You have almost certainly heard the term ‘ESG reporting’ appear more frequently over the past 2 years. Environment, Social and Governance reporting – another term to throw onto the pile of nebulous concepts like sustainability and net zero, right?
Not quite.
To have value, ESG reporting must operate in a system of standards and frameworks, providing a criterion that businesses can set themselves against. Unfortunately, this is hampered by a lack of international consensus on what exactly these standards and frameworks are.
The result? A plethora of acronyms and terms to trawl through, making sure you know your CDSB from your CSRD and your frameworks from your standards.
In this blog post we are going to tackle the information rich world of ESG reporting, providing you with a list of the best-known frameworks and standards and helping you to understand the difference between the two.
Let’s get started with a (very) brief look at the history of ESG.
A brief background on ESG
ESG has very concrete roots in the world of capital markets, being used as a way for investors to assess a potential investment. According to Deloitte, the ‘goal’ of ESG is to “capture all the non-financial risks and opportunities inherent in a company’s day to day activities”.
The emphasis on ESG reflects the changing world that we live in. The effects of climate change and changing societal needs influence the decisions investors make on what they require from companies, and what risks they are willing to take. This means more transparency from businesses on their impact in the areas of Environment, Social issues, and Corporate Governance.
While investors may have been at the center of the ESG concept, relevant stakeholders also include regulators, consumers, and employees, all of whom are looking for more accountability from businesses.
Part of the issue with ESG reporting (and sustainability reporting as a whole) is the lack of global standardized metrics on what exactly businesses should report on. Coupled with the fact that most ESG reporting until very recently has been voluntary, it has led to an uneven reporting landscape.
However, this is changing. With the introduction of legislation such as the Corporate Sustainability Reporting Directive (CSRD) in the EU, it is now mandatory for a selection of large, public-interest companies in the region with more than 500 employees to start meeting ESG reporting requirements. This will affect approximately 11, 700 large companies and groups, with more to follow in the coming years. To learn more about the CSRD and who it will affect and when, read our post on the subject.
What are ESG Frameworks vs. Standards?
The terms “frameworks” and “standards” tend to be used interchangeably in an ESG reporting context, but there are some significant differences between them.
What is a framework?
According to the SASB (Sustainability Accounting Standards Board), frameworks: “provide principles-based guidance on how information is structured, how it is prepared and what broad topics are covered.”
ESG reporting frameworks focus on guiding principles and what information is to be collected.
ESG reporting frameworks can be further broken down into mandatory and voluntary or voluntary disclosure frameworks. As the name suggests, mandatory frameworks are implemented on a national or international level through legislation, whereas voluntary frameworks are brought in by businesses themselves to help them report on ESG issues.
What is a standard?
According to the SASB, standards: “provide specific, detailed and replicable requirements for what should be reported for each topic, including metrics.”
Standards provide the specific metrics and indicators for topics that companies must report on. They are used to make sure that disclosures made using a specific framework are “consistent and can be compared to one another”. A standard will also include the unit of measurement to use when collecting data.
Some metrics that might be used within a standard can include (depending on industry):
- Energy consumption
- Water consumption
- Employee information (diversity and inclusion, turnover rate)
- Scope 1,2 and 3 emissions information
- Data protection information
Common ESG reporting frameworks and standards
It’s important to keep in mind that ESG frameworks and standards are designed to work together. Some of the following are frameworks made up of multiple standards or exist in the grey area of organizations that offer both.
Framework: Task Force on Climate-Related Financial Disclosures (TCFD)
The TCFD was established in 2015 by the G20 and Financial Stability Board (FSB). It’s 2017 framework was created to “develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change.”
The TCFD is structured around 4 pillars: governance, strategy, risk management, and metrics and targets. The TCFD is a mandatory framework already implemented in the EU, Canada, South Africa, Japan, Singapore and South Africa. New Zealand and the UK have also announced that they will make it mandatory to disclose climate risk information in accordance with the TCFD by 2023 and 2025.
Note that the TCFD has disbanded as of November 2023, with the International Financial Reporting Standards (IFRS) Foundation taking over its remit.
Framework: Climate Disclosure Standards Board (CDSB)
Founded in 2007, the CDSB was an international consortium of business and environmental NGOs. The CDSB framework “sets out an approach for reporting environmental and social information in mainstream reports, such as annual reports, 10-K filing (an annual report required by the US Securities and Exchange Commission), or integrated report”.
This framework focused on environmental and social reporting, with its most recent guidelines issued in 2021. The CDSB was consolidated into the IFRS Foundation as of 2022, as part of its International Sustainability Standards Board (ISSB). The technical guidance and resource base of the CDSB will be used as part of the evidence base for the IFRS Sustainability Disclosure Standards.
Framework: Global Reporting Initiative (GRI)
The GRI is the most widely used reporting framework globally (1), used by 78% of the world's largest 250 corporations. It’s described as a “flexible framework for creating standalone sustainability or non-financial reports, or integrated ESG reports”. In 2016 the GRI set the first global standards for sustainability reporting, and as of 2023, there are over 10,000 GRI reporters in over 100 countries.
The framework is modular and structured around 3 sets of GRI standards: the Universal Standards, Sector Standards and Topic Standards. It’s designed to work with regulatory disclosure needs such as the EU’s CSRD, while also supporting voluntary reporting.
Framework: Carbon Disclosure Project (CDP)
The CDP is a voluntary reporting framework established in 2000. It is described as a “global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts”. This framework focuses on environmental reporting, specifically climate, water and forestry.
The CDP also produces ‘CDP Scores’ on an annual basis. This sees responding companies being scored from a D- to A and aims to incentivize companies to ‘measure and manage’ environmental impacts through the use of CPD questionnaires.
Framework: United Nations Global Compact (UNGC)
The UNCG refers to itself as ‘the world's largest voluntary corporate sustainability initiative’. It was formed in 2000 with the goal of encouraging a commitment to sustainability among businesses worldwide.
It does through the promotion of its ‘10 Principles of the UN Global Compact' (2003) and 17 Sustainable Development Goals (SDGs, 2016). The UNGC framework places a lot of emphasis on CEO commitment.
Reporting is done via the Communication of Progress (CoP) format and is submitted in an online questionnaire. To date over 17,000 companies in more than 160 countries are reporting to the UNCG.
Standard: Sustainability Accounting Standards Board (SASB) Standards
SASB standards were first released in 2018 and provide “industry-based sustainability disclosures about risks and opportunities that affect enterprise value”. They identify sustainability related issues for investors across 77 industries.
The SASB standards place a lot of emphasis on materiality, and the SASB website includes both a materiality map and materiality finder. These tools help businesses to discern the most relevant disclosure topics for their industry.
As of 2022, responsibility for the SASB standards transferred to the IFRS Foundation. The SASB standards (while still in use) are being used as part of the basis for the IFRS developing their own standards – see below.
Standard: International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards
In 2021, the IFRS Foundation formed the International Sustainability Standards Board (ISSB), an independent standard setting body. As mentioned above, the IFRS (and ISSB) has assumed responsibility for several other ESG frameworks and standards, including:
- Task Force on Climate-Related Financial Disclosures (TCFD) – 2023
- Climate Disclosure Standards Board (CDSB) – 2022
- Sustainability Accounting Standards Board (SASB) Standards – 2022
- Integrated Reporting Framework (IRF) - 2022
The ISSB has built on the collective work of the above frameworks and standards to issue the first 2 IFRS sustainability disclosure standards in 2023:
- IRFS 1 (General Requirements for Disclosure of Sustainability-related Financial Information)
- IRFS 2 (Climate-related Disclosures)
The IFRS sustainability standards are described as “developed to enhance investor-company dialogue so that investors receive decision-useful, globally comparable sustainability-related disclosures that meet their information needs”.
Standard: European Financial Reporting Advisory Groups (EFRAG) European Sustainability Reporting Standards (ESRS)
The ESRS were adopted by the European Commission to provide common reporting standards in line with the Corporate Sustainability Reporting Directive (CSRD). The first 12 ESRS were published in July 2023, in line with proposals made by EFRAG. The ESRS cover a wide range of sustainability issues, divided as follows:
- 2 cross cutting standards
- 10 topical standards (e.g. climate change, circular economy, business conduct etc.)
The 10 topical standards are gathered under the ‘ESG’ umbrella, with further sector-agnostic standards currently in development.
Relevant businesses must start using the ESRS to meet CSRD requirements in 2024. Read our blog on the topic to discover when your business will have to comply.
Conclusion
Looking through this blog, it's easy to become overwhelmed with the variety of standards, frameworks and jargon that’s out there.
As reporting on ESG topics becomes a legal requirement for many businesses, it's not something that can be avoided for much longer. But it also isn’t something that you must figure out on your own.
At EcoOnline, we have significant experience in assisting businesses like yours to accurately report on their climate impact, with our software helping you to stay compliant with all major directives. If you’re ready to learn more about GHG Reporting software, get in touch today.
