Non-financial reporting and environmental due diligence: The International Sustainability Standards Board case

Abstract

The growing attention given to the sustainability matter in the economic area has brought to the development of several Environmental, Social and Corporate Governance recommendations and frameworks (ESG). Nowadays, investors and potential business partners consider the non-financial information as a primary and highly impactable part in strategic decisions. More precisely, it became particularly influential in the well-doing of the due diligence process. The first chapter is going to explain how the “due diligence” is structured and how investors that are not implementing this procedure are more likely to face significant risks due to uncertainty and asymmetric information. More precisely, an overview of the due diligence process and a summary of the fragmented ESG frameworks will be provided, followed by a theoretical review of the importance of the environmental issues in the due diligence process and how the lack of availability of such information can have a significant impact on the decision-making process. In the second chapter, the main characteristics and purpose of the International Sustainability Standards Board are introduced, focusing on the analysis of the Exposure draft S2 Climate-related disclosure, to investigate what are the main improvements on the subject provided by this new standard and how it will impact the definition of the non-financial reporting materiality and their main ESG performance indicators used in the due diligence process. A clear overview of the elements characterising the environmental due diligence will be disclosed, highlighting the importance of clear and comparable key performance indicators in order to guarantee the accountability of the process itself. Furthermore, a review of the most important key performance indicators will be provided. Finally, the third chapter will explain the many steps put in place by the Climate Change and Sustainable Services team of the big consulting firms in order to assist the client from the collection, review, consolidation and draft of its non-financial report. More precisely, this section aims to identify if the implementation of ESG framework in the reporting activities of a sample of companies has brought to an improvement of their performances through an empirical comparison analysis of financial and non-financial KPIs. Based on the information collected in the first part of the chapter and after having defined some assumptions, it will be possible to understand if the implementation of the ISSB Standards is going to have an impact on the reduction of companies’ risks.