A timeline of what's happening with global ESG reporting standards

Together with the announcement of the International Sustainability Standards Board by the IFRS Foundation, the IFRS Technical Readiness Working Group published a prototype to be used by the ISSB to develop a disclosure standard setting out the requirements for the identification, measurement and disclosure of climate-related financial information (Climate Prototype).

The Climate Prototype is based on the TCFD recommendations, however it is more prescriptive when it comes to the content to be included within each of the TCFD categories of governance, strategy, risk management, and metrics and targets. For example, the strategy disclosure requirements ask the entity to disclose whether it has used a “Paris-aligned scenario” and to disclose current or planned investment in lower-carbon alternatives and reskilling the workforce.

The Climate Prototype also defines cross-industry metrics of:

• greenhouse gas emissions
• the amount and percentage of assets or business activities vulnerable to transition risks and physical risks
• revenue, assets or other business activities aligned with climate-related opportunities
• capital expenditure deployed toward climate-related issues
• internal carbon prices
• proportion of executive management remuneration affected by climate-related considerations

Quantifying many of these metrics should be taken with care given the uncertainty involved and thus the potential for oversimplifying or misrepresenting a company’s position, which would defeat the purpose of the Climate Prototype to provide reliable information. Noting this, the working group has recommended that the ISSB develop detailed technical protocols for the cross-industry metrics.

Together with the IFRS Foundation announcement establishing the International Sustainability Standards Board, the IFRS Technical Readiness Working Group published a prototype to be used by the ISSB to develop general requirements for sustainability disclosure (General Requirements Prototype). The general requirements would set out overall requirements for disclosure of sustainability-related financial information relevant to an entity, and would be supported by separate standards for specific industries and specific sustainability matters (such as climate change).

The General Requirements Prototype suggests that ‘material’ information could include but is not limited to information about (a) an entity’s impacts on society and the environment, if those impacts could reasonably be expected to affect the entity’s future cash flows; and (b) events considered to have a low likelihood but a high potential impact on the entity’s future cash flows. This conceptualization of materiality broadly aligns with that of the Integrated Reporting Framework and should be contrasted with the conceptualization of materiality used by the GRI Standards.

The General Requirements Prototype hopes to standardize sustainability-related financial information by specifying that entities shall disclose information on material matters using the categories of:

• Governance – i.e. the entity’s governance procedures regarding each material matter
• Strategy – i.e. how material matters represent risks and opportunities for the business model and strategy
• Risk Management – i.e. how the entity identifies, assesses, manages and mitigates material matters
• Metrics and Targets – i.e. metrics and targets used by the entity to monitor its performance in relation to material matters

The IFRS Foundation announces the establishment of the International Sustainability Standards Board (ISSB) to develop – in the public interest – a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.

The Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation will be consolidated into the ISSB. This consolidation puts climate disclosure, the SASB Standards, and the Integrated Reporting Framework front-and-center in the development of the IFRS Sustainability Disclosure Standards.

GRI releases an updated version of its Universal Standards, effective for reports published from 1 January 2023. The new Universal Standards present key updates regarding materiality:

• Updated definition stating that “Material topics are topics that represent an organization’s most significant impacts on the economy, environment, and people, including impacts on their human rights”
• GRI no longer suggests the use of a matrix to rank/prioritize material topics. Instead, “the organization should arrange its impacts from most to least significant and define a cut-off point or threshold to determine the impacts it will focus its reporting on.”
• GRI firmly positions its definition of material issues with regard to an organization’s impact on the external environment/stakeholders, and underscores that reporting on material issues (as defined through external impact) is relevant regardless of whether the issues also impact an organization financially (i.e. financial materiality). “It is…important for the organization to report on all the material topics that it has determined using the GRI Standards. These material topics cannot be deprioritized on the basis of not being considered financially material by the organization.”

In the launch email about the new Universal Standards, GRI stated that the new Standards are “now the first and only global reporting standards to fully reflect due diligence expectations for sustainability impacts, including those on human rights as set out in authoritative and intergovernmental instruments by the UN and OECD.”

At the SASB Public Standards Board meeting on 1 October 2021, the Board discussed market confusion on the role of materiality in the SASB Conceptual Framework. One of the considerations is to improve alignment and connectivity with financial reporting conceptual frameworks. SASB Board meeting slides 14-17 go over the market feedback and provide comparisons with financial reporting definitions of materiality.

The Value Reporting Foundation consultation response focused on four key areas of particular relevance as the ISSB is being designed:

• realizing the commitment to building on existing global frameworks and standards;
• achieving genuine connectivity between financial accounting and sustainability standards;
• meeting investor needs for industry-specific standards that include metrics;
• a governance structure that includes capital market participants.

The G20 Finance Ministers and Central Bank Governors published a Communique following their meeting in Venice, Italy, on 10 July 2021, referencing the IFRS Foundation.

The Communique states:

“We will work to promote implementation of disclosure requirements or guidance, building on the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) framework, in line with domestic regulatory frameworks, to pave the way for future global coordination efforts, taking into account jurisdictions’ circumstances, aimed at developing a baseline global reporting standard. To that aim, we welcome the work programme of the International Financial Reporting Standards Foundation to develop a baseline global reporting standard under robust governance and public oversight, building upon the TCFD framework and the work of sustainability standard-setters, involving them and consulting with a wide range of stakeholders to foster global best practices.”

A group of experts has begun work to develop EU-wide sustainability reporting standards and joined with the Global Reporting Initiative (GRI) to ensure the standards inform, and are informed by, global efforts at standardisation.

The European Financial Reporting Advisory Group (EFRAG) and the GRI signed a ‘statement of cooperation’ as they “work towards international sustainability reporting convergence”. EFRAG also said it is exploring similar partnerships with other reporting organisations.

GRI shares the EU’s focus on ‘double materiality’ – reporting on both sustainability factors affecting the company and how the company impacts on society and the environment – while the IFRS focuses on ‘enterprise value’, which captures expected value creation for investors in the short-, medium- and long-term

Value Reporting Foundation official announcement of its commencement – merging SASB and IIRC.

The Foundation supports business and investor decision-making with three key resources: Integrated Thinking Principles, Integrated Reporting Framework and SASB Standards.

The letter set out seven key positions and recommendations the Value Reporting Foundation has for the US Securities and Exchange Commission, given the crucial role the Value Reporting Foundation believes the SEC can play in advancing the coherence that both investors and businesses have called for in sustainability disclosure:

1. Sustainability information is market infrastructure essential to making informed investment and voting decisions
2. The SEC should consider the full range of sustainability factors that investors analyze in their assessments of enterprise value, in addition to climate change
3. Industry-specific disclosure is critical to investment decision making, including with respect to climate risk
4. Strong governance and a robust, transparent due process are essential to ensure sustainability standards can evolve along with the market
5. Existing standards and frameworks – including the SASB Standards and the recommendations of the Task Force on Climate-related Financial Disclosures – can help the SEC establish a common structure for sustainability-related financial disclosure that includes an appropriate mix of qualitative and quantitative information, as well as cross-industry and industry specific metrics
6. The use of third-party standards that meet specified criteria (e.g. SASB Standards) can have a range of benefits, including the provision of investor-focused disclosure on the sustainability issues reasonably likely to be financially material for the typical company in an industry
7. The SEC should continue to engage in the efforts of the IFRS Foundation to ensure international coherence.

Whitepaper commissioned by GRI that covers double materiality and ongoing discussions in financial materiality vs broader impacts on sustainable development.

According to the whitepaper:

• The identification of financially materiality issues are incomplete if companies do not first assess their impacts on sustainable development
• Reporting material sustainable development issues can enhance financial performance, improve stakeholder engagement and enable more robust disclosure
• Focusing on the impacts of organizations on people and planet, rather than financial materiality, increases engagement with the Sustainable Development Goals
• For companies to contribute to sustainable development, they need to understand and manage their positive and negative impacts in a way that is transparent, trusted and objective. This understanding has led to a growing demand for sustainability reporting and a call for a global solution – one that reflects the needs of reporting companies together with the information requirements of their stakeholders, as well as those of the jurisdictions they operate in.

Double-materiality is central to the European Commission’s proposed Corporate Sustainability Reporting Directive (CSRD), while it also closely aligns with the materiality approach in the GRI Standards. The authors believe each direction of the notion of double materiality needs to be considered in its own right – it is not about the convergence of the two perspectives that renders an issue as material. Impacts on the environment and society cannot be deprioritized on the basis that they are not financially material, or vice versa. Moreover, a company should start with the assessment of the outward impact component of the double-materiality principle followed by the identification of the subset of information that is financially material to the company and their stakeholders.

This new “schematic” uses a “building blocks approach” to encourage consistent, comparable, and assurable sustainability information.

• Block 1: Investor-focused sustainability information that is material to Enterprise Value. To meet the needs of capital markets, these standards must be global, and we have called on the IFRS Foundation to set up a new sustainability standards board.
• Block 2:  Multi-stakeholder focused sustainability reporting that helps a wider range of stakeholders understand a company’s positive and negative contributions to sustainable development and impacts on economy, environment, and people. This reporting could be based on global standards or guidance and/or jurisdiction-specific requirements to meet specific public policy objectives.

A couple of key takeaways:

• The building blocks embrace the ‘double materiality’ concept
• Suggests that the proposed IFRS International Sustainability Standards Board will be active only in financial materiality component (leaving the GRI-governed ‘impact materiality’ lens on its own)

Proposing amendments to the IFRS Foundation Constitution that would enable the creation of a new sustainability standards board under the governance of the Foundation.

The Trustees are proposing amendments that are a prerequisite for creating a new board within the governance structure of the IFRS Foundation

The objective of the IFRS Foundation would be expanded to include the development, in the public interest, of a single set of high quality, understandable, enforceable and globally accepted sustainability standards based upon clearly articulated principles.

SASB and IIRC comment on the forthcoming merger of the two entities into the Value Reporting Foundation:

“We will be one global organization with a unified strategy and three principal products:  

• Integrated Thinking Principles 
• International Framework 
• SASB Standards 

We will advance a simplified corporate reporting landscape, bringing together our existing framework and standards…  

We will provide active support to achieve the ambition of a global Sustainability Standards Board under the IFRS Foundation’s governance…” 

The International <IR> Framework prompts thinking across the capitals, reinforcing the need for connectivity and explicit links between governance and value creation, and driving management analysis of risks, opportunities and resource allocation. Combining financial reporting with the SASB Standards can help drive integrated thinking through the six capitals concept: 

• Financial statements prepared in accordance with IFRS or US GAAP provide full or partial insight into two of the six capitals 
• SASB Standards provide industry specific disclosure topics and metrics for four of six capitals 

GRI has welcomed that the European Commission is maintaining its ambition to achieve progress in corporate transparency on sustainability impacts, following publication of the proposed new  Corporate Sustainability Reporting Directive (CSRD).

Announcement that the EU is planning a Corporate Sustainability Reporting Directive to replace the Non-financial Reporting Directive. Key takeaways:

• All large and all listed companies, including listed small and medium-sized enterprises (SMEs), will be covered by the new regime, meaning that the number of companies that need to report sustainability information will rise to 49,000, up from 12,000 covered by the NFRD.
• The CSRD will be based on a new standard to be adopted by October 2022 that will take into account the EU’s forthcoming taxonomy on sustainable finance, its recently-leaked plans for guidance on transition activities, and will require third-party assurance. It will be designed to help give investors the information they need to more easily comply with the recently-introduced Sustainable Financial Disclosure Regulation (SFDR).

SASB’s Climate Risk Technical Bulletin is designed to help investors better understand, measure, and manage their exposure to climate-related risks and opportunities. The research finds that climate change is likely to materially affect nearly every industry, but manifests differently in each one. Investors can’t simply diversify away from climate risk; instead they must focus on managing it—and on encouraging portfolio companies to manage it—in all its forms.

To this end, the bulletin includes an analysis of the systematic nature of climate risk, a climate-focused view of the SASB Materiality Map broken down by climate risk type (physical, transition, regulatory), a breakdown of financial impact channels by industry, an overview of current disclosure practices, and a full table of SASB’s climate-related metrics and associated risks across 77 industries.

Suggests that SASB can serve as a “foundational” layer of investor-focused disclosure.

A Practical Guide to Sustainability Reporting Using GRI and SASB Standards is based on extensive interviews with four global companies: UK-based Diageo, City Developments Limited (CDL) of Singapore, US-headquartered General Motors (GM), and Canada’s Suncor Energy. All four are long-term GRI reporters that now also report with SASB. Their insights are supplemented by survey findings with 132 business representatives around the word.

The publication overviews the similarities and distinctions between the standards – covering materiality, the type and scope of disclosures, audiences and the standard setting process – and indicates how they can be used together to meet the needs of a broad range of users.

Key themes from the research include:

• Each set of standards complement rather than substitute the other, with GRI supporting broad and comprehensive disclosures on organizational impacts and SASB focusing on a subset of financially material issues
• Using the GRI and SASB Standards together can offer a holistic picture of corporate performance, bringing sustainability and financial information more closely together
• Reporting with GRI and SASB can meet the needs of a broad range of stakeholders, with expanded disclosure to increase user engagement
• Taken together, GRI and SASB Standards offer a company a practical approach to reflect on and disclose their material issues and impacts

GRI statement on continued developments toward IFRS oversight of sustainability reporting.

“As I set out in my response on 8 March, recognizing investors’ needs for reporting that identifies the effects on value creation, linked to social and environmental issues, is a step in the right direction. However, companies need to be accountable to a multiplicity of stakeholders. This is why financial reporting and comprehensive sustainability reporting, as enabled by GRI, need to be on an equal footing.

The case for multi-stakeholder reporting, which applies the principle of double materiality, is clear. We will continue to work with IFRS, the European Commission and others to support global changes that fulfill these aims.”

GRI welcomes the direction of travel IFRS is taking, which has the potential to strengthen financial reporting by taking into account the financial opportunities and risks of a company’s sustainability impacts. GRI believes that such strengthened financial reporting complements sustainability reporting, which focuses on disclosing a company’s impact on the world.

At the same time as the IFRS Foundation progress their work, the European Commission is exploring how new EU sustainability standards could be created and managed. In January, GRI contributed to the consultation led by the European Financial Reporting Advisory Group.

Much of the complementarity of the <IR> Framework and SASB Standards can be attributed to the inherent purpose of ‘frameworks’ and ‘standards’ for disclosure. Frameworks provide a set of (often) industry agnostic, principles-based guidance for how information is structured and prepared and which broad topics are covered. Whereas standards often offer industry-specific, replicable and detailed requirements for what should be reported for each topic.

Provides instructions on how to align SASB standards to IR capitals

This paper states IFRS Foundation’s intent to publish feedback to initial consultation paper and investigate setup of SSB.

The Trustees remain on track to make a final determination about a new board in advance of the November 2021 United Nations COP26 conference

Based on the feedback to the 2020 Consultation, and encouraged by the IOSCO Board statement, the Trustees have reached the following views about the strategic direction of a new board:

• Investor focus for enterprise value: the new board would focus on information that is material to the decisions of investors, lenders and other creditors.
• Sustainability scope, prioritising climate: due to the urgent need for better information about climate-related matters, the new board would initially focus its efforts on climate-related reporting, while also working towards meeting the information needs of investors on other ESG (environmental, social and governance) matters.
• Build on existing frameworks: the new board would build upon the well-established work of the Financial Stability Board’s Task Force on Climate related Financial Disclosures (TCFD), as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value. The Trustees will consider the prototype proposed by the alliance for an approach to climate-related disclosures as a potential basis for the new board to develop climate-related reporting standards. To prepare for this work, the IFRS Foundation will initiate a process of structured engagement with the relevant organisations.

IOSCO identifies the proposed Sustainability Standards Board (SSB) within the IFRS Foundation’s governance structure as the most suitable home for standards relevant to enterprise value creation and we support this proposal.

Endorses climate-first approach, endorses ‘Group of five’ corporate reporting system prototype as suitable for the basis of SSB’s climate-related reporting standards.

Three priority areas for future improvement:

• Increased leverage of existing principles, frameworks, standards
• Promotion of comparable metrics and narrative

IOSCO sees an urgent need to improve the consistency, comparability, and reliability of sustainability reporting, with an initial focus on climate change-related risks and opportunities, which would subsequently be broadened to other sustainability issues.

Welcomed the announcement of a potential SSB

Encourages use of ‘Group of five’ reporting frameworks prototype

This report proposes a roadmap for the development of a comprehensive set of EU sustainability reporting standards.

The objective of the recommendations is to describe the scope and structure of future sustainability reporting standards that contribute to the achievement of the EU’s policy objectives, not to set out specific disclosure requirements, indicators or metrics.

Double materiality concept introduced from page 74 onward.

GRI maintains its materiality focus “on an organization’s most significant impacts outward: on the economy, environment, and people, including impacts on human rights.” The new exposure draft adds new language around the interplay between these outward impacts and financial consequences for the entity…

“The outward impacts of an organization are therefore also important for those interested in the financial performance and long-term success of the organization. Understanding an organization’s impacts outward is necessary in order to identify financially material risks, opportunities, and impacts for the organization. … The material topics identified using the GRI Standards need to be prioritizes in their own right and cannot be deprioritizes on the basis that they are not financially material”

‘Group of five’ standards setters put forward a ‘corporate reporting system’ that defines how the standards can be used together, to develop disclosure that meets the needs of investors and other stakeholders.

Introduces the concept of ‘nested materiality’ (which aligns strongly with the EU double materiality concept)

Enterprise value materiality vs sustainable development materiality

For example, carbon emissions enter the big lens perspective as society becomes aware of global warming, the middle lens as investors start to factor net zero transition into capital market pricing, and the small lens as financial consequences are felt in net asset values.

Sustainability reporting can therefore include leading indicators of matters that may, over time, become relevant for enterprise value.

The authors’ reporting prototype follows a governance-strategy-risk management-metrics/targets scheme similar to TCFD, and suggests that the prototype can be deployed for climate change initially, with other ESG topics to follow the same standard.

Announcement of IIRC and SASB merger to form the Value Reporting Foundation from mid-2021. This entity will provide investors and corporates with a comprehensive corporate reporting framework across the full range of enterprise value drivers and standards to drive global sustainability performance.

Organizations globally already use both to communicate effectively with investors about how sustainability issues are connected to long-term enterprise value, with these endeavors ultimately benefiting other key stakeholders. Under the Value Reporting Foundation, we will link the concepts between the <IR> Framework and SASB Standards even further.

The Value Reporting Foundation could eventually integrate other entities focused on enterprise value creation, and the Foundation and CDSB have jointly signalled interest in entering into exploratory discussions in the coming months.

“Information is the lifeblood of good decision making.”

The IFRS Foundation published this Consultation Paper to assess demands from stakeholders for a global set of internationally-recognised sustainability standards and understand the role IFRS Foundation should play in developing such standards.

• ‘Climate-first’: Developing global sustainability-reporting standards for climate-related information is seen the most pressing concern.
• Materiality: If established, the Sustainability Standards Board (SSB) would initially focus its efforts on the sustainability information most relevant to investors and other market participants (i.e., not double materiality). Such information would more closely connect with the current focus of the IASB.

The ‘group of five’ standards setters describe a comprehensive corporate reporting system comprising various types of reporting:

• Reporting already reflected in the financial accounts (financial reporting)
• Reporting on the subset of sustainability topics that are material for enterprise value creation – which is directed at users whose primary objective is to improve economic decisions
• Reporting on matters that reflect the organisation’s significant impacts on the economy, environment and people – which is directed at users who want to understand the enterprise’s positive and negative contributions to sustainable development

Concepts of nested materiality (which would later become synonymous with double materiality) and dynamic materiality govern the information presentation a cross the three types of reporting.

Defines how information flow proceeds through the various elements of the sustainability information ecosystem, including: reporters, software providers, auditors, frameworks and standards, data providers, analytics platforms, end users, and regulators.