Sustainability Reporting

Sustainability reporting is the disclosure and communication of environmental, social, and governance (ESG) goals—as well as a company’s progress towards them. The benefits of sustainability reporting include improved corporate reputation, building consumer confidence, increased innovation, and even improvement of risk management. Sustainability reporting requirements in the United States are still in the process of being developed, meaning reports aren't required... yet. But the EU's Corporate Sustainability Reporting Directive (CSRD) is already here and will affect many companies based outside of Europe, as well. How should companies prepare?

There are many ways to build sustainability reporting into your corporate social responsibility programs, whether by making use of established sustainability reporting frameworks such as GRI or CDP, including sustainability performance as part of your overall performance disclosures, by using guidelines such as those created by the Value Reporting Foundation (VRF), or making use of ranking tools such as the Dow Jones Sustainability Index (DJSI).

What's New in Sustainability Reporting?

UPDATE: In March 2024, the U.S. Securities and Exchange Commission (SEC) approved a final rule on corporate climate disclosure that companies have been anticipating for several years. 

ESG reporting has been a topic of discussion and debate for several decades. To date, ESG reporting has been voluntary. Today, multiple financial markets either have adopted or are contemplating regulation to introduce some level of mandatory reporting. While this will get us closer to the standardized, comparable ESG information that has been sought by investors and other stakeholders for decades, the standard of practice is by no means a settled matter.

The voluntary standards that have been with us for varying amounts of time (i.e., GRI for decades, TCFD and ISSB for a couple of years) will now be working to position themselves as full or partial solutions to these regulations and to the ongoing inquiries of stakeholders of all stripes. For the teams preparing corporate ESG reports, we foresee a landscape that continues to be complex and evolving. 

Sustainability Reporting Standards

While there are numerous reporting frameworks available, this discussion will focus primarily on the commonly used frameworks and standards in the U.S. Many companies struggle with identifying which frameworks or standards are best suited for their needs and the needs of their stakeholders.

The descriptions below will provide an overview of the primary audience for each reporting framework, as well as the types of information that are required to be disclosed.

Global Reporting Initiative (GRI)

Provides all organizations with standards for reporting material environmental, social, and economic performance and impacts, as well as organizational governance, to financial and other stakeholders.

Key Audiences: All stakeholders, including investors and communities

Types of information disclosed:

• General disclosures: Governance, stakeholder engagement, and reporting practices
• Sector-specific standards relevant to your industry
• Topic standards to report specific information on your material issues across economic, environmental, and social topics

Task Force on Climate-related Financial Disclosures (TCFD)

Disclosure standards launched by the Financial Stability Board (FSB), premised on the assumptions that a climate risk is a form of financial risk and that it is non-diversifiable.

Key Audiences: All stakeholders, particularly of interest to regulators

Types of information disclosed:

• Governance, such as how and by whom climate-related risks are identified, assessed, and communicated
• Strategy, such as how a changing climate affects it, including your plans and the financial implications your strategy is affected
• Risk management, including risks to your people, operations, customers, and the communities where you operate due to a changing climate, and how you will respond
• Metrics and targets, such as how you are calculating impacts, the results of your actions or inactions, and how you reduce your climate impacts 

International Sustainability Standards Board (ISSB)

Developed by the IFRS Foundation, the ISSB is developing standards to establish a global baseline of sustainability disclosures focused on needs of investors and financial markets. The ISSB standard consolidates the Sustainability Accounting Standards Board (SASB), Integrated Reporting (IR), and Climate Disclosure Standards Board (CDSB) frameworks. ISSB emphasizes consistency and connection between financial statements and sustainability disclosures.

Key Audiences: Investors and lenders with an interest in industry-based standards

Types of information disclosed (proposed – final expected in 2023):

• TCFD consistent structure: Governance, Strategy, Risk Management, Metrics and Targets
• Consideration of SASB standards in the identification and disclosure of sustainability risks and opportunities
• Inclusion of SASB standards for climate-related industry disclosures on physical risks, transition risks, and climate-related opportunities.
• Scope 1, 2, and 3 emissions

Sustainable Development Goals (SDGs):

The 17 goals, adopted by the U.N. as part of the 2030 Agenda for Sustainable Development, provide a global blueprint to improve the lives and prospects of all people. For each goal, there are sub-goals—or “targets”—and related indicators, all of which can be useful for tracking your company’s progress.

Key Audiences: All stakeholders

Emerging Regulations on Disclosure & Sustainability Reporting

U.S. Securities and Exchange Commission

Though consolidation of sustainability reporting standards holds promise for simplifying reporting processes and providing consistent comparable data to stakeholders, emerging regulation is another aspect of ESG reporting to monitor. Individual nations are implementing ESG reporting requirements in their own jurisdictions, and most will not delegate their authority to any single jurisdiction or existing reporting standard. Because jurisdictions may require different approaches, the level of complexity for reporters creates the potential for overlapping and inconsistent requirements. There are several important changes coming in ESG reporting. Both the U.S. Securities and Exchange Commission (SEC) and the European Financial Reporting Advisory Group (EFRAG) are putting stakes in the ground regarding ESG information.

READ THE SEC's NEW RULE FOR CORPORATE CLIMATE RISK DISCLOSURE.

Per the SEC, disclosures in registration statements and annual financial reports will be required for climate-related risks that are reasonably likely to have a material impact on a company's business or financial statements.
Reasonably likely means:

• A meaningful chance (but not necessarily a probability) of occurring
• Having the character of being more probable than not, based in reason or experience

Required disclosures proposed will include:

• Scope 1 and Scope 2 GHG emissions (if material)
• Climate-related risks and opportunities
• Climate risk management processes
• Climate targets and goals
• Governance and oversight of climate-related risks
• Assurance (for some registrants)

These rules will apply to:

• SEC registrants, including foreign registrants and emerging growth companies
• Companies entering the U.S. capital markets for the first time by through IPO or acquisition

European Union Corporate Sustainability Reporting Directive

Under the new European Corporate Sustainability Reporting Directive (CSRD) rules, approximately 50,000 EU businesses and many U.S. businesses will be required to provide ESG disclosures using the European Sustainability Reporting Standards (ESRS). This includes all large companies and all listed companies (except listed micro enterprises).

This new regulation comes into effect in 2024 with reporting expected in 2025 for more than four times the number of companies (approximately 11,700 organizations) currently required to provide non-financial reporting under the EU’s Nonfinancial Reporting Directive (NFRD). According to the European Commission, the reason for the expansion is to ensure “that all large companies are publicly accountable for their impact on people and the environment. It also responds to demands from investors for sustainability information from such companies.” This regulation applies to:

• All companies that were subject to NFRD
• All companies listed on EU-regulated markets, except for micro companies
• Insurance and credit institutions regardless of their legal form
• Any EU company, meeting at least two of the following three criteria:
  • More than €40M in net turnover
  • More than €20M on the balance sheet
  • 250 or more employees

• Subsidiaries of EU companies must either be included in the consolidated parent company’s ESRS-compliant reports or issue standalone reports
• Any large listed subsidiaries (i.e., those that meet the criteria in the first two bullet points above) must report on their own and cannot apply the subsidiary exemption
  • Subsidiaries of non-EU parent companies operating in the EU and meeting the two of the three criteria above must either be included in the consolidated parent company’s ESRS-compliant reports or issue standalone reports (please see additional transition conditions for and conditions for foreign subsidiaries)

No matter what method you choose, the Boston College Center for Corporate Citizenship can help you get up to speed. 

Preparing for New Sustainability Reporting Requirements: Advice for Companies

How can your company get ready for these new and evolving requirements?

1. Get a good grasp on the inventory of unreported information that the company already has and in the existing public domain. People automatically gravitate towards what's in your ESG report, which is a great start, but don't forget about social media and your general website. There's a lot more information floating out there. Having a baseline understanding of the current state is important as the company continues to think about how they want to talk about ESG commitments, goals, and progress.
2. Keep scanning the horizon. Your company may be impacted by regulation from a foreign jurisdiction before regulation in your domiciled country.
3. Get comfortable with the fact that once you are reporting anywhere, you are reporting everywhere. Many regulators are writing XBRL requirements into their reporting standards. Tagging and current AI tools will make it much easier to gather information about companies.
4. Prepare to report earlier. Several regulations either do or will require ESG information to be reported with financial statements and regulatory filings.