When less equals more: rethinking sustainability reporting 

The efficient flow of information between companies and their investors is fundamental to modern shareholder capitalism. The variety of requests corporates receive, whether to meet regulatory obligations or other requests from investors for comprehensive, reliable and actionable information about corporate sustainability, risks turning a steady flow into a flood of requests that doesn’t necessarily provide investors with the insights they need. 

The UK Government has been consulting on disclosures around climate-related transition plans – a critically important component of corporate sustainability reporting. The consultation on transition plans was part of a suite of consultations sitting alongside two others on sustainability reporting standards (UK SRS) and assurance. The Government Consultations provide an opportunity to reconsider how companies can best meet the needs of their investors while addressing the growing reporting burden.  

To help inform our position, LSEG together with the World Business Council for Sustainable Development (WBCSD), and the Principles for Responsible Investment (PRI), convened a group of leading companies and investors to discuss the sustainability reporting landscape.  Insights from our roundtable have helped inform this blog.

Investors increasingly recognise that sustainability factors can have a material impact on companies’ long term financial performance [Note1]. As such demand for information about companies’ sustainability management has spurred the creation of a variety of voluntary sustainability reporting frameworks and a growing body of mandatory reporting requirements – of which the EU’s Corporate Sustainability Reporting Directive (CSRD), even when considering the upcoming EU simplification Omnibus Directive, is perhaps the most far-reaching.  

The International Sustainability Standards Board (ISSB) is working towards achieving consistent global reporting standards rooted in the disciplines of financial reporting, with its IFRS S1 and IFRS S2 Standards, covering general sustainability-related financial information and climate-related disclosures respectively.

Nonetheless, companies are subject to increasing requirements to track, collect, verify and disclose sustainability-related information. This creates cost and resourcing requirements. Based on our engagement with companies, a FTSE 100 company in its first year of reporting can find itself spending millions of pounds to put in place the systems, processes, and assurance services to meet both EU and UK sustainability reporting requirements. 

There are also questions around how digestible this information is for investors, when considering different data points, metrics, and formats for information. More information is being put in sustainability reports and given that some sustainability issues are financially material for companies, there is – quite rightly – a move towards including such information in their main annual report and accounts. This is contributing to a growing size of annual reports for FTSE 100 companies, which, according to the Quoted Companies Alliance (QCA) [Note2], are now on average 237 pages long, with sustainability reports also often being somewhere between 50 and 100 pages.

Annual reports and stand-alone sustainability reports now tend to combine information and data on sustainability performance metrics and updates from the prior 12 months with standing information such as sustainability policies and governance, which tends to be little changed from year to year.

The transition to a low-carbon global economy is also creating demand for information. The Task Force for Climate-related Financial Disclosures (TCFD) first suggested companies describe their transition plans, providing guidance on the subject in 2021 [Note3] that called on them to describe how they intend to adapt business models, investment plans and operations to align with its recommendations. 

The UK’s Transition Plan Taskforce (TPT) was convened to set the ‘gold standard’ for transition plans, and its guidance – published in 2023 – has since been incorporated under ISSB’s remit. 

LSEG has been closely involved in work helping to develop an industry framework for “real economy” companies’ transition plans based on the expectations from financial institutions. LSEG was a member of the UK’s  Transition Plan Taskforce, which took the previous framework and created clear guidance for corporate transition plans. 

We welcome the work of the ISSB, which recently published guidance on disclosing transition plans. This incorporates TPT Guidance [Note4], in another step towards consistency in transition plan reporting. 

Getting this reporting right is important. Within our Index business,  FTSE Russell, we have seen a trend of passive and climate investing with growing demand from institutional investors to integrate climate risks and opportunities into index investment strategies [Note5]. Despite this investor demand, in many sectors, transition plans underpinning these investment strategies are either non-existent or poorly communicated. At the same time, many companies we have engaged with say that that the quality of engagement they experience with investors is weak.

Meanwhile, the UK government initially set out proposals to introduce regulations requiring financial institutions and some of the UK’s largest companies to “develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement”. It is now undertaking a consultation to, among other things, ensure this commitment “enhances transparency for investors and promotes efficient capital allocation” [Note6].

The consultation specifically asked whether and how frequently a standalone transition plan should be disclosed, “in addition to transition plan-related disclosure as part of annual reporting”. It also asks about “opportunities to simplify or rationalise existing climate-related reporting requirements”.

Given the context outlined above we believe there’s a case for rethinking how sustainability information, including transition plans, is disclosed. At the heart of this is a distinction between information that conveys sustainability performance over the preceding 12 months versus more forward-looking information about a company’s climate transition plan.  This approach has four elements: 

• More focused annual reports: Focusing on annual performance and key new developments, including updated emissions data, progress against near-term targets and significant climate-related investments or divestments. 
• Stand-alone transition plans: Including comprehensive, forward-looking strategic information, such as the company’s long-term vision, detailed decarbonisation pathways, scenario analysis, engagement strategies and long-term targets. Updated every three years, they should enable companies to present a deeper and more holistic narrative without overwhelming investors with lengthy annual filings. 
• Separate governance, policy and process information: Much of this information is relatively static and, barring material updates, could be provided in a clearly labelled library on the company’s website, with cross-referencing in annual reports and transition plans as required.  
• Rigorous XBRL tagging: All data points relating to the CSRD, ISSB and transition plan reporting should be digitally tagged, enabling investors and data providers to automatically extract information as needed. 

Such an approach would provide investors with important, forward-looking insights in a dedicated, comprehensive format, while simplifying the format to enable more efficient extraction and analysis of annual performance updates. This could also help ease the reporting burden on companies.  

Sustainability reporting and transition plans are evolving fields, with Governments around the world in the process of codifying requirements. There is an opportunity to ensure the needs of both investors and companies are considered, with pragmatic and flexible approaches adopted. Constructive cross-working between companies and investors can also help and could create a “community of practice” where over time reporting practices can be iterated.

There is nothing stopping companies choosing to report in the manner set out above by cross referencing the other materials including the transition plans in the annual reporting, which would need to reconfirm these other materials were still valid and up-to-date. ’Indeed, taking this route would be consistent with the IFRS ISSB standards , which states [Note7] “an entity could disclose information about its transition towards a lower-carbon economy by cross-reference to another report published by the entity (for example, to a formal transition plan document)”.  

Now is the time to facilitate the reporting of transition-relevant information in a manner that provides investors with what they need, without overly burdening reporting companies, and improving their ability to have strategic and meaningful engagement with investors.