A Guide to the Common Languages of Sustainability
Sustainability reporting refers to the public disclosure of an organisation’s ability to manage risks and opportunities in terms of Environmental, Social and Governance (ESG) issues. In response to rising demands for credible ESG and climate information, sustainability reporting emerges as the primary approach for organisations to communicate their ESG progress and impacts with stakeholders. This has created an urgent need for a common language for sustainability reporting to enable organisations to improve standardised, consistent disclosure and various stakeholders to assess and compare sustainability reports. A number of sustainability reporting standards - guidelines to report ESG information on an organisational level - have thus been established to provide tools for organisations to report against.
Why Do ESG Reporting Standards Matter?
Like how financial accounting standards set the baseline for businesses to prepare financial statements, sustainability reporting standards are the backbone of effective ESG disclosure, and are important for a number of reasons.
Primarily, sustainability reporting standards facilitate effective ESG disclosure. Put simply, they help businesses decide what and how to report in terms of ESG. Organisations are guided to provide consistent and comparable information. This allows investors and other external stakeholders to evaluate an organisation’s transparency and accountability, and decipher how advanced it is with sustainability. Ineffective or misleading disclosure may signal an organisation’s inaction towards sustainability or acts of greenwashing.
Moreover, sustainability reporting standards promote progress towards a sustainable economy. As an entity reports regularly against the standards, it tracks progress and delivers results of how well it is performing in terms of key ESG metrics. Under the need to make previously private information public, organisations are more likely to be driven to establish an ESG strategy, incorporate ESG considerations into their operations and/or business activities, and turn plans into actions with trackable goals across different timeframes.
Take sustainable finance for instance. From the Equator Principles, the Principles of Responsible Investment (PRI), to the Principles of Responsible Banking (PRB), the regulatory frameworks of sustainable finance have provided guidance to financial institutions to integrate ESG considerations into their credit and investment cycle. Along with the evolution over the past three decades, financial institutions face increasing commercial imperative and investor demands to finance a green agenda, propelling the capital market facilitators to channel funds to green businesses and activities that contribute to a sustainable economy.
Meanwhile, sustainability reporting standards inform international regulatory changes. While sustainability reporting standards remain largely voluntary, they reflect the latest and most material ESG issues that require disclosure, awareness and management. This gives rise to a global momentum towards the adoption of globally recognised standards by regulatory bodies.
For instance, effective from April 2022, the U.K. has made climate-related disclosure mandatory for its largest companies and financial institutions. Similarly, the U.S. Securities and Exchange Commission (SEC) proposed mandatory rules on climate-related disclosure in March 2022, under which companies are expected to disclose specific climate metrics, including material climate financial impacts, Scopes 1 and 2 emissions (and Scope 3 emissions in some cases), and transition plans, in notes to their audited financial statements. Both mandates build upon the widely adopted Climate-related Financial Disclosures (TCFD) recommendations, manifesting the influence of sustainability reporting standards over regional and domestic regulations.
What Are the Trends of ESG Reporting?
Survey suggested that sustainability reporting has been standard practice among the world’s largest companies, with more than 90% of them having reported on sustainability for more than a decade. In the same period of time, the reporting rates have shown steady growth for the top 100 companies within 58 territories and jurisdictions.
Among all reporting standards, the Global Reporting Initiative (GRI) standards remain the most widespread across the world, while other frameworks are more prevalent in specific regions and jurisdictions. For instance, the Sustainability Accounting Standards Board (SASB) standards is the leading reporting standard in the Americas, and the Corporate Sustainability Reporting Directive (CSRD) requirements are mandatory for over 50,000 companies in the EU since it became effective in January 2023.
Meanwhile, reporting standards designed for climate and nature have gained traction as their corresponding risks become more pronounced. More than 60% of the world’s largest 250 companies have adopted the TCFD recommendations for climate-related disclosure. With the introduction of the Taskforce for Nature-related Disclosures (TNFD), reporting on nature and biodiversity loss is also expected to grow rapidly.
In addition, there is an increasing attempt to align existing reporting standards. For instance, the International Sustainability Standards Board (ISSB) was established with an aim to develop a global baseline of sustainability disclosures, bringing together globally recognised reporting initiatives such as the TCFD recommendations, the SASB Standards, the Climate Disclosure Standards Board (CDSB), and the Value Reporting Foundation’s Integrated Reporting (IR) Framework. ISSB is set to launch its initial IFRS Sustainability Disclosure Standards - S1 and S2 - by Q2 2023, and bring them into effect in January 2024.
What’s Next?
Navigating the sustainability reporting landscape enables organisations to gain knowledge of stakeholder expectations and pinpoint strategic ESG imperatives to invest in and act on. It also empowers investors and other stakeholders to gain valuable ESG data to make informed decisions, taking into account risks and opportunities that impact an organisation’s ability to create long-term value.
This article series will explore the most widely adopted sustainability reporting frameworks worldwide, including voluntary reporting frameworks and government mandates, to provide insight into deciphering how advanced an organisation is with sustainability based on their public reporting.