As ESG reporting practices mature, industry sectors are increasingly coalescing around their preferred frameworks.
The future of Environmental, Social, and Governance (ESG) reporting is poised for a significant transformation. Three key perspectives—regulatory changes, industry coalescence around frameworks, and interframework consolidation—are driving the movement towards the harmonization of ESG reporting frameworks. This harmonization is expected to bring clarity, consistency, and comparability to ESG disclosures globally.
The Rise of Corporate ESG
The rapid acceleration of ESG metric reporting is remarkable. In response to increasing interest from investors and communities, an ever-growing number of organizations are prioritizing their ESG performance and striving for sustainability improvements driven by ESG goals. Consequently, ESG considerations have shifted from the periphery to the forefront, becoming a mainstream expectation for organizations. Failure to address ESG risks seriously can lead to negative repercussions, such as shareholder activism at annual general meetings and divestment by asset managers.
The Importance of ESG Reporting
There is a global agreement among governments, businesses, and financial institutions that ESG risks are essentially investment risks. Protecting the environment and society through strong governance is critical for our future. Just as companies are expected to produce financial reports, they are also expected—and sometimes legally required—to disclose their ESG performance.
However, unlike financial reporting, ESG reporting is still fragmented and often confusing. Each ESG framework has its own set of questions and requirements, and these frameworks often overlap, necessitating complex cross-checking of responses. Most frameworks also require extensive supporting documentation, and many of the quantitative questions demand intricate numerical calculations from various data streams.
ESG reporting has become a critical business imperative. These reports often need to be fully auditable, comparable over time, and approved by a corporate officer.
Regulatory Changes
Significant progress is being made in various national and supranational jurisdictions regarding ESG reporting regulations. The U.S. Securities and Exchange Commission (SEC) announced a proposal in 2022 to mandate ESG disclosures modeled after the Task Force on Climate-related Financial Disclosures (TCFD). These new SEC climate disclosure regulations are expected to come into effect in 2023 for reporting in 2024.
Similarly, the European Union (EU) has introduced a comprehensive sustainable finance package that includes the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD), all requiring enhanced ESG-related disclosures from companies.
Industry Sectors Coalescing Around Frameworks
As ESG reporting practices mature, industry sectors are increasingly coalescing around their preferred frameworks. The property sector, for example, has been an early mover, favoring reporting against the Global Real Estate Sustainability Benchmark (GRESB) framework. This trend is expected to continue as different sectors identify and align with frameworks that best address their specific ESG reporting needs.
Framework Consolidation
The ESG reporting landscape is also experiencing a trend towards specialization and consolidation of frameworks. The International Financial Reporting Standards (IFRS) Foundation and the Global Reporting Initiative (GRI) are examples of organizations developing more specialized frameworks. On the other hand, consolidation efforts are exemplified by the merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) to form the Value Reporting Foundation.
Key Milestones in ESG Reporting Evolution
January 2020: Larry Fink’s Letter to CEOs
In January 2020, Larry Fink, the CEO of BlackRock, the world’s largest asset management firm, issued a groundbreaking letter to CEOs worldwide. He emphasized that climate risk equates to investment risk, signaling a paradigm shift in investment strategies. Fink highlighted that sustainability should be a crucial part of a company’s strategic framework, and companies that fail to address environmental risks would face increased scrutiny from investors.
This letter underscored the importance of ESG considerations in investment decisions, pushing companies to integrate ESG factors into their operations and disclosures.
June 2020: Introduction of the EU Sustainable Finance Taxonomy
The EU Sustainable Finance Taxonomy, introduced in June 2020, is a classification system establishing a list of environmentally sustainable economic activities. It aims to provide companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. This taxonomy helps to direct investments towards projects and activities that have a substantial positive impact on the climate and the environment. By setting clear criteria, the taxonomy aids in reducing market fragmentation and fostering transparency, thereby encouraging sustainable investment practices across the EU.
September 2020: IFRS Consultation and Joint Statement from ESG Organizations
- IFRS Consultation on Sustainability Reporting: In September 2020, the International Financial Reporting Standards (IFRS) Foundation issued a consultation paper on sustainability reporting. The paper proposed the creation of the International Sustainability Standards Board (ISSB), aimed at developing global standards for sustainability disclosures. This initiative was driven by the need for consistent and comparable sustainability information to meet the growing demand from investors and other stakeholders.
- Joint Statement by CDP, CDSB, GRI, IIRC, and SASB: In the same month, leading ESG organizations—CDP, CDSB, GRI, IIRC, and SASB—released a joint statement of intent. They expressed their commitment to work with the IFRS Foundation towards a comprehensive corporate reporting system. This collaboration aimed to align their standards and frameworks to create a more cohesive and standardized approach to sustainability reporting globally.
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March-April 2021: Significant Developments in ESG Reporting
- World Economic Forum and SASB Collaboration: In March 2021, the World Economic Forum (WEF) and the Sustainability Accounting Standards Board (SASB) announced their intent to collaborate on developing a global corporate disclosure framework. This collaboration aimed to enhance the quality and comparability of ESG disclosures, facilitating better decision-making for investors and stakeholders.
- EU Sustainable Finance Disclosure Regulation (SFDR): The SFDR came into force in March 2021, imposing mandatory ESG disclosure obligations on asset managers and other financial market participants. This regulation aims to increase transparency in how financial market participants integrate sustainability risks and consider adverse sustainability impacts in their processes.
- Proposal for the EU Corporate Sustainability Reporting Directive (CSRD): In April 2021, the EU published a proposal for the CSRD, which aims to enhance and standardize corporate sustainability reporting across Europe. The directive proposes more detailed reporting requirements and extends the scope to include a wider range of companies, ensuring greater accountability and transparency in sustainability practices.
June 2021: Formation of the Value Reporting Foundation
In June 2021, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) finalized their merger, creating the Value Reporting Foundation.
This merger aimed to integrate the strengths of both organizations, providing a comprehensive suite of resources for businesses and investors to manage and communicate value creation effectively. The new foundation focuses on advancing integrated thinking and reporting, enhancing the coherence and comparability of ESG information.
November 2021: Creation of the ISSB
The IFRS Foundation announced the creation of the International Sustainability Standards Board (ISSB) in November 2021. The ISSB was established to develop a comprehensive global baseline of sustainability disclosures for financial markets. This unified corporate reporting system aims to meet the needs of investors and other stakeholders for consistent and comparable information on sustainability-related risks and opportunities, fostering greater transparency and accountability in corporate reporting.
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March 2022: US SEC Climate Disclosure Rule Proposal
In March 2022, the US Securities and Exchange Commission (SEC) proposed a climate disclosure rule that would require large companies to disclose their greenhouse gas emissions and climate-related risks.
This proposal aims to provide investors with consistent, comparable, and reliable information about how climate-related risks are impacting companies. The rule focuses on enhancing transparency and accountability, ensuring that investors have access to material information needed for informed decision-making.
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June 2023: ISSB Issues Sustainability Disclosure Standards
In June 2023, the International Sustainability Standards Board (ISSB) issued its first two sustainability disclosure standards—IFRS S1 and S2. These standards provide a globally consistent framework for companies to disclose sustainability-related financial information. The standards aim to enhance the transparency and comparability of sustainability disclosures, enabling investors to make more informed decisions based on reliable and comparable ESG data.
Mid to Late 2023: New SEC Reporting Regulations
By mid to late 2023, new SEC reporting regulations for large enterprises are expected to come into effect. These regulations will mandate the disclosure of Scope 1 and Scope 2 greenhouse gas emissions, which cover direct emissions from company operations and indirect emissions from the consumption of purchased energy.
The implementation of these regulations aims to improve the accuracy and completeness of climate-related disclosures, helping investors assess the climate risks and opportunities associated with their investments.
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2024 (Anticipated): Implementation of CSRD and TCFD Requirements
- Implementation of CSRD Requirements: In the first quarter of 2024, large organizations are expected to start publishing their reports following the requirements of the Corporate Sustainability Reporting Directive (CSRD). This directive will require companies to disclose detailed information on their sustainability practices, enhancing the transparency and comparability of corporate sustainability reporting across Europe.
- Enforcement of TCFD for Financial Institutions: The Task Force on Climate-related Financial Disclosures (TCFD) will enforce its requirements for financial institutions from 2021 to 2024 or 2025, depending on the size of the institution. These requirements aim to improve the quality and consistency of climate-related financial disclosures, helping investors, lenders, and insurance underwriters to assess and price climate-related risks and opportunities accurately.
(India CSR)
