In his annual letter to CEOs, BlackRock’s Larry Fink emphasized the importance of high-quality sustainability data and disclosure to better assess sustainability risk. His words speak volumes about the need for organizations to focus on ESG disclosure now.
“Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them.”
Larry Fink, BlackRock CEO
ESG Investing is on the rise, and investors are demanding more from organizations than ever before. Transparency and accurate, timely reporting are paramount. To address this demand there are a staggering number of ESG reporting frameworks a company can report to but where should you start?
Some of the most common ESG frameworks are:
- Global Reporting Initiative (GRI)
- Formerly Carbon Disclosure Project (CDP)
- Task Force on Climate-related Financial Disclosures (TCFD)
- Sustainability Accounting Standards Board (SASB)
- International Sustainability Standards Board (ISSB)
We’ll start by reviewing these five, but there are still even more frameworks to consider including SBTi (Science Based Targets), IIRC (International Integrated Reporting Council), GRESB (Global Real Estate Sustainability Benchmark), and the CDSB (Climate Disclosure Standards Board).
The Global Reporting Initiative
The Global Reporting Initiative (GRI) is an independent, international non-profit body that helps businesses, governments, and other organizations report their sustainability impacts. GRI is considered to be the dominant global standard for sustainability reporting, with a whopping 73% of the world’s 250 largest companies preparing their reports using this framework.
The GRI standards are public, freely available, and can be downloaded and used by any public or private organization for sustainability reporting.
This set of standards is designed to be a global yardstick for organizations to understand and communicate their impacts. They cover various topics across economic, environmental, and social domains, including climate change, human rights, occupational health and safety, anti-corruption, and others. Organizations can select and cover the topics relevant to their organization for reporting their impacts.
GRI comprises three categories of standards:
- Universal – A set of three standards that apply to every reporting organization.
- Topic-specific – A set of GRI standards that organizations can select for reporting on its material topics. They’re further organized into three series – 200 (Economic topics), 300 (Environmental topics), and 400 (Social topics).
- Sector Standards – Four priority groups that make up a sector’s most significant impact areas: Priority Group 1 (basic materials and needs), Priority Group 2 (industrial), Priority Group 3 (transport, infrastructure, and tourism), and Priority Group 4 (other services and light manufacturing)
Formerly the Carbon Disclosure Project
Founded in 2002, the CDP (formerly known as the Carbon Disclosure Project) is an international non-profit organization that runs the global environmental disclosure system for investors, companies, cities, states & regions. The CDP disclosure system enables organizations to report under three main focus areas: Climate Change, Forests, and Water Security. Parts of the climate change questionnaire are aligned to the TCFD framework.
CDP also developed its widely known, quality-reviewed GHG modelled emissions data set in 2015, which helps assess carbon risk for companies and investor portfolios.
Apart from a system for disclosure, the CDP also provides a rating or scoring mechanism. The CDP score is based on the depth of disclosure and level of company action. Their annual A List recognizes organizations leading the way on transparency and sustainability efforts.
Task Force on Climate-Related Financial Disclosures
Task Force on Climate-Related Financial Disclosures (TCFD) was established by the Financial Stability Board (FSB) in 2015. It is an industry-led organization set up to develop climate-related financial disclosures.
The FSB aims to help investors identify the climate change risks companies face so that they can make well-informed investment decisions. The disclosures ultimately enable businesses to communicate how climate-related risks and opportunities are impacting, and will affect, future financial performance.
The disclosure recommendations are structured around four thematic areas: Governance, Strategy, Risk Management, and Metrics & Targets. TCFD also recommends some best practices for reporting, including scenario analysis. Scenarios are hypothetical constructs that provide a path for companies to consider how the future might look if particular trends continue.
Sustainability Accounting Standards Boards
Sustainability Accounting Standards Board (SASB) is a non-profit organization that provides global standards for disclosing financially-material sustainability information to investors. The sustainability accounting standards connect businesses and investors on the financial impacts caused by sustainability issues.
The organization offers a set of industry-specific standards covering 77 industries across 11 categories. It has identified 30 issues that impact an organization’s financial performance under five major sustainability themes: Environment, Social Capital, Human Capital, Business Model & Innovation, and Leadership and Governance. The standard also provides a Materiality Map that helps companies determine the most relevant disclosure topics based on their industry.
International Sustainability Standards Board
At the recent 2021 UN Climate Change Conference (COP26), the International Financial Reporting Standards (IFRS) Foundation announced the creation of the International Sustainability Standards Board (ISSB). This framework consolidates VRF (the recent product of the merger of SASB & IIRC) and CDSB reporting requirements.
Confused yet? The good news is that the complex ESG reporting landscape seems to be heading towards harmonization with this move.
The IFRS Foundation’s trustees formed the Technical Readiness Working Group (TRWG) who then developed the new prototype general disclosure and climate frameworks, informed by TCFD.
Organizations can review these prototypes and prepare for potential future disclosure requirements. The ISSB’s standards will enable companies to provide comprehensive sustainability information for the global financial markets.
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