ESG – which stands for Environmental, Social, and Governance – is a much-debated term today. On the one side are investors, analysts, and business leaders who believe ESG is a diversion from what enterprises are meant to do. On the other side are those who extol ESG and call it a revolution, or the biggest thing to influence business activity in recent times. Whichever side of the spectrum one may belong to, one cannot deny that ESG represents an entire narrative that the business world and even the financial markets have ignored until now. Most investors prefer looking beyond the financial numbers of an organization and ESG intends to formalize the activity. Organizations everywhere are proactively adopting ESG reporting to meet a growing need for information on their interactions with the environment and society, and matters of corporate governance. Sustainability bodies are scrambling to create an ideal framework for the disclosure of ESG information. And ESG rating agencies are proliferating to provide the market with sustainability scores on which to base investment decisions.
In a developing ESG ecosystem, one thing that must fall into place is the steady flow of ESG data. For that to happen, companies must begin to produce transparent and comparable ESG reports that stakeholders can use. In this blog, we attempt to provide a guide for companies to kickstart their ESG reporting process.
Digital ESG Reporting – The Way to Go
What is digital ESG reporting? It is a more powerful way of disclosing ESG information. That’s because digital ESG reporting uses documents that serve a dual purpose – they cater to a human reader as well as a computer. They do this by using a computer-readable language called the eXtensible Business Reporting Language (XBRL).
For many years now, XBRL is being used for financial reporting in geographies such as the United States, United Kingdom, European Union, and South Africa. XBRL reporting is based on a taxonomy or a collection of XBRL tags, where each tag represents an individual accounting concept. Simply put, a taxonomy is a collection of digital accounting concepts. Think of the taxonomy as a digital dictionary of accounting concepts. Most sustainability reporting frameworks have a digital taxonomy as we will see in the next section. Want to know more about digital ESG reporting? Write to us at info@iriscarbon.com.
Getting Started with ESG Reporting
To get started with ESG reporting, companies first need to get familiar with the available ESG reporting frameworks and the ESG requirements of their national regulator. They must then put in place an efficient ESG reporting process. We will look at each of these steps in detail.
Get Familiar with an ESG Reporting Framework
Companies have multiple ESG reporting frameworks to choose from, but they must also check if their national regulator prefers a specific standard over the others. Here are some of the more popular ESG reporting frameworks.
International Sustainability Standards Board (ISSB) Framework
The International Sustainability Standards Board (ISSB) is currently developing a sustainability framework for which it seeks global acceptance. The ISSB is consolidating the efforts of other sustainability bodies such as the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF). In March 2022, the ISSB released two draft standards setting out general sustainability-related and climate-related disclosure requirements. Subsequently, the Board also released a draft digital taxonomy corresponding to the ISSB standards.
Sustainability Accounting Standards Board (SASB) Framework
What sets apart the Sustainability Accounting Standards Board (SASB) framework from other frameworks is its focus on industry-specific ESG disclosures. The SASB framework for reporting environmental, social, and governance metrics spans 77 industries. The SASB September 2021 released an XBRL taxonomy with the digital definitions of its industry standards.
The Task Force on Climate-related Financial Disclosures (TCFD) is a popular sustainability framework. The TCFD framework works through 11 recommendations across four pillars: Governance, Strategy, Risk Management, and Metrics & Targets. TCFD disclosures will be mandatory across the UK economy by 2025. The US Securities and Exchange Commission (SEC) has proposed climate-risk disclosures modeled partly on TCFD recommendations.
Global Reporting Initiative (GRI) Framework
Set up in 1997, the Global Reporting Initiative (GRI) was the first-ever effort to facilitate sustainability reporting by companies. Every three years, the GRI’s Global Sustainability Standards Board (GSSB) carries out a work program to review existing standards and develop new ones. In 2013, GRI released an XBRL taxonomy corresponding to its standards.
European Sustainability Reporting Standards (ESRSs)
The European Sustainability Reporting Standards (ESRSs) are currently being developed by the European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI). European companies will use the ESRSs for ESG reporting under the Corporate Sustainability Reporting Directive (CSRD). EFRAG has released a draft set of ESRSs and also a corresponding proof-of-concept XBRL taxonomy.
Get Familiar with your country’s ESG Regulation
What are the ESG reporting regulations in place in various countries? We look at regulations (or proposed regulations) in the US, UK, EU, China, and India.
The United States: The Securities and Exchange Commission has proposed that public companies disclose climate-risk information in their filings with the regulator. The disclosures include Scope 1, Scope 2, and even Scope 3 emissions information in accordance with the Greenhouse Gas (GHG) Protocol. At this point, sustainability disclosure in the US is largely voluntary. The SEC is expected to adopt climate-related disclosure rules by end-2022.
The United Kingdom: In April 2022, large UK companies started reporting ESG information using the Task Force on Climate-Related Financial Disclosures (TCFD) framework. The UK aims to introduce TCFD-based reporting across its economy by 2025.
The European Union: Starting in January 2024, the Corporate Sustainability Reporting Directive (CSRD) will begin to apply to close to 50,000 EU companies. CSRD will replace the Non-financial Reporting Directive (NFRD) regime, which currently covers only around 12,000 EU companies.
China: From June 1, 2022, Chinese companies began to make sustainability disclosures in accordance with a Guidance for Enterprise ESG Disclosure. The Guidance has been developed by the China Enterprise Reform and Development Society (CERDS) in collaboration with various other stakeholders. Disclosures differ based on company type and size.
India: Beginning in 2022-23, India’s top 1,000 listed companies by market capitalization will have to prepare a Business Responsibility and Sustainability Report (BRSR) and file it with the Ministry of Corporate Affairs (MCA). BRSR replaces the Business Responsibility Report (BRR), which applied only to the top 100 listed Indian companies since 2012.
Establish an Efficient ESG Reporting Process
Companies must attach as much rigor to ESG reporting as they do to financial disclosures. We recommend the following four steps for ESG reporting.
Step 1: Understand what your Stakeholders expect from your ESG Reports
The stakeholders of ESG information include regulators, investors, non-governmental organizations, and ESG rating agencies. Each stakeholder group has specific expectations from companies and it is crucial that companies ensure their ESG reporting process accounts for those expectations. For instance, regulators and investors seek to ensure that ESG reports meet regulatory requirements and that companies’ interactions with the environment and society are transparent and above board; non-governmental organizations want to ensure business operations have no adverse effects on the climate and there are no human rights abuses; ESG rating agencies look to test the soundness of a company’s ESG performance.
Step 2: Evolve your Company’s ESG Data Gathering and Reporting Process
ESG reporting calls for an internal data gathering and analysis process that may not have existed until this point. Companies must also verify if they are already collecting data that falls under the ESG bracket. Through internal discussion, companies can identify areas where data collection can be enhanced.
When it comes to drafting ESG disclosures, companies must first study the documentation or user guide that accompanies any sustainability standard. Ideally, companies must involve sustainability and governance personnel, financial disclosure experts, and investor relations experts in the process of drafting ESG disclosures. It is also useful to craft a narrative around the qualitative information in ESG reports.
Step 3: Create Digital ESG Reports for greater Accessibility and Comparability
Digital ESG reports, which we have mentioned above, are easier to analyze and compare. That is because computers understand the XBRL elements or tags embedded in the information. With digital reports, ESG disclosures can be pulled into spreadsheets at a click as opposed to a manual keying in of the data.
Digital ESG reports are expected to be mandatory in the US and the EU. In these jurisdictions, it will be easier for analysts, investors, and others to compare ESG disclosures across companies and industries. This will speed up investing and other decision-making processes.
Financial reporting in digital format has improved the quality of disclosures and their analysis. ESG reporting will see the same benefit wherever companies take the digital route.
Step 4: Engage various Stakeholders to Strengthen your ESG Credentials
After companies draft their ESG disclosures, it is advisable that they get them vetted by law firms and ESG-focused organizations. These experts can ensure that ESG reports meet stakeholder expectations.
Even after ESG reports are published, companies must encourage comments, feedback, and suggestions from stakeholders. In fact, sustainability reports must be easy to access. Companies must publish them on their website and notify investors and the general public. The narrative built around ESG performance has a wide audience. Publicizing an ESG narrative would signal to the public – including customers and future employees – that the company in question is serious about its ESG credentials and aims to improve or sustain positive interactions with the environment and society.
Benefits of ESG Reporting
ESG reporting helps companies on multiple counts. It enhances a company’s reputation with stakeholders through better communication and facilitates regulatory compliance.
Stakeholder Communication: Today’s investors and customers look beyond the financial numbers and narrative. The story beyond the numbers is what ESG reporting allows companies to present. The more effectively a company conveys ESG information, the greater will be its image enhancement. ESG disclosures are also an opportunity for companies to have an honest dialogue with their stakeholders about areas of concern or where performance can be improved.
Regulatory Compliance: Despite the criticism ESG is receiving from various quarters, ESG reports will soon be mandatory across jurisdictions. By putting in place efficient procedures for gathering and disclosing ESG information, companies will help themselves efficiently comply with regulatory requirements. Universal acceptance of ESG reporting requirements will open up a whole new area of competition for companies.
Comparable ESG Information: For ESG information to be comparable, companies everywhere must adopt digital ESG reporting. Here’s one of the biggest benefits of digital ESG reporting – the prevention of greenwashing. By adopting the XBRL digital standard for financial reporting, regulators in the US, EU, UK, and some other countries have brought immense transparency and efficiency to disclosure, analysis, and regulatory activities.
The Final Word on ESG and ESG Reporting
ESG as a movement is at a crossroads now. A recent Bloomberg article, ‘Hating ESG: Advocates Are Looking to Replace the Label’ brought to the fore divisions surrounding the concept, which might even force its proponents to change its name. “I’m happy to not use the term ESG,” says Robert Eccles, a professor at the University of Oxford’s Said Business School who has spent 12 years researching sustainability. “People are so invested now in hating ESG for reasons that don’t really have much to do with ESG.”
But here’s what we believe. Whatever the name ESG is known by, the fact remains that today’s informed investors will continue to look for information that companies do not disclose in their financial statements. There is no choice but to search for such information given the rapid pace at which the effects of climate change are being seen, or the impunity with the environment is exploited and human rights abused in certain geographies.
The facts require companies to make a commitment – not just to disclose sustainability information but also to be transparent about associations that disregard the ESG cause. And the logical next step would be to renounce such opportunities or associations.
The first step, however, is transparent ESG reporting.
