The Harmonization of ESG Standards: An Update
At SustainabilityNext, we strive to stay on top of the ever-shifting field of ESG reporting frameworks. The overlap and slightly varying focus of the disparate frameworks leave many businesses wondering which one(s) to choose. Last summer, we wrote a blog post summarizing the state of the leading frameworks, including both the efforts to harmonize and streamline them that were underway as well as ongoing efforts to make elements of the frameworks mandatory rather than voluntary. Yet even in the past six months, major developments have occurred, warranting an update.
As anticipated, the International Financial Reporting Standards Foundation (IFRS) did launch the International Sustainability Standards Board (ISSB) in the fall of 2021 to develop globally accepted ESG standards. In a further step towards consolidation, the Value Reporting Foundation (itself a merger between SASB and IIRC), along with CDSB, TCFD and the World Economic Forum have all agreed to contribute to the ISSB’s effort. Thus, it appears that in time, ESG reporting will coalesce around a single standard put forth by the IFRS.
Initially and conspicuously absent from this list of collaborators was the Global Reporting Initiative, currently the most widely used ESG reporting standard (used by 52% of Russell 1000 sustainability reporters in a 2020 G&A study). In a response to the announcement of the newly appointed chair of the ISSB Emmanuel Faber, the GRI’s website noted that the ISSB standards will be investor-focused and that, while they look forward to working together, “GRI sees this as a separate yet complementary function to broad reporting on sustainability impacts, as enabled by the GRI Standards.” As we were preparing this blog update at the end of March, the IFRS and GRI announced a collaboration agreement under which the two organizations will seek to coordinate their activities, but even this announcement refers to “two pillars” of reporting, suggesting there is still some wrangling behind the scenes of the consolidation efforts.
What Will the New Standards Look Like?
In general, the ISSB standards are likely to look familiar to companies already engaged in ESG reporting. The standards will include a combination of general (e.g., social metrics), thematic (e.g., climate-related) and industry-specific requirements. The thematic requirements will be based on existing practices, such as the TCFD standards in the case of climate-related disclosures. The industry-specific requirements will use as a starting point the current SASB frameworks developed for specific industries.
What Does This Mean for Current Users of Other Frameworks?
In the near term, companies do not need to make any changes to their sustainability reporting practices. Regardless of which frameworks companies are currently using, efforts to measure and track sustainability metrics will no doubt provide a strong foundation for whatever consolidated reporting framework emerges.
In the medium term, framework users are encouraged to help shape the standards by sharing comments on the prototypes put forth by the ISSB. In addition, the ISSB plans to publish exposure drafts of reporting standards in the second quarter of 2022, which will provide another pathway for user input.
In the longer term, keep an eye out for a consolidated sustainability reporting framework. And beyond that, there is even the potential for a framework that combines financial and sustainability reporting into a single structure in order to provide investors and others with a comprehensive view of a company’s performance, potential and material issues.
So That’s What’s Going on with Consolidation… What’s Happening with Mandatory Reporting?
Funny you should ask! Just this week (March 22nd), the U.S. Securities and Exchange Commission released a proposed rule that would require all publicly traded companies – for the first time ever – to report on their greenhouse gas emissions and the climate-related risks they face. The rule will undergo a public comment period for the next two months, and then if it survives expected legal challenges, could go into effect for larger companies in FY23 and for all others in FY24. Like the anticipated ISSB standards, much of the proposed disclosure in the SEC rule is based on the TCFD framework.
How Do I Stay on Top of All This?
We will continue to provide updates onto the reporting landscape in this blog. In addition, the Value Reporting Foundation has a mailing list that keeps readers apprised of developments along the road to consolidated reporting under the ISSB. For more information, you can also check out the IFRS, the Value Reporting Foundation, and SASB.