Shaping the future of sustainability reporting: Genpact's response to ISSB's S1 and S2 exposure drafts

Businesses are seeing an increased push and interest from customers, investors, regulators, and communities for companies to measure, report, and improve their impact on environmental, social, and governance (ESG) goals. As demand for investor-grade data and reporting for sustainability has grown, various global bodies such as the Global Reporting Initiative, Sustainability Accounting Standards Board, and the Task Force on Climate-Related Financial Disclosures have released sustainability reporting standards that organizations can adopt voluntarily. In addition, there are jurisdictional regulatory reporting guidelines such as the US SEC climate proposal and the European sustainability reporting standards that have proposed mandating these disclosures.

Mindful of the need to simplify the sustainability reporting landscape, the International Financial Reporting Standards (IFRS) Foundation set up the International Sustainability Standards Board (ISSB) during COP26 in Glasgow with the aim of establishing a baseline for sustainability reporting standards that can be applied globally.

A year later, these standards have been built into the environmental disclosure platform that 1,800 major corporations use from CDP, the not-for profit that runs the platform. Announced at COP27, the standards will be incorporated into CDP's questionnaires that it issues each year on behalf of 680 financial institutions with over $130 trillion in assets. But in the time since COP26, Genpact, in collaboration with The B Team, a global collective of business and sustainability leaders, helped shape the standards that will give investors the consistent climate-related information they need and reduce the burden of reporting.

In March 2022, the ISSB released Exposure Drafts S1 (general requirements for disclosure of sustainability-related financial information) and S2 (climate-related disclosures) and requested feedback from stakeholders to shape the final draft of the standards.

Genpact and The B Team delivered a multi-pronged approach to capture the industry's view –the voice of industry - on the S1 and S2 exposure drafts as part of the consultation process. We ran a moderated roundtable discussion with finance and sustainability leaders, held one-to-one discussions before and after the roundtable with select leaders, and ran a survey on key topics of the exposure drafts.

The voice of industry captures feedback on the proposed standards from 20 finance and sustainability leaders from 16 Fortune 500 enterprises across industries and regions including North America, Europe, and Africa. Some of the participants include The Archer-Daniels-Midland Company (ADM), Cardinal Health, Inc, AstraZeneca plc, Cigna, The Estee Lauder Companies Inc., and Coca-Cola Hellenic Bottling Company.

From the discussions, we identified five themes across IFRS S1 and S2. The goal? To build standards that are practical, fit for purpose, and easy to adopt. This paper identifies the areas that require more clarity or guidance or whose implementation might be onerous compared to its potential value. The five themes:

1. The definition of materiality and its application

The group aligned on the need for organizations to disclose material information about sustainability-related risks and opportunities to which they become exposed. However, our group highlighted that the ISSB definition of materiality is too vague and could lead to subjective interpretation and inconsistent application. We suggest that the ISSB provide further clarity.

2. Timing and accounting treatment for reporting Scope 3 emissions

We agreed that Scope 3 emission reporting should reflect actual data and not estimates to enable more accurate reporting. Most participants also agreed that Scope 3 emission reporting should become mandatory regardless of the materiality because Scope 3 is typically the largest source of organizations' emissions. Not making it a requirement could cause widespread underreporting.

3. Feasibility of greenhouse gas emissions intensity disclosures

We discussed the feasibility and value of reporting greenhouse gas (GHG) emissions intensity per unit of physical or economic output for external and internal stakeholders. The view was that for external reporting purposes, GHG emissions intensity as a unit of revenue makes sense, but emissions intensity per unit of physical or economic output will be onerous and complex with access to data proving a big challenge. We suggested setting standards for industry-specific definitions of economic and physical output to allow for comparability and the creation of benchmarks.

At the same time, our group called out that GHG emissions intensity per unit of output would be extremely useful for internal management reporting when tracking, benchmarking, and improving GHG emissions at the product level.

4. Tracking and reporting of emissions data at the country level with origin tagging

Our group also pointed out that emissions-related disclosures may need reporting based on their points of origin. This is because countries and reporting jurisdictions are pushing for net-zero targets within their territories, and there might be a future requirement to reconcile emissions data reported by companies operating in these countries. Therefore, participants requested additional guidance on the reporting of emissions at a country or jurisdiction level. Our group suggested setting up a data-collection and aggregation process where companies can tag their origin country in case they need to go back and report on territory-specific emissions data.

5. Timelines for applicability and adoption of the proposed standards

Participants highlighted that reporting on Scope 3 emissions will bring many challenges as organizations scramble to get ready and familiarize themselves with the new governance structures. We concluded that these standards should apply from the 2024 reporting period with reporting starting in 2025. And the timeline for adoption should coincide with other jurisdictional reporting regulations.