ESG Reporting Basics

ESG reporting is what a company discloses on its performance and activities related to environmental, social and governance issues. ESG reporting is central to building trust – with investors, customers, employees, partners, and regulators. It’s becoming an increasingly important data set relied upon by stakeholders to gauge the value and long-term viability of an organization. For example, shareholders and customers are seeking to make more sustainable and socially responsible investment and purchasing decisions, now and in the future. Businesses use ESG ratings to find ethical, sustainable partners that will be an asset to their brand reputation. And employees want to be affiliated with organizations that are aligned with their values and are sensitive to gender, pay, and racial equality.

ESG reporting key terms and definitions

Understanding key terminology will help you decide what ESG reporting structure makes the most sense for your organization. Here are some basic terms and definitions you may encounter:

Financial vs. non-financial reporting

Financial reporting is the process of documenting and communicating financial activities and performance over specific time periods, typically on a quarterly or yearly basis. Companies use these reports to measure the financial health of a business. By contrast, non-financial reporting is the disclosure of key non-financial activities and topics that can impact an organization, including financially. This most often focuses on ESG topics. Increasingly, investors rely on both financial and non-financial data to evaluate companies in which they are considering investing.

Materiality vs. double materiality

Materiality, or more specifically financial materiality, is an accounting principle first introduced in the US Securities Act of 1933. It refers to any information about an enterprise that would affect an investor’s decision to invest. Material information should be publicly disclosed, and businesses use materiality assessments to identify those issues. Traditionally, materiality is applied to financial information, but increasingly, investors are demanding that companies also include ESG considerations in their assessments.

ESG reporting regulatory drivers

As the shift to mandatory ESG disclosures continues to gather speed, it’s helpful to keep an eye on major regulatory drivers as you plan your ESG reporting strategy. While some rules allow flexibility on which ESG standards and frameworks can be used, others like the EU CSRD may stipulate specific reporting standards. These are some of the major regulatory drivers impacting corporate ESG reporting in different regions:

Multiple regions

TCFD: The Task Force on Climate-related Financial Disclosures (TCFD) is an international initiative that provides an ESG framework for corporate disclosure of climate-related risks and opportunities. It is required by law in ten+ countries and provides the necessary information to investors to assess the potential financial impact of climate-related risks.

IFRS: The International Financial Reporting Standards (IFRS) Foundation is developing a set of common, global ESG disclosure standards. Currently 145 jurisdictions around the world require IFRS standards for all or most companies in their public capital markets.

European Union (EU)

SFDR: (Applies to financial market participants) The Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants (asset managers, pension funds, etc.) to disclose how they integrate ESG risks into decision-making. It also requires them to disclose the sustainability risks and characteristics of their financial offerings and how they manage those risks. It was introduced by the European Commission to provide investors more details on the sustainability risks and characteristics of financial products, so they can make more informed decisions.

NFRD/CSRD: (Applies to companies) The Corporate Sustainability Reporting Directive (CSRD) amends and expands the Non-Financial Reporting Directives (NFRD). Approved on November 28, 2022, it aims to make ESG disclosures more standardized for companies operating in the EU. The new disclosure requirements are expected to take effect in January 2024, with first reports due by 2025. The CSRD introduces more stringent ESG reporting requirements and third-party assurance for reported information. Companies must also use the European Sustainability Reporting Standards (ESRS) to prepare their reports.

EU Taxonomy: The EU taxonomy is a classification system that establishes a list of environmentally sustainable economic activities for companies, investors, and policymakers. It is designed to protect investors from “greenwashing,” motivate companies to become more climate friendly, and help shift investments to activities with the most enduring environmental impact. The SFDR and CSRD require alignment with the EU Taxonomy.

CSDD: The European Commission’s Corporate Sustainability Due Diligence (CSDD) directive aims to foster sustainable and responsible corporate behavior throughout global value chains. Companies will be required to identify and, where necessary, prevent, end, or mitigate adverse impacts of their activities on human rights and on the environment.

TPT Disclosure Framework: The UK already requires ESG disclosures to be aligned with the TCFD. The recently proposed Transition Plan Taskforce (TPT) Disclosure Framework aims to build on this with a disclosure framework for private sector climate transition plans. It will require businesses and asset owners to set and follow concrete, standardized net zero transition plans or explain if they have not done so.

SEC: The proposed Securities Exchange Commission (SEC) climate disclosure rules for companies and fund managers are based on broadly accepted disclosure frameworks and accounting methodologies, such as TCFD and the Greenhouse Gas Protocol. The intention of these proposed rules is to enhance and standardize climate-related disclosures by improving the consistency, transparency, and comparability of corporate ESG performance. The new requirements will help stakeholders get a clearer picture and make more informed decisions when comparing ESG investment, purchasing, and partnering options.

Inflation Reduction Act: The Inflation Reduction Act introduces several environmental incentives and penalties, including a minimum 15% corporate tax to help pay for climate measures. The latter applies to companies generating at least $1 billion in earnings annually.

Federal: The proposed Federal Supplier Climate Risks and Resilience Rule will require major suppliers to the US government to disclose greenhouse gas (GHG) emissions and set science-based emissions reduction targets.

Source: onetrust