ESG reporting trends in Switzerland, the EU, and the world
Last year’s surge in mandatory ESG reporting requirements was notable for companies operating in the German speaking countries (Switzerland, Germany, Austria): consider the EU’s adoption of the Directive on Corporate Sustainability Reporting (CSRD) and Switzerland’s adoption of the Climate Ordinance. This overview discusses these new reporting requirements and wider trends in ESG reporting.
By Olivier Jäggi & Lana Ollier
originally published in the 22nd issue of “The Reporting Times”
May 2023
Climate disclosures become mainstream
Figure 1: Timeline ESG Reporting (Source: ECOFACT Policy Outlook)
In 2017, the Task Force on Climate-related Financial Disclosures (TCFD) published recommendations for climate-related financial disclosures. These recommendations, including guidance on how to implement them, are the foundation for climate reporting around the world.
Building on these recommendations, governments have introduced legislation that moves climate-related disclosures from the realm of “nice-to-have” to “must-have.” Currently, mandatory reporting mainly applies to large, listed companies; financial institutions; and other public-interest entities. However, the EU’s CSRD demands climate reporting from certain listed small- and medium-sized enterprises starting in 2028.
In Switzerland, large, listed companies publish their first comprehensive climate report in 2025, basing it on the TCFD recommendations, and as part of their non-financial report. However, reporting on environmental issues and specifically CO2 targets (but also social issues, staff issues, respect for human rights, and the fight against corruption) is already expected and the subject of the first mandatory non-financial report in 2024 (article 964 a ff. Swiss Code of Obligations).
The problem of interoperability
One of the bigger challenges in the Swiss context is that reporting obligations are less prescriptive: Switzerland gives companies options for how they can approach reporting. Other jurisdictions take a more prescriptive approach. Notably, the EU is working on the European Sustainability Reporting Standards (ESRS), which so far consist of twelve very prescriptive standards: five related to the “environment,” four to “social” issues, one to “governance,” and general disclosures and requirements for reporting under the CSRD. The Commission plans to adopt these standards by June 1, 2023.
Considering that differences in national approaches to sustainability reporting are readily apparent, there are questions about how to ensure interoperability between reporting standards issued in different jurisdictions. To address this problem, the IFRS Foundation’s International Sustainability Standards Board (ISSB) is developing a global baseline standard for reporting on sustainability topics. The first two standards on general sustainability disclosures and climate-related disclosures are expected to be finalized in June 2023.
The challenge of interoperability is magnified by standard-setters’ varying definitions of sustainability. Although an agreed-upon definition has yet to materialize, generally, sustainability reporting standards can be characterized by how broad their definition of sustainability is and by how they define materiality of ESG topics.
When it comes to defining sustainability, most standards separate the ESG realm into subtopics that must be reported on, indicating a wide-ranging approach to what is considered under the “sustainability” banner. For example, the EU has proposed ten topical standards in addition to general requirements and aims to finalize more sector-specific reporting requirements in June 2024. Other jurisdictions, like the UK and the United States adopt a much narrower interpretation of sustainability and distinctly focus on climate-related disclosure.
Divergent treatment of materiality also raises questions about the interoperability of standards (Figure 2). The ISSB frames its reporting from a predominantly financial-risk approach: meaning that only financial risks to a company are deemed material. At the other end of the spectrum is the EU, which generally requires companies to consider the internal risks and opportunities arising from social and environmental risks as well as the impacts of their activities on people and the environment (i.e. double materiality).
Further complicating the field is the impact approach taken by the Global Reporting Initiative (GRI). Positive news is emerging: standard setters are actively collaborating, and there is general ambition to ensure interoperability despite differences. It will be interesting to see how this problem is solved.
Figure 2: ESG reporting standards vary in the scope of topics covered and their approach to materiality. (Source: ECOFACT Policy Outlook)
In addition, the following trends are to be highlighted for 2023:
The year 2023 will see many companies prepare their first boarder ESG report and begin to gather data for their 2025 report on the 2024 fiscal year. Data availability will be a persistent problem for the foreseeable future, especially for Scope 3 emissions. Companies are advised to preemptively consider how they will address gaps in reported data and adapt their governance structure for gathering, validating, and reporting non-financial data.
In addition to data-availability concerns, we highlight the following additional trends for 2023:
Nature: Fueled by the work of the Taskforce on Nature-related Financial Disclosures, nature-related disclosures will see more attention. The ESRS developers are considering biodiversity-related disclosure, the GRI is updating its standard, and the CDP may expand its coverage of nature-related topics.
Just transition: Enabling a just transition that considers the social dimension is seen as important. The GRI will revise its climate-related standards to support a just transition for communities and workers. Also, the ISSB indicates it has prioritized work on human capital and human rights.
Credible transition: More societal attention to transition plans means more jurisdictions require them, such as the EU, Switzerland, and the UK. The Science Based Targets initiative newly requires companies to communicate transition targets within 24 months of joining the initiative.
Ensuring interoperability: Dissimilar national approaches to ESG reporting raises questions about how to ensure interoperability between reporting standards. Even though many standard setters and legislators are collaborating closely, differences will likely persist, particularly when it comes to approaching materiality.
Overall, ESG reporting will remain a very dynamic field, and requires reporting company’s continued attention in 2023 and beyond.
What’s important to know about ESG reporting?
Keep an eye on the ESRS: EU and non-EU companies with significant exposure to the EU must report under the CSRD. It is recommended to closely monitor the development of these standards.
GRI provides a solid base: If your company is reporting under the GRI Standards, you are well prepared for the imminent reporting obligations under the CSRD and the Swiss Code of Obligations. Unique specifications under each regulation should be observed.
Auditing: External auditing of non-financial reporting is becoming more common.
Olivier Jaeggi
is ECOFACT's Managing Director. Prior to founding ECOFACT in 1998, he graduated from the ETH Zurich and worked at UBS.
Lana Ollier
is the Co-Head of ECOFACT’s regulatory advisory team. Prior to joining ECOFACT, Lana wrote her doctoral thesis at the ETH Zurich and the Research Institute for Sustainability Helmholtz Centre Potsdam and worked as an advisor for the German Environment Ministry's International Climate Initiative.
The Reporting Times
The 22nd issue of our flagship publication The Reporting Times on the main topic «The Paradox of Transparency» was published on May 9, 2023. Read exciting expert articles and interviews!
Finde more information on the 22nd issue here.