Environmental, social, and governance (ESG) reporting standards and frameworks are crucial to provide consistent and comparable reporting of relevant ESG information. Several significant changes have occurred in the past year related to ESG reporting. This article attempts to demystify these ESG reporting changes and serve as a brief introduction to ESG standards and frameworks.
ESG Reporting Changes
Several large consolidations of ESG reporting foundations occurred in 2021. Formation of the International Sustainability Standards Board (ISSB) was announced at the COP26 climate conference in November 2021 by the International Financial Reporting Standards (IFRS) Foundation. The ISSB will be overseen by the IFRS Foundation Trustees, who also oversee the International Accounting Standards Board (IASB). The ISSB was formed and organized such that the IFRS Foundation is giving sustainability accounting equal footing to financial accounting.
The ISSB is expected to set sustainability disclosure standards that are shareholder focused and industry specific, like the Sustainability Accounting Standards Board (SASB) standards. The new international standards are not starting from scratch, as the ISSB is using and consolidating most of the prominent ESG standards and frameworks when drafting the new standards.
In addition to consolidating the standards, the ISSB is consolidating organizations and personnel. The Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) are to be merged into the IFRS Foundation by June 2022. The VRF is the successor to the SASB and the International Integrated Reporting Council (IIRC). The VRF was formed when the SASB and IIRC merged in June 2021.
An issue of ESG reporting has been that information disclosed is often not comparable between companies or highly relevant. This is because companies can choose which ESG standard or framework they would like to use for their ESG report. It is common for large public companies to use multiple standards and frameworks for their ESG report. It also is common for companies in the same industry to issue their ESG reports at different times using different reporting boundaries, accounting methodologies, metrics, measurement units, and reporting formats. The establishment of the ISSB is expected to address these differences to improve the comparability of ESG information as the ISSB’s standards are positioned to be the predominant ESG standards focused on enterprise value, i.e., focused on shareholders.
The VRF recommends that companies do not wait until the full ISSB standards are released to report ESG information. Companies are expected to continue using existing ESG standards while the standards from the ISSB are drafted.
Existing ESG Standards & Frameworks
Global Reporting Initiative (GRI) Standards, Task Force on Climate-related Financial Disclosures (TCFD), and SASB Standards are three of the significant ESG standards and frameworks used.
- GRI Standards help organizations report on significant impacts on the economy, environment, and surrounding society. GRI disclosures cater to a broad range of stakeholders instead of focusing on shareholders and are the most widely used ESG reporting standards globally.
- TCFD is a principles-based framework for climate-related financial disclosures.
- SASB Standards are focused on the information needs of shareholders and designed to produce information that is financially material, decision useful, and cost-effective. SASB Standards are commonly used by public companies with more than half of the companies in the S&P Global 1200 Index and nearly 1,300 businesses using SASB Standards.
A company’s decision to identify what to disclose and what ESG standard(s) or framework(s) to use depends on several factors, including:
- What is commonly disclosed and relevant for the industry
- Company strategy and focus
- Reporting requirements, if any
- Intended audience of the ESG report
Example of SASB Standards
The SASB Standards are organized into 77 industries across 11 sectors, including the commercial banks industry. Commercial banks have five topics that apply to them:
- Data Security
- Financial Inclusion and Capacity Building
- Incorporation of ESG Factors in Credit Analysis
- Business Ethics
- Systemic Risk Management
Within these five topics, there are a total of 12 accounting metrics and two activity metrics to be disclosed by companies.
For example, the Financial Inclusion and Capacity Building topic includes the following four accounting metrics:
- (1) Number and (2) amount of loans outstanding qualified to programs designed to promote small business and community development
- (1) Number and (2) amount of past due and nonaccrual loans qualified to programs designed to promote small business and community development
- Number of no-cost retail checking accounts provided to previously unbanked or underbanked customers
- Number of participants in financial literacy initiatives for unbanked, underbanked, or underserved customers
Activity metrics give context to accounting metrics by stating the quantity of activity, which allows for comparison of accounting metrics across organizations of different sizes. The two activity metrics for the commercial bank industry are:
- (1) Number and (2) value of checking and savings accounts by segment: (a) personal and (b) small business
- (1) Number and (2) value of loans by segment: (a) personal, (b) small business, and (c) corporate
SASB Standards can be downloaded by industry on the Value Reporting Foundation’s website.
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