2022 Will Prove a Pivotal Year for ESG Reporting

ESG reporting has historically been voluntary, ad-hoc and focused on communicating aspirations while providing some data to support or help tell the story around those aspirations. Company-wide data collection, done in good faith, would have been completed with the systems and resources in place, but without the concerns relating to legal or regulatory enforcement.

2022 appears to be the year where that will change, with certain ESG reporting being made mandatory per regulations. The process has begun for the adoption of specific and auditable sustainability standards. During 2022, affected companies will need to take immediate steps to ensure required information will be timely, accurate and readily available.

Here are significant ESG developments expected to occur in 2022:

SEC-Required Reporting on ESG

Throughout early 2021, the U.S. Securities and Exchange Commission proposed rules for mandatory reporting relating to several key areas of ESG, including climate change, human capital management, board diversity and cybersecurity risk governance.

However, these proposals resulted in a bit of a firestorm, with important issues being intensely debated regarding the SEC’s jurisdiction for such mandates and how the concept of materiality would be treated. The outcome of these debates and final decisions made, which could include litigation, should most definitely have a material impact on any future SEC ESG-related disclosure requirements and beyond.

Despite this ongoing spirited debate, it is expected that in early 2022, the SEC will issue a proposed climate change disclosure rule for public comment with required reporting likely to begin in calendar year 2023. However, during 2022, actions would have to be taken by all affected organizations to ensure processes and systems are in place to collect accurate and verifiable data.

EU ESG Required Reporting

Also in April 2021, the European Commission (EC) adopted a proposal for a corporate sustainability reporting directive (CSRD) to include specific European sustainability reporting standards (ESRS). These standards, once adopted by member countries, could be applicable to all “undertakings” within the EU, which are broadly defined as any entity engaged in an economic activity consisting of goods or services in a given market.

The update report issued Nov. 16 included an ambitious timeline, with the first set of standards to be adopted by way of delegate act in October 2022 (initially presented to the EC in June), with 2023 being the first required reporting year. A second set of disclosures, including sector/industry specific ones, are slated for proposal and adoption in 2023.

Of note, in July 2021, it was announced that the Global Reporting Initiative (GRI), one of the leading global ESG standard organizations, was working in cooperation with the EU on the initial stages of the standards being developed by the EU.

Further GRI sustainability standards are focused on material impact to others, while the other leading ESG standard-setting organization, the Sustainability Accounting Standards Board (SASB), focuses on materiality and value to the entity. In November 2021, a comprehensive and complex architecture of the future standards, referred to as “the rules of three,” was published in an update report.

IFRS Sustainability Standards

In early November 2021, during the COP26 climate conference, the International Financial Reporting Standards Foundation (IFRS) announced the creation of the International Sustainability Standards Board (ISSB) that was tasked with developing mandatory corporate ESG disclosures.

With IFRS accounting standards adopted by more 140 countries, new ESG reporting standards, some of which will likely be communicated in 2022, could have an enormous impact on companies around the globe. With accounting standards primarily focused on the material impact to the legal entity in terms of required disclosures, it makes sense that the IRFS and ISSB will be developing standards consistent with existing SASB standards.

Current SASB guidelines include 77 industry-specific standards with numerous reporting elements under each. It’s possible the ISSB sustainability standards expected in 2022 will involve a significant amount of sustainability-related disclosure requirements each with the mandate of collecting company-wide information, probably on a quarterly basis, with proper controls in place to ensure the accuracy of such data.

Other ESG Developments Expected in 2022

Other important ESG-related changes already announced for 2022 include the transition to the new GRI universal and sector standards, the Value Reporting Foundation, created through a recent merger of SASB and International Integrated Reporting Council (IIRC), to combine with the IFRS Foundation, and a new government-led and Organisation for Economic Co-operation and Development (OECD)-assisted ESG certification initiative for large infrastructure projects, the Blue Dot Network, being rolled out.

In addition, on December 15th, the Singapore stock exchange (SGX) announced new ESG-related requirements including board diversity disclosures and training effective January 1, 2022, and mandatory climate reporting requirements for certain industries effective January 1, 2023.

There is significant effort being expended on reporting frameworks with definitive changes scheduled for 2022. We are starting to see convergence and consolidation of standards, but at the same time, major organizations and government agencies are pursuing their own agendas independently.

It remains to be seen what the ultimate regulatory framework and reporting requirements will be or whether there will be more than one framework companies will adhere to. However, what is clear is that companies around the world must stay closely abreast of these important 2022 ESG reporting developments and early as possible, take thoughtful steps to be in the best position to respond in a well thought-out and organized manner. Understanding and preparation are always key.