ESG Reporting: Understanding How Corporations Communicate Their Environmental Goals and Performance
Corporate Sustainability Reporting allows companies to measure and track their progress and contributions towards global sustainable development goals (SDGs) in all dimensions of sustainable development. Because of the potential health and environmental risks posed by companies, and the goods and services they produce, there is increasing pressure on the private sector to make the details of their sustainability performance publicly available in order to demonstrate transparency and accountability to their stakeholders. Understanding how these reports are generated and what they mean can help conscious consumers become more confident in their purchasing decisions, having formed a clearer picture of how their support of a particular company is influencing the environment and broader society. In this article focusing on the “E” in ESG, we will explore the basics of sustainability reporting, its popular standards and frameworks, and how the corporate sustainability landscape is expanding and evolving.
Even though trying to be a conscious consumer can sometimes be overwhelming – being on the lookout for greenwashing, wondering what your purchases may be indirectly supporting, and doubting the significance of your seemingly small impacts – it can help us regain a sense of agency in battling the climate crisis. Individual choices add up to influence systemic change, especially when those choices have a collective impact on our habits: how we travel, what we eat, and what kinds of products we purchase. Though our economic system is more complex than the basic principles of supply and demand, it’s built on this foundation in which consumers play half the part. Seeking out reliable information on a company’s environmental actions and impacts can help dispel doubt and confusion around misleading advertising and environmental claims; ESG reports can provide that information for both consumers and other stakeholders.
Corporations have responded to the increase of eco-consciousness in both the consumer and investor space by participating in ESG (Environmental, Social, and Governance) reporting and disclosure. Terms like ESG, Corporate Responsibility (CR), Corporate Social Responsibility (CSR), and Corporate Sustainability Reporting are often used interchangeably, though a lot of specialists in this space have strong views on the nuances around each of these terms. In the past two decades, this practice has evolved to allow transparency between corporations and their stakeholders on how they impact the environment and society, and how these factors impact them. So, how can we understand how some of our favorite businesses are impacting the environment through their ESG Report? Let’s start by breaking down what sustainability reporting is all about.
What is ESG Reporting, and Why Is it Important?
ESG reporting uses environmental, social, and governance factors to evaluate a company’s sustainability performance, and how they impact the broader society. This provides individuals, investors, employees, and both governmental and non-governmental regulatory organizations with a clearer picture of a company’s direction and progression; it’s another way of assessing a company without looking at its balance sheet. An ESG report is both a disclosure document and a story-telling document, allowing companies the opportunity to engage stakeholders by highlighting their successes and corporate initiatives that they’re proud of, like employee programs promoting healthy lifestyles, community development programs, environmental initiatives, and fair trade practices. They also get to control how they explain some of their gaps, detailing their plans for growth in those spaces.
The environmental branch of ESG looks at how efficient a company is at managing its resources and how well they look out for the environment around them. There are several environmental assessments that provide guidance for reporting these metrics, taking into account a company’s carbon emissions (scopes 1, 2, and 3), how they consume and discharge water, and how they impact climate change. Social reporting examines criteria on how well a company fosters its people and culture, and how that has a ripple effect on the broader community; this includes factors like labor standards, service to the community, and corporate giving. And the final branch of ESG, governance, evaluates the efficiency and ethics of a company’s internal systems and strategies, considering their shareholder rights, political contributions, and areas of leadership.
Graphic by Rosalie Ballo
ESG reporting doesn’t just benefit stakeholders, it also comes with benefits for corporations that aren’t usually associated with other annual financial reports. This kind of transparency can help build trust with a company and improve its reputation, which is critical for collaboration. The majority of investors are seeking ESG information from companies, and the strength and maturity of their reports impact their competitive edge because it shows whether they are leaders or laggards in the ESG space. Internally, the process of ESG reporting can help point out a company’s strengths and weaknesses, and areas where its strategy may be lacking. Establishing goals and initiatives and tracking their progress can also drive employee motivation, encouraging the refinement of management systems to better monitor environmental and social risks. These benefits and drivers help ensure that a company is staying in alignment with its sustainability mission.
With a greater customer and industry focus on sustainability and reaching carbon net zero, creating, verifying, and publishing information related to ESG issues is becoming more prevalent; both customers and investors want to know how companies are fairing in terms of climate change, and what they're doing about it. Right now, this kind of reporting is voluntary for the most part and holds a combination of self-reported information and analysis provided by third-party or internal analysts who pour over company fact sheets and other regulatory reports to filter relevant ESG information. Using and referencing reporting standards, frameworks, and rankings & ratings is critical in the process of creating and communicating an ESG report, and as ESG reporting grows and transforms, so does the need to consolidate these tools.
The Rundown on ESG Reporting Standards, Frameworks, and Rankings & Ratings
Reporting Standards
Reporting standards guide businesses on how to measure and communicate the ESG information they want to disclose to the public; they contain detailed criteria, or ESG metrics, of what should be reported for each specific topic. Standards represent the level of quality of requirements set for reporting entities to meet. A distinctive feature of standards is their ability to be enforced, and businesses base their reporting on recognized standards and frameworks in order to maintain consistency and transparency in the reporting process. In general, corporate reporting standards have in common the following elements: they are set with a focus on public interest, they are independent, they are formed through due process, and they involve public consultation, all in an effort to generate a strong basis for the information being sought from reporting entities. While the world of sustainability reporting is ever-changing and evolving, there are two common reporting standards on a global scale, GRI and SASB, each with a different audience and scope.
The Global Reporting Initiative (GRI) was founded in 1997 as a non-profit hoping to create a mechanism to keep companies accountable for their environmental conduct, and in 2016 they created the first global standards for sustainability reporting, including social, economic, and governance issues. They are the universal standard representing the global best practices regarding the disclosure of ESG related information. The GRI Standards are developed following a Due Process Protocol, which uses a multi-stakeholder approach involving experts in business, civil society, labor organizations, investment institutions, academics, and accountants around the world; this allows broad consensus to be reached on what adequate reporting on sustainability topics should look like. The GRI provides guidance for reporting on topics that are determined to be materially important to a company’s larger stakeholder community, offering sector-specific and topic-specific standards.
The Sustainability Accounting Standards Board (SASB) was founded in 2011 to help businesses develop a common language for the financial impacts of sustainable development. Their standards were published in 2018, developed through due process involving extensive research and engagement with corporate professionals, investors, and subject matter experts. They provide guidance for reporting on topics that are financially material to your stakeholder community, but more specifically investors. SASB has 77 different industry-specific standards to track and communicate sustainability actions most financially-material to investors.
Reporting Frameworks and Rankings & Ratings
Unlike standards, which provide specific requirements and metrics for reporting, frameworks provide guidance to contextualize or frame that information; how it should be structured, how it should be prepared, and which broader topics are covered. They can help shape a company's ESG efforts by providing the correct context for their information, tailoring their reports to their intended audience, and ensuring that a company is reporting on topics that are most material to their stakeholders. Additionally, frameworks can assist in determining what kind of deliverable is best for a company to use in order to effectively communicate its impacts and efforts. Frameworks can also take the form of a questionnaire or survey asking for ESG-related data that is then answered by an organization, outputting a score or ranking to benchmark an organization against industry peers and competitors. Different frameworks have different guidelines and requirements making them difficult to compare, which has posed challenges to the consolidation efforts of the ESG industry. Frameworks and standards are complementary and designed to be used together; while there are many, these are two frameworks that have been trending in the industry:
The CDP (formerly the Carbon Disclosure Project) is a global non-profit organization, and this framework primarily focuses on areas of environmental sustainability: disclosure related to climate change, forests and water security. Providing annual sustainability scoring ranging from an A to a D- based on the depth of company reporting and their climate action, they promote corporate transparency by incentivizing and assessing environmental action with a competitive edge. Investors often refer to CDP scores and their annual A-List of organizations to identify sustainable partners. In 2015, the CDP also introduced a quality-reviewed greenhouse gas modeled emissions data set that has been widely used to assess a company’s carbon risk.
The Task Force of Climate Disclosures (TCFD) provides a framework that is specific to climate change, while some other frameworks are industry-specific. TCFD helps companies understand how they are being financially impacted by climate change, and how they can strategize to mitigate climate change, while effectively disclosing their climate-related financial risks and opportunities. This framework focuses on financial materiality and intends to communicate to investors how their assets will be affected given certain climate scenarios.
With multiple reporting standards, frameworks, and rankers & raters in the ESG space, a single company can't realistically use all of them; this allows them the opportunity to be strategic about which ones they use and why they use them. A lot of frameworks and standards are intentionally aligned, like SASB, TCFD, and CDP. Both TCFD and SASB focus on the financial impact of ESG issues, and SASB’s focus on the broader range of sustainability issues impacting financial performance is complemented by the TCFD’s focus on specifically climate-related issues. The CDP framework is also specific to climate-related issues and is very closely aligned with TCFD – so closely aligned that choosing to submit to the CDP will also satisfy the requirements of the TCFD. While overlap among reporting elements and tools can be helpful for reporting entities, consolidation would be better in the sense that it would remove a lot of complexities involved in ESG reporting.
Developments in Sustainability Reporting Standards & Frameworks
As the corporate sustainability disclosure landscape has expanded over the years, it has also become increasingly complex, and consolidation is key. In 2021, SASB and the International Integrated Reporting Council (IIRC) – whose objective is to develop a universal integrated reporting framework for organizations – both merged into the Value Reporting Foundation. The Value Reporting Foundation was created to offer resources to companies for communicating their value, with the guidance of SASB standards and IIRC frameworks. More recently, the International Financial Reporting Standards (IFRS) Foundation established the International Sustainability Standards Board (ISSB) tasked with developing a comprehensive global baseline of high-quality sustainability disclosure standards geared towards investors. On August 1, 2022 three was even further consolidation with the IFRS Foundation merging with the Value Reporting Foundation and the Carbon Disclosure Standards Board (CDSB), which was formerly an international consortium of business and environmental NGOs committed to equating natural and social capital with financial capital in mainstream corporate reporting models. The ISSB is one of two standard-setting boards within the IFRS, and the GRI will play a key role in working with the IFRS to build a comprehensive set of sustainability reporting standards. With the GRI standards being the only global standards with an exclusive focus in impact reporting for a multi-stakeholder audience, they play an essential role in the shaping of a comprehensive reporting structure. IFRS Sustainability Disclosure Standards and GRI Standards can be viewed as two interconnected reporting pillars that address distinct perspectives, which can together form a comprehensive corporate reporting regime for the disclosure of sustainability information. In this two-pillar structure for financial and sustainability standards, the goal is for each to have equal footing. Covering the information needs of both investors and other stakeholders, companies can be more confident in the credibility of their sustainability behavior with these developments.
