What are the Organisations developing Sustainability Reporting Standards and Frameworks?

The main investor-focused sustainability and integrated reporting organisations and initiatives have been working jointly for the past six months as part of the Technical Readiness Working Group (TRWG), which was created by the IFRS Foundation Trustees to enable the International Sustainability Standards Board (ISSB) to build on existing initiatives and give the ISSB a ‘running start’. This work has been supported by the International Organization for Securities Commissions (IOSCO).

The members of the TRWG are the Climate Disclosure Standards Board (CDSB), the IASB, the Task Force for Climate-related Disclosures (TCFD), the Value Reporting Foundation (VRF—which brought together the Integrated Reporting Framework and SASB Standards) and the World Economic Forum (WEF).

The Trustees announced on 3 November 2021 that the IFRS Foundation has reached commitments with the CDSB, whose secretariat is hosted by CDP, and the VRF to consolidate their technical expertise, content, staff and other resources with the IFRS Foundation. The TCFD and WEF fully support the formation of the ISSB.

The TRWG has worked on recommendations for the ISSB. This work includes consolidating and enhancing key aspects of TRWG members’ content to develop two unified prototypes that provide recommendations for consideration by the ISSB of potential climate and general disclosure requirements.

How will the ISSB’s standards approach materiality?

 The IFRS Foundation’s focus is on meeting the information needs of investors. The intention is for the ISSB to develop standards that will require companies to provide all material information related to significant sustainability matters that are relevant to investors’ decision-making, including thematic and industry-based requirements. The information needed by investors about the effects of sustainability extends beyond information included in the financial statements. Such information would include forward-looking sustainability matters that are reasonably possible to affect enterprise value creation, preservation or erosion over the short, medium and long term—which therefore would impact investors’ investment decisions.

IFRS Foundation

The IFRS Foundation is a not-for-profit organisation created in 2001. It serves the public interest by developing globally accepted reporting standards that meet investors and other capital market participants’ need for transparent and comparable information to make economic decisions.

Within the IFRS Foundation, the International Accounting Standards Board (IASB) is responsible for IFRS Accounting Standards—required for use by more than 140 jurisdictions around the world. The newly announced International Sustainability Standards Board (ISSB) will set IFRS Sustainability Disclosure Standards.

International Sustainability Standards Board (ISSB)

The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.

International investors with global investment portfolios are increasingly calling for high quality, transparent, reliable and comparable reporting by companies on climate and other environmental, social and governance (ESG) matters.

On 3 November 2021, the IFRS Foundation Trustees announced the creation of a new standard-setting board—the International Sustainability Standards Board (ISSB)—to help meet this demand.

Task Force on Climate Related Financial Disclosures (TCFD)

The TCFD was created by The Financial Stability Board (FSB) to improve and increase reporting of climate-related financial information. The aim of the TCFD is to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change. Given its remit from the FSB, the TCFD is committed to market transparency.

TCFD’s recommendations are structured around four thematic areas that represent core elements of how companies operate:

  • Governance – the company’s governance around climate-related risks and opportunities.
  • Strategy – the actual and potential impacts of climate-related risks and opportunities on the company’s businesses, strategy, and financial planning where such information is material.
  • Risk Management – how the company identifies, assesses, and manages climate-related risks.
  • Metrics and Targets – the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

The four recommendations are interrelated and supported by 11 recommended disclosures that build out the framework with information to help investors and others understand how reporting organizations think about and assess climate-related risks and opportunities. They are designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings.

  • Governance – Board Oversight and Managements Role.
  • Strategy – Risks and Opportunities, Impact on Organisation, and Resilience of Strategy.
  • Risk Management – Risk ID and Assessment Processes, Risk Management Processes, and Integration into Overall Risk Management
  • Metrics and Targets – Climate-Related Metrics, Scope 1, 2, 3 GHG Emissions, and Climate-Related Targets.

The TCFD has support from International Standard Setters and Regulators including G7 Finance Ministers and Central Bank Governors, G20 Finance Ministers and Central Bank Governors, the Financial Stability Board (FSB), International Financial Reporting Standards Foundation (IFRS), International Organization of Securities Commissions (IOSCO), “The Alliance” which includes the Climate Disclosure Standards Board (CDSB), CDP Global Disclosures on Environmental Impact, and Global Reporting Initiatives (GRI), as well as the European Commission.

Sustainability Accounting Standards Board (SASB)

SASB was founded as a non-profit organization in 2011 to help businesses and investors develop a common language about the financial impacts of sustainability. In June 2021, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) merged into the Value Reporting Foundation (VRF). The VRF officially consolidated into the IFRS Foundation and the Carbon Disclosure Standards Board on August 1, 2022.

For decades, traditional accounting was developed in a world where tangible assets comprised most of the market valuation of companies. In today’s economy, Data security—a social issue—is important to companies in the software industry. Water management—an environmental issue—is essential to a beverage producer. Managing conflicts of interest—a governance issue—is critical for an investment bank. Effectively managing these issues over the long-term is likely to improve business performance in the form of reduced operating costs, enhanced reputation, greater resilience to risks, the potential for competitive advantage, and increased long-term enterprise value.

SASB Standards surface sustainability information which is financially material and is reasonably likely to affect the financial performance of a company. They are industry based and produce information that is decision-useful for investors. They are developed using evidence-based and market informed processes and are designed to be cost-effective.

SASB Standards identify the subset of environmental, social and governance issues most relevant to financial performance and enterprise value for 77 industries. The outcome of this evidence-based research approach, which includes participation from subject matter experts and oversight from the independent SASB Standards Board is industry specific topics and related accounting metrics for companies seeking to make consistent and comparable sustainability disclosures. This could be anything from Greenhouse Gas Emissions, Air Quality and Water Management accounting metrics.

Global Reporting Initiatives (GRI)

Global Reporting Initiative is an independent, international organization that helps businesses and other organizations take responsibility for their impacts, by providing them with a global common language to communicate those impacts. The GRI Standards are widely used standards for sustainability reporting.

The GRI Standards enable organizations to understand and report on their impacts on the economy, environment and people in a comparable and credible way, thereby increasing transparency on their contribution to sustainable development.

The GRI Standards are a modular system of interconnected standards. They allow organizations to publicly report the impacts of their activities in a structured way that is transparent to stakeholders and other interested parties.

Three series of Standards support the reporting process: the GRI Topic Standards, each dedicated to a particular topic and listing disclosures relevant to that topic; the GRI Sector Standards, applicable to specific sectors; and the GRI Universal Standards, which apply to all organizations.

The GRI Standards allow an organization to report information in a way that covers all its most significant impacts on the economy, environment, and people, or to focus only on specific topics, such as climate change or child labour.

GRI recommends reporting in accordance with the GRI Standards. However, if an organization cannot fulfil some of the requirements to report in accordance with the GRI Standards or only wants to report specific information for specific purposes, such as when complying with regulatory requirements; in that case, it can use selected GRI Standards or parts of their content, and report with reference to the GRI Standards.

Integrated Reporting (Part of IFRS Foundation)

Integrated Reporting produces integrated reports that communicates how an organization’s strategy, governance, performance and prospects, in the context of its external environment, create, preserve or erode value in the short, medium and long term.

The Integrated Reporting Framework is a principles-based, multi-capital, framework that is used to accelerate the adoption of integrated reporting across the world with the aim of improving efficiency and productive capital allocation, acting as a force for financial stability and sustainable development.

This includes:

  • Improving the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital.
  • Promoting a more cohesive and efficient approach to corporate reporting which communicates the full range of factors that materially affect the ability of an organization to create value over time.
  • Enhancing accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural).
  • Supporting integrated thinking, decision-making and actions that focus on the creation of value over the short, medium and long term.

The Integrated Reporting Framework and Integrated Thinking Principles are maintained under the auspices of the IFRS Foundation, a global not-for-profit, public interest organisation established to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.

The IFRS Foundation’s International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB) are jointly responsible for the Integrated Reporting Framework.

 UN Sustainable Development Goals (UN SDG’s)

The 2030 Agenda for Sustainable Development, adopted by all United Nations Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries – developed and developing – in a global partnership. They recognize that ending poverty and other deprivations must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.

Today, the Division for Sustainable Development Goals (DSDG) in the United Nations Department of Economic and Social Affairs (UNDESA) provides substantive support and capacity-building for the SDGs and their related thematic issues, including water, energy, climate, oceans, urbanization, transport, science and technology, the Global Sustainable Development Report (GSDR), partnerships and Small Island Developing States.

The 17 UN Sustainable Development Goals are shared below:

  • Goal 1 – End poverty in all its forms everywhere.
  • Goal 2 – End hunger, achieve food security and improved nutrition and promote sustainable agriculture.
  • Goal 3 – Ensure healthy lives and promote well-being for all at all ages.
  • Goal 4 – Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.
  • Goal 5 – Achieve gender equality and empower all women and girls.
  • Goal 6 – Ensure availability and sustainable management of water and sanitation for all.
  • Goal 7 – Ensure access to affordable, reliable, sustainable and modern energy for all.
  • Goal 8 – Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.
  • Goal 9 – Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.
  • Goal 10 – Reduce inequality within and among countries.
  • Goal 11 – Make cities and human settlements inclusive, safe, resilient and sustainable.
  • Goal 12 – Ensure sustainable consumption and production patterns.
  • Goal 13 – Take urgent action to combat climate change and its impacts.
  • Goal 14 – Conserve and sustainably use the oceans, seas and marine resources for sustainable development.
  • Goal 15 – Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss.
  • Goal 16 – Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels.
  • Goal 17 – Strengthen the means of implementation and revitalize the global partnership for sustainable development.

Principles for Responsible Investment (PRI)

In early 2005, the then United Nations Secretary-General Kofi Annan invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment. A 20-person investor group drawn from institutions in 12 countries was supported by a 70-person group of experts from the investment industry, intergovernmental organisations and civil society.

The PRI is the world’s leading proponent of responsible investment. It works to understand the investment implications of environmental, social and governance (ESG) factors; to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.

The PRI acts in the long-term interests: of its signatories; of the financial markets and economies in which they operate; and ultimately of the environment and society as a whole.

The PRI aims to be independent. It encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations.

The PRI six Principles for Responsible Investment offer a menu of possible actions for incorporating ESG issues into investment practice:

  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

The PRI has developed extensive investment tools and research on sustainability and ESG in financial markets from Fixed Income (including credit risk and ratings and sovereign debt), Listed Equity, Private Markets, Hedge Funds and Asset Owner Resources.

United Nations Environment Programme (UNEP)

UNEP FI is a unique partnership between the United Nations Environment Programme (UNEP) and the global financial sector. UNEP FI works closely with over 200 financial institutions that are signatories to the UNEP FI Statement on Sustainable Development, and a range of partner organisations, to develop and promote linkages between sustainability and financial performance.

Through peer-to-peer networks, research and training, UNEP FI carries out its mission to identify, promote, and realise the adoption of best environmental and sustainability practice at all levels of financial institution operations.

CDP Global Disclosures on Environmental Impact

Founded in 2000, CDP was one of the first platforms to leverage investor pressure to influence corporate disclosure on environmental impact. CDP aims to empower economic actors with tools, insights and capacity-building to thrive in the new economy.

CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP aims to be the gold standard of environmental reporting with the richest and most comprehensive dataset on corporate and city action. Their goal is to prevent dangerous climate change and environmental damage by raising awareness of our impact so that investors, companies, cities and governments can make more sustainable decisions.

CDP runs the global environmental disclosure system. Each year CDP supports thousands of companies, cities, states and regions to measure and manage their risks and opportunities on climate change, water security and deforestation. CDP takes the information supplied in its annual reporting process and scores companies and cities based on their journey through disclosure and towards environmental leadership.

CDP works with Companies, Investors, Cities and Governments to provide environmental disclosures, research and data as part of their CSR initiatives towards environmental transparency and accountability.

CDP has developed extensive collaboration programmes with companies and financial institutions, research partners, investor associations, index and fund providers/platforms, networks for cities, states and regions, government and inter-governmental organisations, NGO’s, policy experts, strategic partnerships and media and communications.

Climate Disclosure Standards Board (CDSB)

CDSB is an international consortium of business and environmental NGOs committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. They do this by offering companies a (CDSB) framework for reporting environmental information with the same rigour as financial information.

  • The CDSB Framework can help companies understand how environmental issues affect their performance and the necessary actions they could take to address the related risks and opportunities.
  • This helps to provide investors with decision-useful environmental information via the mainstream corporate report, enhancing the efficient allocation of capital.
  • Regulators can benefit from standards-ready material and a framework that can be immediately adopted or referenced as a method of compliance in regulation or guidance;
  • Stock exchanges can consider new voluntary and mandatory listing requirements, taking into account climate change and natural capital-related risks and opportunities;
  • Accounting firms can provide more comprehensive assurance of companies reporting on climate change and natural capital-related performance;
  • Analysts can be better equipped to utilise climate change and natural capital-related information in determining impacts on future cash flow and ultimately company valuations.

The CDSB Framework forms part of the evidence base as the ISSB develops its IFRS Sustainability Disclosure Standards. The CDSB Framework and technical guidance on Climate, Water, Biodiversity and Social disclosures will remain useful for companies until such time as the ISSB issues its IFRS Sustainability Disclosure Standards on such topics.

U.S Securities and Exchange Commission (SEC)

In May 2022, the Securities and Exchange Commission proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors. The proposed changes would apply to certain registered investment advisers, registered investment companies, and business development companies.

The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue.

  • Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments.
  • Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts.
  • Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

The Corporate Sustainability Reporting Directive (CSRD)

The CSRD is the new EU legislation requiring all large companies to publish regular reports on their environmental and social impact activities. It helps investors, consumers, policymakers, and other stakeholders evaluate large companies’ non-financial performance, thereby encouraging companies to develop more responsible approaches to business.

The CSRD is one of the measures within the Sustainable Finance Package adopted by the European Commission in April 2021 to help improve money flow towards sustainable activities across the European Union. The CSRD extends the scope and reporting requirements of the already existing Non-Financial Reporting Directive – a regulatory framework that mandates sizeable public interest entities to report on their sustainability performance since 2018.

Companies will be required to submit their report aligning with the CSRD on 1 January 2025, for the 2024 financial year. Nearly 50,000 companies (15,000 in Germany alone) in the EU will need to follow detailed EU sustainability reporting standards. These large companies will have to publish information related to:

  • Environmental protection
  • Social responsibility and treatment of employees
  • Respect for human rights
  • Anti-corruption and bribery and
  • Diversity on company boards (in terms of age, gender, educational and professional background)