Key sustainability reporting initiatives for the fashion industry
Three key initiatives are expected to make the most difference, with the UK government withdrawing plans to propose mandatory sustainability reporting for British companies in May (2022).
Global sustainability initiative for the fashion industry – International Sustainability Standards Board (ISSB)
Firstly, as a global proposal, the ISSB, which has been created by the International Financial Reporting Standards (IFRS) Foundation, of the International Accounting Standards Board (IASB), could have the widest impact.
In May, it released its strategy to create a “global baseline” of guidance on how companies and public organisations should disclose how they are impacted by environmental and social pressures and are dealing with them, with this core formal advice due to be unveiled by December this year (2022).
The ISSB is taking a focused approach, with standards advising listed companies to report on ‘single materiality’ social and environmental impacts on companies themselves and ignoring – for the moment – the public sector.
Europe sustainability initiative for the fashion industry – EU corporate sustainability reporting directive (CSRD)
Second, the European Union (EU) has arguably the most ambitious plans. With the EU Council of Ministers and the European Parliament having approved in principle the proposed EU corporate sustainability reporting directive (CSRD), which mandates some sustainability reporting in all 27 member states, the clock is now ticking for fashion and textile company accountants to prepare for writing sustainability reports.
An industry-led body, the European Financial Reporting Advisory Group (EFRAG), has been tasked with developing detailed rules for this reporting, as a formal technical advisor to the European Commission. It has been consulting on ‘exposure drafts’ of its planned sustainability reporting standards, with this process ending 8 August – allowing for EFRAG approval, which is expected in November. Its standards will then be passed to the EU executive to enshrine them as the EU standard by mid-2023.
Meanwhile, ministers and MEPs are expected to approve the directive later this year (2022), with it coming into force on 1 January 2024 – forcing member states to make sustainability reporting mandatory.
It is then that the real work begins. Companies with more than 500 employees, including listed companies, banks, insurers and corporations defined by member states must report in 2025 based on 2024 financial year (FY) data. Other EU-based large companies will start sustainability reporting in 2026 based on 2025 FY data; listed small-and-medium-sized enterprises (SMEs) will report in 2027 on 2026 FY data; and non-EU-based companies operating in the EU must report from 2029 on 2028 data, and going forward.
This is quick work for the EU and a key issue here is the EU wants companies to release a lot more sustainability information than the ISSB. The EU directive mandates ‘double materiality’ sustainability reports. This means companies must report on the impact of environmental and social pressures on their own profitability, and also on how their operations impact the environment and society. EFRAG’s exposure drafts lay down in detail how this should be done. Its standard on general strategy, governance and materiality assessment itself runs to 39 pages, for example.
There are also separate drafts on general principles, climate change, pollution, water and marine resources, biodiversity, resource usage, company workers, value chain workers, affected communities, consumers and end users, business conduct. corporate governance and risk management.
This amount of work, and the required speed of introduction has prompted concern, however. “There’s undue time pressure,” said Blomme, stressing that EFRAG has been pressured to act swiftly by a Commission whose core policy is ‘the European Green Deal’. “We don’t know any standard setter that is capable of doing this in three months. The quick ones usually take about a year…” The concern is “the risk that this might impair the quality of the standards,” she said.
Accountancy Europe is concerned about the level of detailed information being demanded of European companies in the EFRAG drafts: “Such a level of detail and granularity means that even the most experienced reporters with sophisticated reporting and data collection systems will struggle to comply with all the requirements stipulated…,” explained Blomme.
United States sustainability initiative for the fashion industry – US’ Securities & Exchange Commission (SEC)
Meanwhile, US listed clothing and textile companies are having to watch proposed sustainability reporting rules being developed by the US’ Securities & Exchange Commission (SEC). The SEC’s planned disclosure requirements move towards double materiality. Not only would they require statements on a listed company’s governance, general risk management and climate-related risk strategy, it will also require reports on corporate greenhouse gas emissions. Some companies would have to file information on greenhouse gas emissions from their upstream and downstream value chain.
Mark Vaessen, partner at KPMG the Netherlands, said he hoped work would be undertaken to avoid contrasting rules within the three sustainability reporting systems: “We need to move away from having three new silos. We wanted to avoid having many different frameworks to provide clarity for companies and it’s important that we try to keep all these initiatives together and interoperable.” He added that the SEC proposals are specific to the US but have “more in common with the ISSB proposals then the EFRAG proposals”, especially on climate impact reporting: “If you compare the US proposals with the international proposals, they are not that far apart – they will be easier to harmonise.”
The EU directive stresses that EFRAG should be to “the greatest extent possible taking into account the work of global standard setting initiatives”, so there is legislative pressure to make this happen – of key importance to global clothing brands who want to demonstrate their sustainability to consumers and investors.
By Just Style