The COP27 UN Climate Change Conference was held in Egypt this November. It underlined the actions required to meet environmental targets – including reporting – with a focus on implementing the Paris Climate Accords.
According to our 2022 International Business Report (IBR), although mid-market enterprises have realized the importance of addressing the challenges of climate change for their long-term development, they are seriously insufficient to prepare the mandatory scope 3 greenhouse gas report.
“Everyone knows that addressing climate change and building a more sustainable future for all is the most serious challenge for a generation,” says Peter Bodin, CEO of Grant Thornton International Ltd. “Unless we take emissions reporting as seriously as the damage emissions are causing, we will not make meaningful progress in tackling climate change. That is why we are calling for governments and regulators to accelerate the publication and adoption of consistent sustainability reporting standards.”
Reporting as the catalyst for ESG action
Reporting is the key to understanding a business’s ESG position and tracking ESG performance throughout its supply chain. For SMEs, most reporting is still voluntary – but with the upcoming implementation of the ISSB global standards (see the ESG reporting frameworks timeline), reporting of Scope 3 GHG emissions will become mandatory in early 2023.
For GHG emissions reporting, Scope 1 covers direct emissions from a company; Scope 2 covers indirect emissions from electricity purchased and used; and Scope 3 covers all other indirect emissions from the value chain. Among our IBR respondents, 67% report on Scope 1 and 2 emissions, but only 14% are already reporting on Scope 3. That 86% of the mid-market is not reporting at this level highlights a worrying lack of comprehension of the incoming ISSB regulations.
“The mid-market, if not already reporting, is going to have to start reporting in accordance with the ISSB standards,” says Sarah Carroll, director of sustainability reporting at Grant Thornton International. “Companies need to set their ESG strategy, which means investing in resources. Now is the time to be looking at where to start, and where to focus their resources.”
"Different countries may have different paths to ESG practice, but the overall direction is the same," says Li Huiqi, CEO of Grant Thornton China. "In China, since the government proposed the 'dual carbon target', the formulation of ESG information disclosure regulations has embarked on the fast track. The Shanghai Stock Exchange, the State-owned Assets Supervision and Administration Commission of the State Council and the Securities Regulatory Commission have successively issued disclosure requirements for ESG reports this year, making ESG reports a must. Under this irreversible trend, many listed companies in mainland China will issue ESG reports this year. It will also provide more data support for the country to formulate relevant policies. "
The mid-market’s ESG reporting journey
As part of our 2022 International Business Report (IBR), Grant Thornton asked around 5,000 mid-market business leaders in 28 countries about their current GHG emissions reporting. Of those reporting or planning to, the main benefits cited were contributing to the goal of net-zero (29%); increasing competitive advantage (29%); making informed decisions about the sustainability of the business (29%); and boosting readiness to deal with climate-related risks (27%).
The mid-market’s preparations for the incoming ISSB standards include following developments and planning their approach (36%); looking at internal reporting processes in preparation for the new standards (36%); and actively trialling new reporting processes before new standards become mandatory (34%).
Despite the clear benefits, the early adoption of ESG reporting is restricted by a lack of guidance on what data needs to be gathered and how it should be reported.
Three major difficulties arise. First is the limited or non-existent experience of first-time reporters when it comes to analysing and reporting accurately on the climate-change scenario affecting their organisations. This not only generates risk; it drives the need for new or realigned resource and expertise, either within the business or externally.
Second is access to the relevant data – particularly difficult for smaller businesses that haven’t historically had the research capabilities to crunch the relevant ESG-related information.
Third is the issue of governance. Does the board have the processes and internal controls in place to keep abreast of climate-related matters? Does it take climate issues into account when setting strategy? And how does it measure progress? The same questions apply to management.
Where should you start on ESG Reporting?
The actionable guide below illustrates how businesses can address these challenges.
1. Understand the timeframe and complexity
For example, regulation around climate reporting, which typically encompasses emissions reporting, is coming in the UK, EU, the US and many other parts of the world. But developing and deploying an effective greenhouse gas (GHG) management programme is a significant undertaking.
Companies cannot afford to underestimate the time, effort and complexity involved in embedding climate issues at the heart of the business. This is especially relevant for first-time reporters. Organisations need to understand from a long way out who’s going to be responsible for driving the project forward, and ensure they have the knowledge and resources they need.
2. Build a workable roadmap
The next step in ensuring the success of new reporting processes is developing the right roadmap to get the organisation to where it needs to be within the required timescale. Too often, companies set and declare ambitious targets while providing no insight into how they are going to achieve them.
Look at the requirements and what you’d need to have in place if you were to report today. What would you have to include, and how does that compare to best practice, to your peers, and to others in your industry? Consider what you want your report to say, work back from that, and prioritise any gaps that emerge during the process.
3. Create an effective and efficient internal reporting framework
Reliable climate-related metrics start with a solid foundation. Documenting the rationale for key decisions through each step of the process will go a long way towards supporting future reporting and assurance requirements, making the required processes easier in the longer term for everyone involved.
4. Define KPIs and track performance
Companies must establish key performance indicators (KPIs) which address the climate-related risks and opportunities it faces and track performance against these over time. For businesses that currently lack the necessary resource to gather and process this data, plans will need to be put in place to ensure this can be done effectively.
As the world moves to aggressively reduce GHG emissions – targeting net-zero by 2050 – it is important to understand current baseline emissions; identify the most effective and efficient ways to abate those emissions, and in the short term offset residual emissions; and make sure those emission-reduction strategies are operational.
5. Understand the financial reporting implications and disclosure challenges
It’s impossible to underemphasise the complexities involved in the interplay between TCFD disclosures and other elements within corporate reporting. The discussions and disclosures companies might include in the TCFD section will have financial reporting implications.
For example, a company might be expecting to exit certain industries or to see changes in consumer behaviour. They will need to consider what this might mean for their forecasting or how they present the business review. They will also need to look at how these factors play into the principal risks they’ve identified, and how this ties into their governance disclosures. And how this all connects with their financial information. Asking these questions is essential for a business at the start of its reporting journey.
6. Gain visibility over your value chain and Scope 3 emissions
Leading companies are increasingly requiring net-zero commitments throughout their value chains, working closely with suppliers and customers as they leverage their ability to meet their Scope 3 emissions targets – setting a precedent that will soon be expected of all businesses.
Effectively tracking Scope 3 emissions will require businesses to ensure they have access to the relevant data and the talent needed to analyse it.
7. Put the appropriate governance structures in place
Companies need to implement the governance structures and procedures required to ensure compliance at both board and management level. While this is becoming easier as leaders embrace their climate responsibilities, it is an important focus area for those companies that have not yet instigated change.
From our global research, we know that integrating ESG thinking at all levels of the organisation is considered the most important factor for boosting the credibility of sustainability reporting, highlighted by 35% of mid-market business leaders.[ii]
The COP27 UN Climate Change Conference in Egypt this November will underline the actions required to meet environmental targets – including reporting – with a focus on implementing the Paris Climate Accords. The global community needs to work together to achieve the Paris goals. The mid-market is an important stakeholder in that community. To achieve a net-zero future, they need to look at reducing their emissions, how they’re going to drive the green technology revolution, and how to access climate finance to scale up adaptation.
