ESG Standards
ESG Standards
Even if your organization is not yet affected by mandatory ESG disclosures, choosing the right reporting standard or framework can help you prepare you for future regulatory changes. Existing ESG reporting standards and frameworks have been refined over time with input from multiple private and public sector stakeholders and represent best practices for sustainability reporting. There’s also a growing trend toward consolidation of ESG reporting standards and frameworks – the IFRS standards are one example.
ESG reporting standards vs. ESG frameworks vs. ESG ratings
Before diving into common ESG reporting standards and frameworks, let’s look at the difference between standards vs. frameworks vs. ratings. According to the Global Reporting Initiative (GRI):
ESG standards contain specific and detailed criteria or metrics for what should be reported on each ESG topic to meet a specific level of quality requirements. Overall, corporate reporting standards include these features: a public interest focus, independence, due process, and public consultation, generating a stronger basis for the requested information.
ESG frameworks help provide context for information and may be used in the absence of well-defined standards. These principles deliver guidance on setting the direction for ESG initiatives without defining reporting requirements.
ESG ratings and rankings assess the level of an organization’s ESG maturity based on information disclosed by companies and based on reporting standards and frameworks. Comprised of a quantitative score and a risk rating, ranking and ratings are increasing in importance.
The following infographic illustrates these distinctions.
IFRS
The International Financial Reporting Standards (IFRS) Foundation is leading the way toward establishing common, global ESG disclosure standards.
Who: Currently 159 of 167 jurisdictions around the world have committed to IFRS standards and 145 require them for all or most companies in their public capital markets.
What: In 2021, the IFRS Foundation created the International Sustainability Standards Board (ISSB) to develop a globally consistent set of ESG disclosure standards for companies to use. The proposed standards integrate the work of other major ESG standards and sustainability frameworks, including CDSP, SASB, WEF, GRI, and TCFD. The first proposal (IFRS S1) outlines requirements for general sustainability-related disclosures, while the second (IFRS S2) specifies climate-related disclosure requirements.
Why: The IFRS sustainability disclosure standards will allow investors to easily compare “apples to apples” when evaluating enterprise values. While the proposed standards are voluntary, opting in could help companies get ahead of any regulatory changes that may require them in the future.
How: The final IFRS Standards are expected to be issued in June 2023. To help companies prepare, the IFRS has published draft versions of the two standards (S1 and S2), as well as guidance on what should be included in reporting to align with the standards.
ESRS
Part of the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS) expand the scope of sustainability reporting currently required under the EU’s Non-Financial Reporting Directive (NFRD).
Who: Under the CSRD, approximately 50,000 EU businesses will be required to provide sustainability disclosures aligned with the ESRS. This is more than 4x the number of companies (approximately 11,700 organizations) currently providing non-financial reporting under the NFRD. For a quick comparison of which companies will be affected and how, download the infographic “NFRD vs. CSRD.”
What: The ESRS are a set of sustainability reporting standards developed by the European Financial Reporting Advisory Group (EFRAG). They are designed to ensure that sustainability information is reported in accordance with the CSRD, can be easily navigated, and has maximum comparability across sectors while allowing flexibility for sector-specific information. The ESRS were released as a set of exposure drafts that outline reporting requirements across 13 ESG issues categorized into four areas: (Cross-cutting, Environment, Social, Governance).
Why: The goal of the ESRS standards is to strengthen corporate accountability by improving the quality, consistency, and comparability of ESG information disclosed. According to the European Commission, the reason for the expanded reporting scope is to ensure “that all large companies are publicly accountable for their impact on people and the environment. It also responds to demands from investors for sustainability information from such companies.”
How: The European Commission adopted the final draft of the ESRS in November 2022. Companies formerly subject to the NFRD will need to start applying the standards in 2024 for their ESG reports publishing in 2025. Other requirements include preparation of the required information in a digital format that is machine readable and audited assurance of the reported information. More details on the reporting process are available in EFRAG’s “Appendix I – Navigating the ESRS.”
SASB
The Sustainability Accounting Standards Board (SASB) standards are accounting standards designed to help companies disclose financially-material ESG information to their investors. As of August 2022, the SASB standards are part of the IFRS and will be incorporated into IFRS standards going forward.
Who: In 2022, there were 2,230 companies applying SASB standards to their ESG reporting.
What: The SASB standards identify and enable reporting on ESG issues most relevant to financial performance across 77 industries. Any company can use SASB standards, and they are free for non-commercial use (including corporate disclosure). The standards are organized by: (a) sustainability dimensions (broad ESG themes), (b) general issue categories (industry-agnostic topics), (c) disclosure topics (industry-specific versions of general issue categories), and (d) accounting metrics (performance measurements for each topic).
Why: Using SASB standards is voluntary but has strong support from some of the largest investment companies in the world. By leveraging the standards, businesses can more easily address investor demand for consistent, comparable data on financially material ESG issues across an industry. This information helps investors and other stakeholders gauge the impact of ESG risks on a company’s financial performance. SASB standards are also complementary to other standards and frameworks including CDP, CDSP, GRI, the <IR> Framework, and TCFD.
How: Companies can use the SASB seven step process to implement the standards.
Establish a foundation
Choose the right tools for the job
Decide where to disclose
Understand SASB standards
Assess readiness
Develop disclosures
Enable continuous improvement
GRI
The Global Reporting Initiative (GRI) provides widely adopted ESG reporting standards that follow an independent, multi-stakeholder process to help organizations be transparent and take responsibility for their impacts.
Who: More than 10,000 companies in 100 countries use the GRI standards to disclose ESG opportunities, risks, and progress. GRI standards are also referenced or required in more than 160 policies in over 60 countries.
What: GRI is an independent, international standard setting institution and collaborating center of the United Nations Environment Program (UNEP). Free for any company to use, the standards are organized by: (a) universal standards that apply to all organizations, (b) sector-specific standards for 40 high-impact industries, and (c) topic standards for specific topics such as waste, health and safety or tax.
Why: Used globally by most large companies to disclose ESG performance, GRI standards provide a comparable, credible, interconnected system that organizations can use for their impact reporting and/or decision-making. The standards help organizations demonstrate transparency and accountability to their stakeholders.
How: Organizations can use the standards to report on all material topics and related impacts or just specific topics. Reports using the GRI Standards must contain a GRI content index, but they can be published in different formats (standalone report, website, etc.).