Standardising ESG reporting

April 20, 2023

Integrated reporting—that brings together a company’s financial and non-financial performance in a single report—is a good way to enable comparison of ESG performance

Environmental, Social, and Governance (ESG) reporting has gained significant traction in recent years as investors, customers, and regulators are increasingly demanding more transparency and accountability from companies regarding their non-financial performance.

However, there is a lack of standardisation and consistency in ESG reporting, making it difficult for stakeholders to compare and assess companies’ ESG performance accurately.

Multiple frameworks and standards such as Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD), Business Responsibility and Sustainability Report (BRSR), and more provide guidance to companies on ESG reporting. These frameworks differ in their stakeholder focus, metrics, and scope—leading to confusion, both for companies and stakeholders. For example, the GRI requires companies to prepare their ESG disclosures with a broader focus on sustainability issues while the SASB focuses on industry-specific financially material ESG issues that can impact companies’ financial performance. This variation in scope and metrics makes it difficult for stakeholders to compare ESG performance across companies and sectors.

In 2020, five leading sustainability reporting organisations globally announced their intention to collaborate on a comprehensive corporate sustainability reporting framework to provide a streamlined and consistent approach towards ESG reporting. COP26, held at Glasgow in November 2021, witnessed the announcement of the International Sustainability Standards Board (ISSB) to develop and promote global sustainability standards for the private sector. Established under the auspices of the International Financial Reporting Standards (IFRS) Foundation, the ISSB is expected to release the final drafts for IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-Related Disclosures by June 2023 and make them effective starting January 2024.

As financial and non-financial disclosures requirements align, the key challenge for companies will be to integrate diverse metrics into a common report that meets the requirements of different stakeholders. Integrated Reporting (IR) is an approach that aims to integrate a company’s financial and non-financial performance into a single report. It encourages companies to report on their strategic objectives, business model, and the broader context in which they operate, including their ESG performance.

For companies to prepare for IR, they need to undertake a few key steps:

1. Companies need to develop a clear understanding of how they create value over time (i.e., their value creation model). This involves identifying their key stakeholders, resources capabilities they utilise, and the broader social and environmental context in which they operate.
2. Companies must embed ESG considerations into decision-making processes. This requires engaging with stakeholders, analysing risks and opportunities, and developing appropriate policies and procedures to manage ESG issues effectively.
3. They need to conduct materiality assessment and identify relevant ESG metrics that matter the most to their business and stakeholders.
4. Investing in data collection and management systems is key to effectively report on ESG performance. This involves identifying the relevant data sources, ensuring data quality and consistency, and reporting on the metrics in a standardised and comparable format.
5. Effective stakeholder engagement is critical to the success of Integrated Reporting. Companies need to engage with their stakeholders, including investors, customers, employees, and communities to understand their expectations and receive feedback on the company’s performance.

By integrating ESG considerations into financial reporting, IR helps companies identify and manage ESG risks and opportunities, enhancing their decision-making and ultimately driving sustainable value creation. Consider the practice of quarterly financial performance reporting. Driven by several factors, including regulatory requirements, investor expectations, and market pressures; a myopic focus on this may lead to prioritisation of factors favorable to enhancing short-term financial performance instead of long-term value creation. IR encourages companies to adopt an integrated thinking approach and report on their performance across multiple dimensions, including financial, social, environmental, and governance aspects. In doing so, companies can better understand and communicate their interdependencies between financial and non-financial performance—enabling them to illustrate the holistic value created over time and demonstrate how they are managing risks and opportunities in a sustainable way.

In 2017, the Securities and Exchange Board of India (Sebi) advised the top 500 listed companies to voluntarily adopt IR. Since then, according to a study conducted by the IFRS Foundation in 2022, over 2,000 companies in more than 70 countries have adopted the IR framework.

Further solidifying the growing role of IR in corporate reporting, the ISSB has encouraged the continued use of the IR framework to help achieve a globally accepted, comprehensive corporate reporting system.

Going forward, the adoption of IR will continue to grow—driven by several factors, including the increasing demand from investors for more comprehensive and integrated information, the need for companies to manage ESG risks and opportunities effectively, and the desire to demonstrate their commitment to sustainability and long-term value creation.

[The Financial Express]