One of the hottest and most complex topics in ESG is how to report on non-financial information. There are currently so many different initiatives, requirements and standards that it can be hard to sift through the noise and work out what’s what.
In this blog post, we give a breakdown of all the latest information you need to know.
What are the main frameworks for ESG reporting?
Some of the main ESG reporting frameworks and standards include:
Mostly used in Europe, the GRI is an international independent standards organization that helps all stakeholders to understand and communicate their impacts on issues such as climate change, human rights and corruption.
The SASB is an independent non-profit, whose mission is to develop and disseminate sustainability accounting standards that help public corporations disclose useful information to investors. It is the most widely used reporting standard in the US.
Integrated Reporting (IR) has been developed and promoted by the International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, standard setters, accounting professionals and non-governmental organizations.
The TCFD was created in 2015 by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.
In September 2020, the WEF and its International Business Council (IBC) released the Stakeholder Capitalism Metrics, a set of ESG metrics and disclosures that measure long-term enterprise value creation for all stakeholders. It’s not a standard, but a set of practical recommendations identified from existing standards like GRI and SASB.
The EFRAG’s Sustainability Reporting Board is currently drafting the European Sustainability Reporting Standards (ESRS), which are due to be submitted to the European Commission by October 2022.
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How are global ESG standards taking shape?
There’s lots of work being done to create a global standard for ESG reporting.
PwC explain how things have progressed in Spain since the implementation of Law 11/2018: “In the first year of Law 11/2018’s application, many companies struggled to report on their non-financial information. However, in subsequent years, the processes for doing so have definitely been improving. Now, we need to focus on training those responsible and improving the consistency and comparability of data.”
In March 2022, the International Financial Reporting Standards Foundation (IFRS Foundation) and the Global Reporting Initiative (GRI) announced an exciting collaboration agreement.
This means that their respective standard-setting boards – the International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB) – will start to coordinate their work.
Their aim is to create a comprehensive global reporting system that can be used by companies, investors, markets and stakeholders. The first standards are expected to be published by the end of 2022 – we will be keeping our eyes peeled for that!
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EU sustainability reporting standards
The Corporate Sustainability Reporting Directive (CSRD) is the new EU legislation requiring all large companies to publish regular reports on their non-financial performance. This is a big step in the right direction for the EU to transition to a more sustainable economy.
It’s expected to be approved in June 2022 and come into effect at the start of 2024, with a phased approach.
Companies will need to publish detailed, standardized data about:
- Environmental protection
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery and
- Diversity on company boards
They will also need to disclose their sustainability targets and green transition plans in line with the Paris Agreement.
There’s a limited assurance requirement for the information to be audited, ensuring the reports are accurate and reliable.
The first set of standards will be adopted in October 2022 and apply to all large companies – whether listed or not:
- EU companies with over 500 employees and net €150 million worldwide turnover
- EU companies with over 250 employees and net €40 million worldwide turnover in high impact sectors, including textiles, agriculture, mining and minerals
This means that around 50,000 companies will need to publish reports, nearly five times more than before.
It’s still undecided whether certain organizations – like non-European companies operating in Europe and subsidiaries whose parent companies need to report – will have to comply with the legislation.
US regulation of non-financial reporting
In the US, the Securities and Exchange Commission (SEC) has also made steps to streamline ESG reporting and make information more readily available to investors.
In March 2022, it announced an initiative that requires all US listed companies to report on an annual basis about how climate change affects their business, including:
Environmental risk management- Climate-related factors with a direct impact on the company and its finances
- Greenhouse gas emissions
- The objectives set out in the company's sustainability policy and the strategy defined to achieve them
The cost of climate-related events – like natural disasters and storms – will also need to be explained as a forecast in the company's future annual accounts.
The final rules are set to be established in the first half of 2022, and will come into force in 2023. If the proposal is adopted, it will have a significant impact on listed companies in the US, as only a third of them reported on this type of information in 2019 and 2020.
What role does data have to play?
Collecting traceable, reliable and auditable data about non-financial factors isn’t always easy. This is why the Internet of Things (IoT) has such an important role to play in ESG.
IoT sensors can measure a wide range of metrics, including things like energy and water consumption. This high quality data is then collated and stored in the cloud, and can be verified by a third-party expert, which is incredibly useful, as auditing will become mandatory in the near future.
Company boards will be held accountable for ensuring the data in their sustainability reports is accurate and valid, so businesses need to implement IoT technology now to get ahead of upcoming legislation.
With the introduction of new standards and better access to high quality data, it definitely feels like we’re a step closer to achieving a global consensus on ESG reporting.
