESG (environmental, social and governance) aspects of your business. You may choose to start with a purely environmental materiality assessment, but social aspects related to employees, human rights, and community relations should not be overlooked. Some industries are characterised by strong governance (e.g. anti-corruption, anti-bribery, data protection, etc.), which should also be covered.

The materiality assessment is commonly visualised in a materiality matrix, which shows the importance of sustainability impacts to your business (profit) on one axis and the importance of your business impacts to stakeholders (people & planet) on the other. Here are some examples of materiality matrices.

• ‍Approach the analysis with an open mind:

- FINANCIAL MATERIALITY (OUTSIDE IN) - Identify topics that will impact your business' ability to create value over time, which may depend on natural resources, a reliable supply chain or other issues relevant to the industry, region, and business context.

- IMPACT MATERIALITY (INSIDE OUT) -  Consider the impact that your business activities have on the environment and society, and their importance to your stakeholders.

• Identify best practices:

Understand from reporting companies with similar activities what is most material in your industry, and consider SASB's recommended topics for your industry.

• Start small:

Not all topics can be covered when you're first beginning your sustainability journey. With the right focus and simplified methodology, you can actually capture the small essence of the issues that are most material to the business. However, it is important to document the non-prioritised issues and the reasons for not including them, to justify your decisions and use them for future reassessment. SMEs need to narrow the scope and prioritise a smaller set of materiality issues in order to measure, manage and communicate their sustainability efforts.

Suppose you are a subsidiary of a multinational company. In this case, you should understand the group's sustainability strategy and objectives, and clarify the scope of influence and control that corresponds to your region.

The first step is to identify the key stakeholders that have the most direct relationship with your business activities. Common stakeholder categories for organisations include business partners, customers, shareholders and other investors, policy makers, governments, suppliers, employees and trade unions, local communities and NGOs.

Engage with them to find out what is important to them and to understand their expectations. This can be done through structured interviews. For companies with limited resources, focus on insightful discussions with a few key stakeholders in different categories, rather than questionnaires and superficial input.

Sustainability risk arises from an uncertain social or environmental event or condition that, if it occurs, could have a material adverse effect on the company. At the same time, these changes and uncertainties can create opportunities. Risks and opportunities create the pressure points that prompt boards/management teams to develop and invest in sustainability strategies. Adopting a sustainable approach not only demonstrates resilience and long-term value creation for the business, but is also a source of competitive advantage.

Failure to address climate change and its consequences, including extreme weather events, environmental damage and loss of biodiversity, is widely recognised as the most urgent potential systemic risk, leading to an unprecedented focus by companies and investors.

There are three main climate-related risks to business:

• ‍Physical risks are the risks of losses due to environmental events such as floods or storms (which can be acute or chronic).
• Transitional risks (transition to a low-carbon economy) arise from changes in policy and new technologies, such as the growth of renewable energy.
• Litigation risks, where those affected by climate change seek compensation from those responsible.

There are also climate-related business opportunities in resource efficiency, energy sources, products and services, markets and resilience.

Follow these three initial steps to identify the specific and material risks/opportunities for your business:

STEP 1: Create a sustainability profile

‍- From the list of industry-specific sustainability issues, identify the list of risks that have a material impact on the business and specify the list of opportunities that have the potential to capture the market and/or create value for the business.

- Do the same with the list of stakeholder engagement and analysis topics derived from your materiality assessment.

STEP 2: Characterise these issues based on internal operations, and external operating environment.

- Internal operations: a) key revenue streams and b) key inputs to value creation.

- External operating environment: a) Geographical footprint b) Business climate c) Regulatory climate d) Political climate e) Economic climate

STEP 3: Define time horizons

The timing of the risks and opportunities may exceed the typical short-term horizon although preparation for these risks takes time and should start now. Therefore companies should assess the risks and opportunities in short-, medium- and long term, as relevant.

Many organisations are already familiar with the Enterprise Risk Management (ERM) frameworks, like the COSO or ISO 31000 (links provided below). They identify new risks and opportunities and manage them through the Risk Register. To assess the risks and opportunities, they typically use the Risk Matrix Approach, whereby the likelihood of occurrence and intensity (severity) of financial impact within a given time horizon (usually short-term) are assessed. Following the generic risk formula: risk = likelihood x intensity (severity), hotspots can be identified and prioritised for a risk response plan.

Because of the uncertainty around the exact timing and severity of climate change impacts, and the challenges and complexities associated with the transition to a low-carbon economy, the Task force on Climate-related Financial Disclosure (TCFD) recommends the use of forward-looking climate scenario analysis. Companies can use some of the pre-defined scenarios, like IPCC's RCPs and SSPs for physical risks, or IEA's scenarios for transition risks.

A response strategy is a mapping of actions to priority topics.  

Threat response actions can be:

a) Avoid the risk

b) Mitigate the risk

c) Transfer the risk

d) Accept a risk that occurs periodically

e) Escalate the risk.

Opportunity response actions can be:

a) Exploit the opportunity

b) Enhance the opportunity

c) Share the opportunity

d) Accept the opportunity

Organisations use their Enterprise Risk Management structures and processes to identify, assess, manage, monitor and communicate risks. Climate-related risks should be integrated into the traditional ERM function/tool.