2,000 Days to 2030: Non-Financial Information Disclosures at an Inflection Point

As London Climate Action Week gets under way, we take a closer look at how non-financial information disclosure is changing the direction of travel on sustainability for corporates.

With around 2,000 days to go before we reach 2030, there is a subtle but noticeable shift happening in the landscape of sustainability disclosures: are we at an inflection point where we move from driving transparency to driving performance?

Driving Sustainability Transparency…

For the past decade, the focus of non-financial information disclosures has been on driving transparency: asking companies to disclose, in a systematic and comparable manner, non-financial metrics such as carbon emissions.

The thinking behind this is that increasing transparency decreases “asymmetric information,” leading to greater market efficiencies. With this information, the market is able to better assess risk as well as the positive and negative externalities of companies; this will lead to shifts in the way capital is allocated and which companies prosper.

But markets are not always logical; many more issues play a role in decisions taken by participants such as investors, but also politicians and company leadership. We can see this in recent developments. In 2019, when global instability and a skyrocketing cost of living weren’t as prevalent as they are today, there was a net inflow towards environmental, social and governance (ESG) investment; today, that has reversed but the climate crisis is not any less urgent.

…Or Driving Sustainability Performance

So, it is possible that the transparency approach doesn’t work—good in theory, not so good in practice. Non-financial disclosure standards, such as the Carbon Disclosure Project, have been around for nearly two decades, and the planet has never been in a worse state. Is it possible that they may even companies to not change their behavior, as long as they disclose their impacts?

The publication of the European Sustainability Reporting Standards (ESRS) last year is indicative of a shift in non-financial information disclosure. ESRS arguably goes further and moves closer to driving sustainability performance than any other widely adopted standard. Why is that?

ESRS does this through three areas: transition plans, double materiality assessments and value chain mapping. All of these are more directional than we have previously seen, requiring a company to take action on its impacts rather than just disclose. Like the Taskforce for Climate-related Financial Disclosures pushes companies to set climate targets to meet the framework, the presence of these elements in ESRS indicates what the regulator really wants companies to do.

Our View

Although we would not entirely describe CSRD as prescriptive, it does point towards a more performance-based approach to disclosure. Its detail and directionality as a management tool positions ESRS as a gentle nudge that companies really should be taking certain actions, rather than hoping that simple transparency will lead to climate action. It’s a step further than we’ve seen before, and at a time of record emissions, such ambition is needed.