Non-financial reporting: standard setters are moving up a gear

Harmonisation is presenting challenges for companies

Stephan Hirschi

Raphael Rutishauser
Sustainability and climate change, PwC Switzerland

The national and international standard setters of non-financial reporting are stepping up the pace. This is putting pressure on companies because implementing the proposed new standards will require a new disclosure methodology, increased frequency and a new mindset. And it will impose more responsibility on management.

1. Accelerated harmonisation

It is standard for there to be no standard – and this has been the case up to now for reporting on environmental, social and governance (ESG) issues. This is likely to change as the process for harmonising the national and international standards for non-financial reporting accelerates.

2. The EU vs Switzerland

In April 2021, the European Commission published its proposal for a Corporate Sustainability Reporting Directive (CSRD) to replace the Non-financial Reporting Directive (NFRD) of 2014. The new directive is to be transposed into national law by 1 December 2022, and initial disclosure standards are to be adopted by 31 October 2022. Consequently, large and listed companies will already have to apply the CSRD when they produce their 2023 financial year reports. By implementing the counterproposal to the Responsible Business Initiative (RBI), Switzerland is at least aligning itself with the NFRD. But probably without an explicit link to a reporting standard. We expect that this new regulation will also apply from 2023.

3. A closer look at the changes

The proposed standards will have a significant impact on future ESG reporting:

3.1 Disclosure of climate risks

On 18 August 2021, the Swiss Federal Council announced an executive decision to implement the indirect counterproposal to the RBI by introducing a supplementary ordinance that will impose a duty to disclose climate risks. Recent reports by the Intergovernmental Panel on Climate Change (IPCC) and similar regulatory initiatives around the world concerning the disclosure of climate risks may have significantly influenced this decision.

This ordinance will require a fresh approach to presenting non-financial risks. Up to now, the focus has been on factors such as energy and water consumption and carbon dioxide emissions by source (Scopes 1, 2 and 3), i.e. a company’s carbon footprint. Now, managers will have to determine (by analogy with conventional risk management) the financial impact that is associated with different degrees of achieving climate goals and measures. They will also have to calculate the impact of their companies on global warming (known as ‘double materiality’). For example, an increase in carbon prices can fundamentally change a company’s economic and capital market position.

3.2 Supply-chain transparency

Standard setters are demanding more transparency about supply chains. In Switzerland, the focus is on child labour and conflict minerals. Germany is aiming to introduce a comprehensive supply-chain law. The EU has similar plans, which will also have a significant impact on the transparency of Swiss companies’ supply chains.

Companies will have to prove that they conduct appropriate due diligence. This will require them to implement active supplier management arrangements, including systematic information collection processes and effective monitoring. This will be particularly difficult for highly interconnected companies because they will find it very hard to replace some dependencies.

3.3 Digital format

The CSRD will require companies to publish their sustainability information in a digital, single electronic reporting format as part of their management reports. We expect the taxonomy to be published at the same time as the standards. Switzerland is not yet planning to introduce a similar requirement.

3.4 Mandatory audits

The CSRD will require external audits of the sustainability information – initially on a limited assurance basis. We expect the basis of the audits to be extended to reasonable assurance in the medium term. Switzerland is not yet planning to introduce mandatory audits.

4.  Acting instead of reacting

The fast pace that the standard setters are dictating is putting pressure on companies in terms of both time and content. A company’s ESG figures for a financial year will have to be available at the same time as its financial reporting for that year. This will require companies to establish faster accounting processes with intermediate steps, estimates and projections. Hence, they will have to increase the frequency of their reporting and at the same time introduce rapid internal and external auditing systems with interim reviews.

The harmonisation of the standards will require companies to change the way they manage their data. They will have to incorporate interfaces into their IT systems to handle new data points in a timely and consistent manner. Additionally, they will need highly qualified employees to help them report using a risk-based approach and connect their financial performance with their non-financial performance in their reporting.

And finally, boards, audit committee members and CEOs will have additional responsibilities. Standard setters are gradually raising issues about liability for disclosure to this level in order to address the needs of the capital markets and shareholders.

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Raphael Rutishauser

Raphael Rutishauser

Sustainability and climate change, PwC Switzerland

Tel: +41 58 792 52 15