In today’s corporate world, the paradigm shift to sustainability and sustainable business practices is quickly gaining ground. Stakeholders including investors, bankers, large customers, and consumers are looking for ESG data and information to make their investing, lending, and purchasing decisions. This shift is fueling a demand for ESG data–information on companies’ environmental, social, and governance practices–that is comparable, reliable, and widely accessible. But how are companies actually disclosing this data? And how can they best manage it to ensure it meets stakeholder needs and expectations of quality?
Below is a comprehensive guide to corporate sustainability reporting, including the different types of reporting, and key organizations, ESG standards, and ESG frameworks in the space.
About corporate sustainability
Corporate sustainability relates to a strategy whereby a business delivers its goods and services in a manner that is both profitable for itself and responsible towards the environment and society, both in its use of natural, human, and social capital and in its impacts on them.
The concept of corporate sustainability is evolving to become a critical component of companies’ strategies, operations, and reporting, and increasingly considers a wide array of environmental, social, and governance (ESG) issues. Although ESG and sustainability are not the same, they are often used interchangeably when we talk about sustainability (or ESG) reporting. For the purpose of this article, we will use “sustainability reporting” and “ESG reporting” synonymously to describe the disclosure of information about a company’s approach to environmental (E), social (S), and governance (G) issues.
About corporate sustainability reporting
The business issues that fall under the ESG categories are not new. If they are material to the conduct of business, companies manage them diligently. For manufacturing companies it may be health and safety, for software companies it may be customer privacy, and for food and beverage makers it may be product ingredients. What is new is the explicit focus of investors, customers, bankers, employees and other stakeholders on how companies are managing these issues and making their decisions accordingly.
By the same token, corporate sustainability reporting isn’t new. In the past, it was limited to a communications exercise in response to environmental liability and public regulations. It was neither mandatory nor standardized. Since the early 2000s, reporting shifted to more of a reporting exercise for enhancing corporate citizenship and reputational capital. During this time, an increasing number of voluntary ESG standards and frameworks became available to use; while this increased the amount of information in the market, it also created a lot of noise and poor quality information. Today, the exponential rise in demand for decision-useful ESG and sustainability information is shifting corporate sustainability reporting to a standardized and increasingly mandatory exercise.
Why report on ESG?
There are several reasons for companies to report on their sustainability, or ESG, performance and issues. Each is a powerful driver in its own right, and when acting in combination, they effectively compel companies to improve their sustainability reporting practices–or to start to report, when they haven’t already:
• Market drivers. Investors, customers, bankers, insurers, and other stakeholders and capital providers are increasingly recognizing that a company’s financial performance, risk profile, and longevity are inextricably tied to its proper management of its sustainability-related issues. As such, they’re increasingly looking to understand, via data and narrative disclosures, how a company is performing on various sustainability and ESG issues. In turn, this information influences the decisions they make–decisions that directly affect the company’s business activities. To meet the information demands of these stakeholders, companies need to produce comparable, reliable, and timely disclosures.
• Regulatory drivers. Governments around the world wishing to respond to market needs, adopting policies to promote sustainability, and increasingly mandating corporate disclosures of sustainability, ESG, and climate-related data and narrative. For example, in Europe the Corporate Sustainability Reporting Directive (CSRD), which targets public and private companies, both large and small, is set to take effect in the second half of 2022. In the US, the Securities and Exchange Commission (SEC) recently issued proposed new climate disclosure regulations for all US listed companies, which could come into effect by 2024. In order to disclose such information, companies will need to collect and report high quality, auditable data–in the same way that they collect and report financial data.
• Value creation. By measuring and managing its material ESG issues, a company can increase its growth prospects, reduce its operating and extraordinary expenses, and reduce its risk profile, all of which improves its financial performance and thus creates financial value. By providing clear, consistent, decision-useful information to capital markets on how it manages these issues, companies can ensure that markets reflect their improved performance by lowering the company’s risk profile and granting a higher market value–and therefore higher enterprise value.
Expanding value creation to the environment and society
When companies expand their focus to manage not only how ESG or sustainability-related issues affect their business, but how their business affects the sustainability dimensions of environment and society, they measure and manage their social, environmental, and economic impacts. By adopting responsible and regenerative practices throughout its value chain (think upstream suppliers and downstream customers and communities), a company can effectively reduce its negative impacts and increase their positive ones, creating value for society by increasing the value of natural, human, and social capitals.
The corporate ESG reporting landscape
The growing demand for more and better ESG and sustainability-related data and disclosures has, in the absence of regulations, given rise to the proliferation of voluntary ESG disclosure standards and frameworks to help address this market need.
Before we dive into the individual ESG standards and frameworks, it’s important to understand the difference between the two, as defined here by the Global Reporting Initiative:
- A standard is a specific quality requirement for reporting. It contains detailed criteria, or ESG metrics, of “what” should be reported on a specific topic. Standards involve a public interest focus, independence, due process, and public consultation, strengthening the basis of what is being asked.
- A framework is a broader, contextual “frame” for information. It is a set of principles providing guidance and shaping understanding of a certain topic, defining the direction of information but not the methodology of collection or reporting itself. It may be used when a well-defined standard does not exist.
Another important distinction pertains to the data or information itself: whether it comes directly from the companies or is produced by third parties. ESG ratings are an example of the latter. They are created by research firms based on proprietary methodologies; while they may include company data and disclosures in the process of assessing a company’s environmental, social, and governance practices, their resulting scores constitute a distinct type of ESG data. While market participants use this data in capital allocation decisions, ESG ratings and scores do not replace the need for comparable, reliable, and timely corporate ESG data disclosures.
List of Key Organizations: ESG standards
EFRAG Sustainability Reporting Board
The European Financial Reporting Advisory Group (EFRAG) was established in 2001 by the European Commission. The group has two pillars—one focused on financial reporting and the other on sustainability reporting. In its financial reporting activities, EFRAG ensures that the European view is represented in the International Accounting Standards Board’s (IASB) standard-setting process and provides advice to the European Commission on the International Financial Reporting Standards (IFRS).
Since being mandated by the European Commission to develop European Sustainability Reporting Standards as part of the Commission’s 2021 Corporate Sustainability Reporting Directive (CSRD) proposal, EFRAG modified its governance structure to create the EFRAG Sustainability Reporting Board, which sits alongside the EFRAG Financial Reporting Board and is divided into three chapters (European Stakeholders, National Organizations, and Civil Society Organizations). The Sustainability Reporting Board is responsible for all sustainability reporting positions of EFRAG and oversees and authorizes EFRAG’s draft and final sustainability reporting due process documents.
In March 2022, EFRAG released working papers, or draft sustainability reporting standards. A first set of finalized standards is expected before the end of 2022, and additional sector-specific standards, and small and medium enterprise (SME) reporting standards by mid-2023. When the final EFRAG standards (the European Sustainability Reporting Standards) are released, they will be enforceable by the European Commission and affect all 28 countries in Europe.
Global Reporting Initiative (GRI)
The Global Reporting Initiative(GRI) is an independent, international, and non-governmental organization created in 1997 that helps businesses and other organizations take responsibility for their impacts by providing them with the global common language to communicate those impacts. Its goal is to empower disclosure and decisions that are accountable, identify and manage risks, and capitalize on opportunities while creating social, environmental, and economic benefits for all.
The GRI provides standards for sustainability reporting called the GRI Standards. First published in 2010, they are the first and most widely adopted standards for sustainability disclosure. They are divided into Universal Standards that apply to all companies, Sector Standards applicable to companies in specific industries, and Topic Standards that apply to companies depending on their material impacts. In October 2021, the GRI significantly revised its Universal Standards and released its first Sector Standard for Oil and Gas (with 40 expected in the coming years).
GRI has also entered into collaborative agreements with the European Financial Reporting Advisory Group (EFRAG) to draft the European Sustainability Reporting Standards and with the International Sustainability Standards Board (ISSB) to draft the IFRS Sustainability Disclosure Standards.
International Sustainability Standards Board (ISSB)
The International Sustainability Standards Board (ISSB) was established in November 2021 by the International Financial Reporting Standards (IFRS) Foundation Trustees to work alongside the International Accounting Standards Board (IASB) to develop the IFRS Sustainability Disclosure Standards. Established in 2001, the IFRS is a not-for-profit organization with the goal of developing a single set of global accounting [and now sustainability] disclosure standards to bring transparency and accountability to financial markets.
The IFRS Foundation has consolidated into the ISSB the Climate Disclosure Standards Board (CDSB) and by June 2022 will also be consolidating the Value Reporting Foundation (VRF), which comprises the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC).
In March 2022, the ISSB launched consultations on two proposed standards—one on general sustainability-related disclosure requirements and one on climate-related disclosure requirements. Final versions are expected by the end of 2022. These prototypes are the result of six months of work by the CDSB, IASB, TCFD, VRF and the World Economic Forum (WEF) and are supported by the International Organization of Securities Commissions (IOSCO). The IFRS Foundation has also signed a collaboration agreement with the GRI to coordinate their standard-setting activities.
Sustainability Accounting Standards Board (SASB)
SASB is an independent, not-for-profit organization established in 2011 to set standards for companies to disclose sustainability or ESG information to investors and other providers of financial capital. From inception, SASB’s goal was to establish industry-specific disclosure standards, called the SASB Standards, across environmental, social, and governance topics that facilitate communication between companies and investors about financially material, decision-useful information.
In 2021, SASB and the International Integrated Reporting Council (IIRC) merged into the new Value Reporting Foundation (VRF). As of June 2022, the VRF will be merging into the International Financial Reporting Standards (IFRS) Foundation as part of the International Sustainability Standards Board (ISSB), which is in the process of creating a global set of baseline corporate sustainability disclosure standards. The ISSB intends to leverage the industry-specific standards and standard-setting process developed by SASB in creating its standards.
SASB Standards were developed for 77 industries, each of which includes disclosure topics and performance metrics for the sustainability risks and opportunities “reasonably likely to materially affect the financial condition, operating performance, or risk profile of a typical company within an industry” (i.e., material impacts on a company’s enterprise value). SASB Standards include disclosure topics and metrics across five dimensions of sustainability: Environment, Social Capital, Human Capital, Business Model and Innovation, and Leadership and Governance.
List of Key Organizations: ESG frameworks
Climate Disclosure Standards Board (CDSB—initiative of CDP)
The Climate Disclosure Standards Board (CDSB) was an international not-for-profit consortium of business and environmental not-for-profit organizations created in 2007. Its goal was to advance and align the global mainstream corporate reporting model and equate the relevance of information about business’s use of and effect on natural capital with the relevance of information about financial capital to better understand holistic corporate performance.
To this end, it created the CDSB Framework. Ultimately, it aimed to standardize reporting on environmental information through collaboration, and by identifying and coalescing around the most widely shared and tested reporting approaches that were emerging around the world. The organization was merged into the International Financial Reporting Standards (IFRS) Foundation as part of the International Sustainability Standards Board (ISSB), which is in the process of creating a global set of baseline corporate sustainability disclosure standards. These will be informed, at least in part, by the CDSB framework and approach.
International Integrated Reporting Council (IIRC)
The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession, academia and not-for-profits created in 2010 to promote integrated thinking and integrated reporting principles, with the view that communication about value creation, preservation, or erosion is the next step in the evolution of corporate reporting.
The Council produced the Integrated Reporting Framework on this basis. In 2021, the IIRC merged with SASB to become the Value Reporting Foundation (VRF). In June 2022, the Value Reporting Foundation will be merging into the International Financial Reporting Standards (IFRS) Foundation as part of the International Sustainability Standards Board (ISSB), which is in the process of creating a global set of baseline corporate sustainability disclosure standards. The ISSB intends to leverage the Integrated Reporting Framework developed by the IIRC in creating its standards.
Task Force on Climate-Related Financial Disclosures (TCFD)
The Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 in the wake of COP21 and the Paris Agreement to develop recommendations for more effective climate-related disclosures that could promote more informed investment, credit, and insurance underwriting decisions. In turn, this would enable stakeholders to better understand the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.
In 2017, the TCFD published its recommendations on climate-related financial disclosures, known as the TCFD Framework. The recommendations are structured around four thematic areas that represent core elements of how organizations operate: governance, strategy, risk management, and metrics and targets. They also embed the principle of double materiality—considering both the impact that a company has on climate through its emissions and the impact that the physical and transition risks of climate change has on the company. In October 2021, the TCFD updated its recommendations and provided new guidance on metrics, targets, and transition plans, and the framework is now also informing the development of the coming IFRS Sustainability Reporting Standards developed by the ISSB.
To date, more than 3,000 organizations and companies support TCFD with a combined market capitalization of $27.2 trillion. Several countries (New Zealand, the UK, Switzerland) and regulators (the US Securities and Exchange Commission and Canadian provincial securities commissions) are issuing regulations to mandate application of the TCFD Recommendations. In addition, both initiatives to develop corporate sustainability reporting standards (see ISSB and EFRAG above) have completely integrated the TCFD Recommendations into their draft climate disclosure standards.
Key organizations: ESG research and ratings
Carbon Disclosure Project (CDP)
The CDP (which was formerly known as the Carbon Disclosure Project until the end of 2012) is a not-for-profit organization that aims to study the implications of climate change for the world’s principal publicly traded companies. It runs a global disclosure platform for investors, companies, cities, states, and regions manage their environmental impacts by helping persuade companies throughout the world to measure, manage, disclose, and ultimately reduce their greenhouse gas (GHG) emissions.
The CDP also publishes annual ratings known as CDP Scores which rate companies and cities on their sustainability performance. The scoring system measures the comprehensiveness of disclosure, awareness of environmental risks, and best practices associated with environmental leadership (such as setting ambitious and meaningful targets) across three categories: climate change, forests, and water security. For each category, the CDP discloses questionnaires, scoring criteria and methodologies, and results publicly on its webiste.
By 2025, CDP aims to expand its scope to cover the full range of planetary boundaries and earth systems including climate, land, resilience, biodiversity, waste, oceans, freshwater, forests, and food. It will adopt a wider, more holistic approach to disclosing, analyzing, and improving environmental data with a focus not only on human demands on the environment but also on increasing the supply of natural systems. The approach will diversify the disclosure levers of market and regulatory actors.
MSCI is an investment research firm providing research, analytics tools, investment indexes across industries, as well as ESG and climate products. Its mission is to provide transparent information on key drivers of risk and return to investors and other market participants to enable better investment decisions.
In its sustainability and ESG activities, MSCI provides several tools and analyses such as ESG and climate indexes, ESG fund rating, and MSCI ESG Ratings of companies that are meant to assess a company’s resilience to long-term industry material ESG risks. The approach is designed to provide institutional investors with insights and ESG integration tools to support long-term value creation. MSCI’s rankings are based on publicly available information such as government, not-for-profit and regulatory datasets, company disclosure documents, and media sources.
S&P Global Corporate Sustainability Assessment (CSA)
The S&P Global Corporate Sustainability Assessment (CSA) is an annual evaluation of companies’ sustainability practices that covers thousands of companies from around the world. Companies are invited to participate (and thus receive a CSA Score) based on their inclusion in the Dow Jones Sustainability Indices, the S&P ESG indices, or several other sustainability indices. In 2021 and 2022, the CSA assessed over 7,000 companies based on 2020 data; of these, over 2,250 actively participated by answering the CSA questionnaire, while the remaining companies were assessed by S&P Global analysts using publicly available information. By April 2022, the S&P CSA plans to bring the number of companies invited and assessed to over 11,000.
A company receives an ESG score by completing one of 61 industry-specific questionnaires, submissions which then undergo multiple layers of quality checks, expert reviews, and peer comparison. As long as it is willing to share its resulting score on the S&P Global platform, any company will be assessed free of charge. The CSA scoring is used by companies to communicate with investors and benchmark sustainability performance relative to industry peers.
Sustainalytics, a Morningstar Company, provides environmental, social, and governance (ESG) research, ratings, and data to institutional investors and companies. The Sustainalytics ESG Risk Ratings evaluate the degree to which a company’s enterprise value is exposed to material ESG issues.
Specifically, they measure a company’s exposure to industry-specific material ESG risks, and how well that company is managing those risks. Combining the concepts of management and exposure, they arrive at an absolute assessment of ESG risk that is comparable across sub-industries, sectors, companies and regions.
Vigeo Eiris provides environmental, social, and governance (ESG) research, ratings, and data to institutional investors and companies. Since 2019, it has operated as a business unit of Moody’s Corporation. As part of the ESG Assessment, Vigeo Eiris analyzes companies’ ESG performance, identifies risks and opportunities, and screens controversies to develop ESG and Sustainability Ratings as well as Carbon Footprints of companies.