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The world is confronting significant challenges related to sustainability, driven by climate change, equity issues, and other critical social and environmental concerns. To secure the long-term sustainability of our planet, legislators, regulators, and intergovernmental organisations are enacting comprehensive reforms that reshape how we work, live, and achieve prosperity. Key international initiatives driving this transformation include the European Union's European Green Deal, the United States' Inflation Reduction Act, and the United Nations' Sustainable Development Goals.
Businesses are pivotal in accelerating the transition towards a sustainable and climate-neutral economy. To fulfil this role effectively, companies must implement governance frameworks that ensure they are mindful of their operations' environmental and social impacts and integrate these considerations into their decision-making processes.
The European Corporate Governance Conference 2022, held under the Czech Presidency of the EU Council, emphasised the significant role that corporate governance can play in advancing more equitable and sustainable socio-economic models. The conference, coordinated by EY, ecoDa, and the Czech Institute of Directors in collaboration with BusinessEurope, European issuers, the Association of Chartered Certified Accountants (ACCA), and other international partners, attracted over 450 participants from 43 countries, both in person and virtually.
The Rise of Sustainability Reporting
Sustainability reporting involves disclosing a company’s environmental and social impacts and governance practices. Traditionally, corporate reporting concentrated on financial performance, but there has been a growing recognition that sustainable business practices are crucial for long-term success. Climate change, resource depletion, and social inequality have pushed companies to consider their broader societal impact.
Several global initiatives and standards have emerged to guide sustainability reporting. The Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD) are among the most prominent frameworks. These standards guide how companies report their ESG performance and risks, aiming to enhance transparency and comparability.
What disclosure obligations does India's new ESG policy have?
SEBI released a circular on May 10, 2021, introducing the Business Responsibility and Sustainability Report (BRSR), replacing the Business Responsibility Reporting (BRR). The new reporting format requires the top 1000 listed businesses by market capitalisation to comply with required ESG policies and obligations. The nine guiding principles of the "National Guidelines on Responsible Business Conduct" (RBC Guidelines) serve as the foundation for the format.
Leading worldwide standards, such as the Paris Agreement, UN Sustainable Development Goals, UN Guiding Principles on Business and Human Rights, and the International Labour Organisation (ILO) Core Conventions, impact the RBC Guidelines. The guidelines cover important sustainability issues like human rights, environmental safety, fair labour standards, and company ethics and transparency.
The reporting format is required for FY 2022–2023 alone; it is optional for FY 2021–2022. This will give businesses enough time to get used to the new reporting requirements. However, businesses are urged to implement the BRSR as soon as possible.
The BRSR aims to ensure that businesses disclose their sustainability-related risks and ESG parameters clearly and uniformly. This strategy should assist businesses in more effectively communicating to the market their sustainability goals, positioning, and performance; this should lead to long-term value creation and improve investors' capacity to make knowledgeable decisions on environmental, social, and governance (ESG) issues.
Challenges and Opportunities
The adaptation of governance frameworks to sustainability reporting presents both challenges and opportunities for companies:
Challenges
The complexity of ESG Reporting: The complexity and breadth of ESG reporting requirements can be overwhelming. Companies must navigate multiple standards and frameworks, which can be resource-intensive and require specialised expertise.
Data Availability and Accuracy: Ensuring the accuracy and reliability of ESG data can be challenging. Companies need robust systems to collect, verify, and report ESG information, which may involve significant investment in data management and technology.
Integration into Business Strategy: Integrating sustainability into the core business strategy requires a shift in mindset and practices. Companies must align their operations, supply chains, and stakeholder engagement with sustainability goals, which can be complex and time-consuming.
Opportunities
Enhanced Reputation and Trust: Companies that excel in sustainability reporting and governance can enhance their reputation and build trust with stakeholders. Transparent and responsible practices can differentiate a company in the market and attract customers, investors, and talent.
Long-Term Value Creation: Emphasizing sustainability can lead to long-term value creation. Companies that manage ESG risks effectively and capitalise on sustainability opportunities are better positioned for future success and resilience.
Innovation and Competitive Advantage: The focus on sustainability can drive innovation. Companies that invest in sustainable technologies and practices may gain a competitive advantage and open new markets and opportunities.
Overview of ESG Reporting Frameworks and Standards
ESG Reporting
ESG Reporting refers to the process by which organisations publicly disclose their progress toward achieving goals related to environmental sustainability, social issues, and corporate governance. Typically conducted annually, these reports present both quantitative and qualitative metrics on ESG performance, outline long-term objectives, and update stakeholders on key milestones. Historically, ESG reporting has been predominantly voluntary. As of November 2022, a Governance & Accountability Institute report revealed that 96% of S&P 500 companies and 81% of Russell 1000 Index companies published sustainability reports in 2021.
With the rise of mandatory reporting requirements, such as the European Union's Corporate Sustainability Reporting Directive (effective January 2023), which mandates around 50,000 companies to disclose risks and opportunities related to social and environmental issues, and the U.S. Securities and Exchange Commission's proposed climate risk disclosure rule, the landscape of ESG reporting is evolving. These regulations are set to enhance transparency and accountability in how companies report their ESG impacts.
ESG Frameworks and Standards
ESG Frameworks and Standards serve different functions within ESG reporting. Frameworks provide principles-based guidance on structuring and preparing ESG information, while standards offer specific, detailed requirements for reporting metrics. Frameworks and standards are often conflated, but they are complementary.
Types of ESG Frameworks:
1. Voluntary Disclosure Frameworks: These platforms facilitate ESG disclosures applicable across various sectors and regions. Reporting is typically conducted through online surveys or questionnaires, which are subsequently scored.
2. Guidance Frameworks: Similar to standards, these frameworks offer specific topics, methodologies, and metrics for ESG reporting.
3. Scoring Services: Provided by third-party aggregators, these services evaluate ESG performance based on publicly available data and issue scores, either numerical or letter-based.
Prominent ESG Frameworks and Standards:
1. IFRS Sustainability Disclosure Standards: Developed by the International Sustainability Standards Board (ISSB), these standards aim to unify global ESG reporting by building on the SASB Standards and superseding the CDSB Framework. The ISSB issued its first set of standards in June 2023, focusing on general sustainability-related financial information and climate-related disclosures.
2. SASB Standards: The Sustainability Accounting Standards Board developed these standards to guide financial material sustainability information disclosure across 77 industries. As of 2022, SASB is part of the Value Reporting Foundation, which was integrated into the IFRS Foundation.
3. CDSB Framework: Created by the Climate Disclosure Standards Board, this framework initially focused on climate change but expanded to cover broader environmental and social factors. It is now under the IFRS Foundation and is not being actively developed.
4. GRI Standards: The Global Reporting Initiative's standards enable organisations to report economic, environmental, and social impacts. The GRI Standards are modular, encompassing universal, sector-specific, and topic-based standards, with updates from 2000 through 2021.
5. CDP (Carbon Disclosure Project): In 2000, CDP provided an environmental disclosure system covering climate change, water security, and deforestation. Companies receive letter-grade scores based on their disclosures, which are accessible to stakeholders.
6. Task Force on Climate-related Financial Disclosures (TCFD): Established by the Financial Stability Board in 2015, the TCFD developed recommendations on climate-related financial disclosures focusing on governance, strategy, risk management, and metrics. Over 4,000 companies support these recommendations, and several countries have adopted TCFD-aligned reporting requirements.
7. United Nations Global Compact: Launched in 2000, this initiative promotes corporate sustainability by aligning business practices with ten principles covering human rights, labor, environment, and anti-corruption. Companies submit annual Communication on Progress (CoP) reports, with over 47,000 reports filed.
8. Workforce Disclosure Initiative (WDI): Created by ShareAction in 2016, the WDI framework provides a platform for reporting on workforce management practices. The survey-based system offers a disclosure scorecard for benchmarking against peers. In 2022, 167 companies participated in the WDI survey.
These frameworks and standards are continually evolving to address the dynamic nature of ESG reporting and to enhance the reliability and comparability of corporate sustainability disclosures.
How to decide which frameworks to use
There are more than a dozen ESG reporting frameworks overall, each with its own metrics and reporting requirements. It can be confusing to try to sort out which one -- or a combination of them -- will best suit your organization, especially with the field of ESG reporting undergoing rapid change due to the development of the IFRS standards and new regulatory requirements.
One obvious factor to consider is the type of ESG information your organisation wants to report on and which framework or frameworks will best support that. Also, in a November 2022 blog post, John Niemoller, CEO of environmental, health and safety management software vendor Perillon, listed the following considerations for choosing among ESG frameworks:
Look at your industry. Consider the frameworks that are most often used by companies that are in the same business as yours.
Look at what your competitors are using. This narrows it down even further to direct competitors. Using the same framework they do can help in benchmarking against them.
Consider your audience. Investors, customers, employees and other stakeholders often want to see different information about ESG initiatives. Your choice of framework can be guided by your primary audience and its information needs.
Look at emerging regulations. Regulatory mandates on climate-related disclosures and other types of ESG reporting can also influence framework choices.
Beyond the specific regulatory requirements, there are other factors to consider about the regions in which your company operates. For example, a report on sustainability reporting standards published jointly by consulting firms EY and Oxford Analytica in 2021 said different countries and jurisdictions "have varying legal constructs governing corporate disclosure, as well as different legal liability profiles." The report added that those differences could influence "the nature and acceptance of both voluntary and mandatory disclosures" on sustainability and ESG issues.
Remember that because the various reporting frameworks were created for slightly different purposes, it's common for huge companies to use more than one. Helpfully, the organisations in charge of some of the frameworks are working to make it easier to do so. For example, the IFRS Foundation and GRI collaborate to coordinate their standard-setting activities and increase compatibility between their frameworks. In addition, CDP plans to incorporate the new IFRS standard on climate-related disclosures into its reporting platform.
How do frameworks for reporting operate?
Three primary mechanisms often underlie the operation of an ESG framework:
Questionnaires: Disclosing businesses are usually sent a series of enquiries specific to their sector. These enquiries frequently call for numerical data, such as historical and present emission levels, or they might want input on sustainability-related problems of the company's value chain. Despite the absence of a mandatory comprehensive report, the purpose of the questions is to promote a high degree of openness and disclosure.
Reports with leveraged information Often called a "reverse report," this approach involves having a third party perform research on a business and compile a report, which is then given to the business for approval and possible revisions before being made public. Although this method is less taxing on businesses, the report's precision and degree of information could not be as high as they would be if the business had carried out the study itself.
Frameworks for reporting: Of the three categories of ESG requirements, reporting frameworks are the most desirable.
These frameworks allow businesses to generate reports by providing comprehensive recommendations tailored to a particular industry.
One of the benefits of a reporting framework is its flexibility regarding the degree of detail needed for each topic. This makes it possible to achieve a wide range of disclosure results tailored to the business's needs.
An illustration of a reporting system in action
A non-profit group called CDP gathers environmental data from businesses and towns. Businesses use the CDP-provided Online Response System (ORS) to report ecological impacts. Independent experts grade the data, which is then used to offer CDP ratings.
Trees, water security, and climate change are the three primary corporate questions. Only the surveys pertinent to a company's operations are graded. For instance, a business engaged in the oil and gas sector will only receive points on the climate change survey.
For businesses operating in high-impact industries, sector-specific questionnaires are available in addition to corporate ones. These surveys delve deeper into the specifics of the business's environmental effects.
A company's environmental performance is represented by its CDP score, which is a letter grade. Businesses that receive higher scores are thought to be more ecologically conscious.
The coming together of standards and frameworks
Regarding ESG reporting, frameworks and standards are similar to two sides of the same coin. Standards supply the specifics, while frameworks supply the overall picture. By utilising both, businesses may produce valuable and actionable ESG reports.
International standards are being matched by framework suppliers such as CDP. Businesses will benefit from this since it allows them to meet the requirements of numerous standards with a single framework. In addition to helping guarantee that companies disclose their ESG data uniformly and comparably, this can save time and money.
Frameworks: The Overall Picture
On the other hand, frameworks provide a structured approach to ESG reporting and help businesses integrate ESG considerations into their overall strategy. They offer a higher-level perspective on approaching ESG reporting and addressing various stakeholder concerns. Notable frameworks include:
Global Reporting Initiative (GRI) Framework: Offers a holistic view of how to report on sustainability issues
Task Force on Climate-related Financial Disclosures (TCFD): Guides integrating climate-related risks into financial reporting.
CDP (formerly Carbon Disclosure Project) focuses on environmental impacts and encourages businesses to disclose their environmental performance and strategies.
Frameworks are essential for contextualising ESG data within broader corporate strategies and ensuring that reporting is aligned with stakeholder expectations and regulatory requirements.
The Synergy Between Standards and Frameworks
The convergence of standards and frameworks in ESG reporting allows businesses to streamline their reporting processes and enhance the quality of their disclosures. Here’s how this synergy benefits organisations:
1. Harmonization Across Multiple Standards
Framework providers like CDP have aligned their frameworks with international standards to reduce the reporting burden on companies. This alignment means businesses can use a single framework to meet the requirements of various standards. For instance, CDP's framework integrates elements from GRI, SASB, and TCFD, helping companies report on environmental issues in a way that meets multiple standards' expectations.
2. Cost and Time Efficiency
Businesses can save time and resources by leveraging a unified framework that aligns with multiple standards. Instead of preparing separate reports for each standard, companies can use one framework to cover all relevant aspects of ESG reporting. This approach reduces duplication and lowers the costs associated with data collection and reporting.
3. Enhanced Comparability and Transparency
Uniformity in ESG reporting is critical for stakeholders who must compare performance across companies and industries. By adhering to frameworks that align with established standards, businesses ensure that their ESG data is comparable, transparent, and reliable. This consistency helps investors, regulators, and other stakeholders make informed decisions.
4. Improved Stakeholder Engagement
Integrated frameworks facilitate more effective stakeholder communication by comprehensively viewing a company’s ESG performance. This holistic approach helps organisations address stakeholder concerns more effectively and demonstrate their commitment to sustainability.
5. Strategic Integration
Frameworks guide businesses in integrating ESG considerations into their overall strategy, while standards provide the metrics and specifics needed for detailed reporting. Together, they support a strategic approach to ESG, ensuring that reporting aligns with both internal goals and external expectations.
Conclusion
The rise of sustainability reporting represents a significant shift in corporate governance. Governance frameworks are adapting to address the increasing demand for transparency and accountability in ESG performance. Companies incorporate ESG considerations into their board oversight, governance policies, and reporting practices. While this transition presents challenges, it also offers opportunities for enhanced reputation, long-term value creation, and competitive advantage.
As sustainability continues to gain prominence, the evolution of governance frameworks will play a crucial role in shaping the future of corporate responsibility. Companies that effectively integrate sustainability into their governance practices will be better positioned to navigate the complexities of the modern business environment and contribute to a more sustainable and equitable world.
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