Words by Amy Brown
Originally published by TriplePundit
NORTHAMPTON, MA / ACCESSWIRE / January 24, 2024 / Global sustainability reporting is finally on the brink of unifying around a set of disclosure requirements for climate and other environmental, social and governance (ESG) issues. This is great news for business leaders who are choking on the alphabet soup of sustainability reporting standards. Yet being prepared to meet the harmonized reporting standards around the corner remains a challenge. Companies are well served to start preparing now rather than later.
More than 600 ESG reporting frameworks and standards are used around the world today. Among the most widely known and adopted are those from the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD).
The proliferation of standards has led to confusion as well as a significant amount of time, effort, and resources to gather the information and data that is shared in annual sustainability and financial reports. On top of that, individual investors often send out their own ESG data questionnaires to companies.
Preparing for regulatory disclosures
To add to the pressure, ESG reporting that has been largely voluntary will now be mandatory in many jurisdictions. The U.S., Canada, the European Union, Australia, Brazil, India, and others have either passed or indicated they will soon enact ESG-specific disclosure requirements for companies.
That includes the European Union's Corporate Sustainability Reporting Directive (CSRD) which entered into force in January 2023 and requires all large companies and listed companies to disclose information on risks and opportunities arising from ESG issues. The final rules from the U.S. Securities and Exchange Commission (SEC) requiring companies to include certain climate-related disclosures in their reporting are now expected in spring of 2024.
Confusion and reporting for reporting's sake
"The biggest downside of this situation has been the confusion," Ted Dhillon, co-founder of the ESG reporting platform FigBytes, told TriplePundit. "The second biggest downside is: How do you standardize your reporting when you have so many different reporting requirements?"
Critically, time spent collecting data for reporting is time not spent on making actual progress toward sustainability goals. The reporting burden has become so overwhelming that the usually small sustainability teams at organizations spend most of their time gathering data, Dhillon said.
"I call sustainability officers ‘nag, bag and drag officers,' because that's essentially what I've seen them do over the years: Pick up the phone and try to get the data, and that takes up most of the year," he said. "It is becoming a reporting exercise for reporting's sake and not for making true improvements. In the larger scheme of things, this makes us lose focus on the bigger challenge: We have to get to net zero."
A welcome move toward harmonized sustainability reporting
Against this backdrop, many welcomed the finalized disclosure standards released by the International Sustainability Standards Board last year, a major step toward a standardized global framework for sustainability reporting. The ISSB Standards, effective from January 1, 2024, provide a comprehensive global baseline of sustainability disclosures that can be mandated and combined with other legislative requirements. The ISSB is part of the IFRS Foundation, which is responsible for writing global financial accounting rules.
Notably, the ISSB supports both regulatory and voluntary adoption, and it has ensured that there will be interoperability between SASB, GRI and the European CSRD. The ISSB Standards have also incorporated the recommendations of the TCFD, and the ISSB will take over monitoring the progress on companies' climate-related disclosures from the TCFD from 2024.
This harmonization is welcome and needed, Dhillon said. "I think it's critical to have consistency and comparability. Otherwise, organizations will report on what suits them best and hide information that shows them in a negative light. While too many competing frameworks lead to confusion, I think standards and disclosure requirements are absolutely critical for setting a global baseline of sustainability performance."
From this vantage point, Dhillon applauded the ISSB's effort to align the various standards and reduce complexity. "The ISSB was clearly the way to go in setting a uniform level playing field for reporting. But I think it will probably take another iteration or two before the ISSB Standards clearly get set as the overarching global standard."
Preparation is the best prescription
Now, with reporting season upon them, many organizations are trying to understand the implications of the different sustainability reporting developments. They need to figure out if their current reporting strategy is sufficient or whether additional steps are needed to comply with regulatory standards and to meet the expectations of investors and other stakeholders.
Dhillon said the first step should be to consult guidance provided by the standard-setting organizations themselves. The ISSB website offers a wealth of information including answers to frequently asked questions. It is the same for the websites of the other frameworks that companies may be using.
"Companies who have been using other standards like GRI or SASB, or following the recommendations of the TCFD, won't have such a heavy lift. They will have already started tracking their emissions across the different scopes of 1, 2 and 3 [categories of direct and indirect greenhouse gas emissions]," Dhillon said. "But in light of the new reporting developments, they will need to take a step back and say, ‘Do we do another materiality exercise or at least a scoping exercise to figure out what we missed?'"
You have to start somewhere
For companies that have not yet made much progress on sustainability reporting, Dhillon advised that the global disclosure system CDP is a good place to start, as well as the Greenhouse Gas (GHG) Protocol which offers tools that help with systematic collection of data.
Over time, legislative and mandatory ESG requirements will likely take center stage and "voluntary reporting will just fade away," Dhillon predicted. "I think the future will be companies reporting probably once, or maybe twice in Europe," he said. "When organizations file a report to meet the CSRD requirements, for example, they won't need to report again to any other framework. There will no longer be a need for multiple reports, and I think that's the ideal situation for any company globally. Once you've filed to meet the CSRD or SEC requirements, you're done and you can focus on your sustainability work."
This should be welcomed by most companies, and Dhillon believes it will be - "aside from some organizations that don't want to put their information out there, but they are outliers."
Taking the alphabet soup of competing frameworks off the menu means companies can focus on the main course: making improvements to their ESG performance overall, he added. And he advised companies not to show up late for that meal.
"The time is now to learn as much as you can, put the systems in place and get started. There's never going to be a perfect situation," Dhillon said. "Even if it's just a scoping exercise at the bare minimum, you'll be in a far better position. At the end of the day, you want to create a mindset shift, because this is a change management issue for organizations. If organizations get started today understanding where their gaps are, they will be ready to meet whatever comes."
This article series is sponsored by FigBytes and produced by the TriplePundit editorial team.
(Image: Vasyl/Adobe Stock)
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