Interview with Fiona Donnelly CA of Chartered Accountants of Scotland (ICAS)
As sustainability reporting undergoes significant evolution in 2023, businesses face both challenges and opportunities with new global and regional standards. In an exclusive interview with Fiona Donnelly, CA of the Institute of Chartered Accountants of Scotland (ICAS), explore how these developments are reshaping reporting practices and what companies need to know to stay ahead in a rapidly changing landscape.
Can you elaborate on the current state of sustainability reporting frameworks, particularly focusing on the challenges and opportunities presented by standards like CSDDD (Corporate Sustainability Due Diligence Directive) across different regions?
2023 was a significant year for sustainability reporting, with changes coming through at global, national and regional levels. We saw the release of two new global standards focusing on sustainability-related financial disclosures and climate from the International Sustainability Standards Board (ISSB). At the same time, the EU published 12 new mandatory standards covering various environmental, social and governance matters. We’re in limbo in the UK, with the government currently considering if and how it will embrace the ISSB standards to inform the creation of the first two UK Sustainability Reporting Standards.
The Corporate Sustainability Due Diligence Directive (CSDDD) is another element of this broader sustainability ecosystem. Adopted on 24 April, the directive aligns with and supports the European Union’s comprehensive Green Deal – a legally binding target that aims to make Europe climate-neutral by 2050.
The goal of the CSDDD is to ensure that in-scope businesses conduct environmental and human rights due diligence in their own operations and across their supply chain. It then requires them to take steps to prevent, mitigate, and remediate their actual and potential adverse impacts. The directive also places emphasis on transparency, requiring businesses to produce an annual statement to show how they are integrating better environmental and human rights behaviours into their corporate strategy.
Although the CSDDD is driven by a desire to encourage more responsible business, there is concern that the final version is watered down. For example, thresholds have reduced from original plans, so that (per some sources) only about .05% of the total number of businesses operating in the EU are required to comply. There are also worries that its wide-reaching requirements place a burden on smaller and unlisted businesses that supply to or are supplied by in-scope businesses.
From your perspective, what are some key lessons that businesses in Europe have learned from navigating the sustainability reporting landscape, and how might these insights inform the anticipated adoption of ISSB S1 and S2 standards in the UK?
Europe set out a very ambitious plan in terms of the adoption of 12 new standards with very little lead time before they became effective. These standards adopt a double materiality approach, which means businesses need to consider their impact on the planet and society, while also considering the planet and society’s impact on their business. While this comprehensive approach is one that ICAS favours, certainly in the long term, such all-inclusive thinking and reporting requires significant effort. Specifically, the measurement of 176 datapoints for all in-scope reporters, possibly over 600 more depending on the results of a materiality assessment, plus another 300 voluntary datapoints.
A representative from Accountancy Europe, a membership body for accountancy professionals in the EU, spoke at ICAS’ Sustainability Summit in April about the urgency for businesses to get started early rather than waiting for perfect data. We are, afterall, on this learning journey together, so businesses should do the best they can, disclose things transparently and with appropriate disclaimers if needed.
Standard issuing bodies are also developing mapping tables and guidance to show how the different standards are interoperable. So if a business already reports to the GRI standards, then tools like the GRI-ESRS Interoperability Index will show how that same business already meets some requirements of the European reporting system.
With the ISSB’s global standards covering only a fraction of the topics included by Europe, as well as focusing solely on financial matters, it will be interesting to see what learnings can be taken. There are however common principles, like governance, so tracking reports issued per EU requirements will be valuable when reporting on S1 and S2.
With the increasing emphasis on sustainability reporting, what trends are you observing in terms of the readiness of businesses to meet these reporting demands, particularly in the UK, Europe, and globally?
Large businesses with established reporting teams are stepping up and tackling the new requirements, either in anticipation of what will be introduced or because parts of their business already need to comply with certain jurisdiction’s new requirements. Depending on the complexity of the business, including the size of its supply chains, this can be a sizable task.
The demands on small and medium businesses are potentially huge, which is one of the reasons why ICAS continue to push for proportionate, mandatory reporting, so that SMEs aren’t overburdened.
That being said, even if SMEs have tolerable reporting requirements directly imposed, they will also be burdened by reporting to their supply chain partners on key figures like carbon footprints. We strongly encourage all businesses to start reporting on this early. ICAS have collaborated with Chartered Accountants Worldwide to develop tools to help with the process, including a Carbon Footprint Guide.
With the sustainability landscape moving at pace, there are also real concerns in the markets as to whether businesses have sufficient skilled and experienced talent to meet the requirements. We’re pleased to be contributing to a solution: ICAS launched our new syllabus in March 2024 to ensure that Chartered Accountants (CAs) starting their training now will have sustainability embedded throughout the various modules of their CA training, plus an option to study an elective specialising in sustainability.
Could you discuss any notable challenges or common pitfalls that organizations encounter when embarking on their sustainability reporting journey, and what practical advice would you offer to mitigate these challenges?
There are two key challenges or pitfalls that businesses face when they embark on their sustainability reporting journey:
The first concerns the materiality assessment. It’s important that businesses take time to engage with stakeholders and undertake a systematic assessment of what sustainability topics matter most, and then concentrate activities and reporting around these areas. Focusing invariably limited time and effort on what matters most, as determined by a robust analysis, is key.
The second is ensuring there is appropriate collaboration within the organisation, from the board and across functions, as well as working smartly with external providers and customers. Building these key relationships, understanding and communications is key to aligning sustainability efforts.
In your view, what are the main drivers behind the growing complexity of sustainability reporting, and how can businesses effectively navigate this complexity while ensuring transparency and accountability?
There are many drivers for the different sustainability reporting frameworks and standards that are being introduced. Europe is motivated by a need to have reporting that captures its progress towards being a carbon-neutral economy by 2050, as well as addressing the concerns of investors. The global standards are, however, written for investors only and are mostly concerned with matters that impact a business’s prospects. This means that sustainability reports prepared per these two sets of standards will be very different and have very different contents. Readers need to understand what type of sustainability report they are reading carefully.
Currently, there is a mix of mandatory reporting for some businesses/countries and voluntary reporting for others due to either choice, pressure from stakeholders, or otherwise. Businesses need to consider the stakeholders they are trying to communicate with and the purpose of these reports. In addition, if you keep in mind core principles like a faithful representation of progress and plans, then you can’t go too far wrong.
Businesses should view reporting as a communications tool, not a compliance exercise. It’s for communicating internally, and externally, to key stakeholders so that they can make informed business decisions based on a comprehensive set of data.
As sustainability reporting becomes more standardized, how do you anticipate it impacting various stakeholders, including investors, regulators, and the wider community?
It’s key that sustainability reporting becomes both standardised and mandatory. This is necessary since a useful, honest, and complete sustainability report is likely to contain items that a business would prefer not to disclose. Without comprehensive regulations, it’s very easy for sustainability reporting to become arbitrary sharing of good news stories only.
Disclosure per a recognised framework ensures comparability and consistency, across countries and sectors. We know sustainability matters present both huge risks and opportunities to a business, so they deserve extensive reporting. We saw this with the PG&E fires of 2019, which were billed as the world’s first climate change bankruptcy.
The ultimate aim has to be for sustainability information to be on par with and presented in an integrated way alongside financial reporting so that readers get a more rounded sense of results and progress, including the impacts of a business to society and the environment.
Looking ahead, what do you envision as the next frontier in sustainability reporting, and how can organizations prepare themselves to stay ahead of evolving reporting standards and expectations?
The next frontier in sustainability reporting will likely involve technology, whether that is artificial intelligence helping to measure and analyse sustainability data or even automate data collection and reporting. Adoption of such technology would also facilitate easier collaboration with supply chain partners.
And while we will continue to advocate for the importance of sound sustainability reporting, we do have to remember that good reporting is not going to save the world. It is action, improving impacts and revising business models that will make the real difference. Good sustainability data and reporting should inform these choices.
Executive Profile
Fiona Donnelly CA is the Director of Sustainability at the Institute of Chartered Accountants of Scotland (ICAS). She drives sustainability efforts within the organisation, produces resources for members and represents ICAS on various advocacy groups. Fiona’s career began in Scotland as a Big 4 consultancy-trained Chartered Accountant, before transitioning into broader strategy and engagement roles in Hong Kong. Her interest in sustainability started in 2007, and since then she has worked for clients in sustainability consulting, cleantech, sustainable finance and carbon innovation.
