Companies around the world have begun to focus on the Environmental, Social, and Governance (ESG) factors that their activities affect, based on investors’ demand for information on the impact of business activities on sustainability – of the companies themselves and the environment in which they operate. If companies do not act responsibly when it comes to protecting the environment and society, or if they fail to make the right disclosures, the consequences can be huge.
Take the case of Brazilian mining company Vale S.A. In January 2019, the company’s Brumadinho dam collapsed, killing 270 people and causing immense harm to the local environment and society, and leading to a $4 billion loss in Vale’s market capitalization. On April 28, 2022, the US Securities and Exchange Commission charged Vale with making false and misleading claims about the safety of its dams. Vale was found to have manipulated multiple dam safety audits by obtaining numerous fraudulent stability certificates. The SEC complaint also states that Vale had known for years that the Brumadinho dam, which had been built to contain potentially toxic byproducts from mining operations, did not meet internationally-recognized standards for dam safety.
It is in the context of such punitive measures that companies everywhere need to take sustainability disclosure seriously. A number of sustainability reporting frameworks exist at this point in time, and we have listed them below. Some of the frameworks are being consolidated as part of efforts to create global baseline standards and bring much of all sustainability reporting on even ground and enhance disclosure comparability.
Here’s a ready reckoner for you on ESG reporting standards.
An Upcoming Framework By The International Sustainability Standards Board (ISSB)
The International Financial Reporting Standards (IFRS) Foundation in November 2021 formed the ISSB with an aim to develop a globally-accepted baseline of high-quality sustainability standards. There are also attempts to consolidate various sustainability standard-setting bodies into the ISSB. By June 2022, the IFRS Foundation will consolidate the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) into the ISSB. The CDSB is an initiative of the Carbon Disclosure Project (CDP). The Value Reporting Foundation (VRF) was formed by a merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) in June 2021.
On March 31, 2022, the ISSB launched a consultation on two proposed standards that set out general sustainability-related and climate-related disclosure requirements. The IFRS Foundation said the proposals build upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and include industry-specific disclosure requirements from the SASB Standards. The ISSB’s consultation over the two proposals ends on July 29, 2022.
Sustainability Accounting Standards Board (SASB)
In 2011, the Sustainability Accounting Standards Board (SASB) began to develop the SASB framework for ESG reporting. What sets apart the SASB framework from other frameworks is its focus on industry-specific disclosures. The SASB has made available metrics for reporting environmental, social, and governance issues across 77 different industries. Reporting in accordance with industry-specific metrics is bound to facilitate communication between a company and its stakeholders and the creation of decision-useful information. In September 2021, the SASB released an XBRL taxonomy containing the digital definitions of its industry standards. A taxonomy, which is what a collection of digital standards is called, helps companies create digital sustainability reports that enhance the analysis and comparability of disclosures. XBRL or eXtensible Business Reporting Language is a structured data format. For a deeper understanding of the SASB standards and their digital version, read one of our previous blogs here.
The International Integrated Reporting Framework (The framework)
The International Integrated Reporting Council (IIRC) was established in August 2010 with the intention of creating a globally accepted framework that helps organizations communicate their value creation over time. Consequently, the <IR> framework was published in April 2013. The <IR> framework advocates integrated thinking, identifying the data that needs to be part of an integrated report – which combines the financial as well as the non-financial aspects of business activity. The framework’s use is voluntary in most international markets, but it has been made mandatory in South Africa.
The TCFD was established in 2015 by the Financial Stability Board. The TCFD framework is one of the more popular sets of sustainability standards and has found global acceptance. The TCFD framework is represented by 11 recommendations across the four pillars of Governance, Strategy, Risk Management, and Metrics and Targets. The UK seeks to make TCFD-based disclosures mandatory across its economy by 2025. The US Securities and Exchange Commission (SEC) recently proposed a climate-related disclosure framework modeled partly on TCFD recommendations. Canada is also set to move towards mandatory climate-related disclosures based on TCFD recommendations. France, Japan, Spain, and New Zealand are some of the other countries that have moved towards mandatory disclosures based on TCFD.
Global Reporting Initiative (GRI)
The GRI, which is the first-ever initiative to facilitate ESG reporting by companies, was set up in 1997. The GRI began to focus on ESG shortly after the term entered the sustainability reporting lexicon in the mid-2000s. The GRI’s Global Sustainability Standards Board (GSSB) carries out a new work program every three years to review existing GRI standards and develop new ones. Currently, GRI is working together with the European Financial Reporting Advisory Group (EFRAG) on creating sustainability standards to be used by companies in the EU. GRI released an XBRL taxonomy of its standards in 2013.
UN Sustainable Development Goals (UN SDGs)
In September 2015, the United Nations General Assembly adopted a sustainable development agenda with 17 goals (SDGs) to be achieved by 2030, including ending poverty, hunger, and inequality; promoting quality education and gender equality; and facilitating climate action, along with the provision of clean and affordable energy, and clean water and sanitation. Each of the 17 goals came with an achievable target that fed into the larger aim of bringing peace and prosperity throughout the world. One drawback of the SDGs might be that they are more qualitative than quantitative in nature.
Carbon Disclosure Project (CDP) Guidance
The CDP helps organizations including companies, cities, states, and regions to manage their environmental impacts while providing investors and other stakeholders with the data they need to make financial decisions. With economic activity causing irreparable damage to the environment and resources becoming more scarce, CDP tries to bring to effect a ‘systemic change in market behavior’. It does so through guidance for companies cities, cities, states, and regions to report on the focus areas of Climate, Water, and Forests. The guidance takes the form of a questionnaire to be filled in on the CDP website. Based on an analysis of the responses to the questionnaire, the respondents are assigned a score. The data that the CDP gathers is available for use by investors and other stakeholders.
Streamlined Energy and Carbon Reporting (SECR)
The SECR rules came into effect in the UK in April 2019, replacing the Carbon Reduction Commitment (CRC) Scheme. CRC was a mandatory scheme aimed at reducing the UK’s carbon emissions by 1.2 million tonnes of carbon by 2020. The CRC scheme ran from April 2010 to March 2019, after which the SECR rules kicked in for large quoted and unquoted companies and limited liability partnerships (LLPs). These companies need to report on their energy use, GHG emissions, and at least one emissions intensity metric in their Directors’ Reports. Large quoted companies also continue to report their global scope 1 and 2 GHG emissions in tonnes of carbon dioxide equivalent.
*Quoted companies have their shares listed on the London Stock Exchange, any other international stock exchange, or on the Alternative Investment Market (AIM) – a submarket of the LSE – or the ICAP Securities and Derivatives Exchange in the UK.
