Sustainability Reporting Standards

Origins

Leading-edge organizations began reporting on environmental, health, safety, social performance, and impacts in the early 1990s.

By the 2000s, these reports were being consolidated into sustainability reports, typically published annually or biennially, and including financial reporting so sustainability stakeholders have all relevant information in one location.

Written reporting has given way to reports available at organization websites with ongoing updates.

What is ESG Reporting?

ESG key focus areas: Environmental, Social, and Governance.

Quantitative Focus: Often includes specific, standardized metrics for comparison across companies and industries.

Example Metrics: GHG, Energy efficiency, Waste management, Labour standards, Diversity&Inclusion, Corporate ethics

Primary Audience: Investors and financial stakeholders who evaluate risks and opportunities related to ESG factors.

What is Sustainability Reporting?

Broader Scope: Sustainability reporting encompasses ESG factors but is broader.

Focus Areas: Includes reporting on environmental, social, and economic impacts.

Challenges and Opportunities: Addresses how the organization manages sustainability challenges and opportunities.

Information Type: Often includes more narrative and qualitative information.

Holistic View: Provides a holistic view of the company's impact on society, the environment, and the economy.

Target Audience: Designed for a wider range of stakeholders, including: Employees, Customers, Suppliers, Communities, Regulators, NGOs, Investors

Sustainability Reporting

General Properties

Regardless of the audience or reporting objectives, sustainability reports must be defensible, readable, and accessible

It's mainly voluntary but mandatory regimes are emerging around the world

It's published annually in addition to the annual reports

It's mostly narrative in nature with some quantifications

Reporting Objectives

Materiality assessment: what ESG matters are most significant to business, stakeholders, and the environment.

Data and modelling: quantitative data to model potential ESG scenarios and outcomes, facilitating strategic decision-making.Indicator definition: define the right set of ESG indicators relevant to business for effective monitoring and reporting.

Carbon accounting: carbon accounting and other sustainability-related analyses to reflect your environmental impact accurately.

Gap analyses and assessments: comprehensive evaluations of current ESG practices, policies, and performances, and understand what needs to be done to comply with regulations and standards or meet market expectations.

Transformation, improvement, and change management: ESG-driven transformation, helping to manage the change process to align with sustainability objectives.

Regulatory compliance and due diligence: full compliance with regulatory requirements while revealing risks and opportunities through detailed due diligence, guiding decisions, and surpassing regulatory standards.

Tax transparency and assurance services: transparent, compliant tax reporting and increase stakeholder trust through assured ESG disclosures.

Assurance of sustainability report: getting ready for assurance and provide limited and reasonable assurance for sustainability report.

Benefits of Sustainability Reporting

Internal Benefits

Set vision and strategy

Manage Risks

Measure Performance

Motivate employees

External Benefits

Build reputation and trust

Attract Capital

Engage with stakeholders

Comply with Regulatory Requirements

Key global trends in Sustainability Reporting

G250: World’s 250 largest companies by revenue based on the 2021 Fortune 500 ranking

N100: Worldwide sample of the top 100 companies by revenue in 58 countries, territories and jurisdictions

Source: KPMG - Key global trends in sustainability reporting 2022

Impact Materiality

This refers to the significance of a company's impact on external factors such as the environment, society, and economy. It encompasses both positive and negative outcomes that result from a company's actions and decisions.

Impact materiality focuses on how a business's activities affect people, the planet, and communities.

It is an "inside-out" perspective, emphasizing the outward effects of the company's operations and value chain on external stakeholders and the environment.

Financial Materiality

In contrast, financial materiality pertains to issues that are likely to impact the financial condition or operating performance of a business. It is concerned with the interests of shareholders and investors and focuses on aspects that could affect the company's profitability, revenue, or valuation.

Financial materiality is more aligned with traditional financial reporting and investment decision-making, where the primary concern is the potential financial implications for the company and its stakeholders.

Impact Materiality

"Impact" definition

"The effect an organization has or could have on the economy, environment, or people, including on their human rights, as a result of its activities or business relationships."

Impacts can be:

Actual or potential
Negative or positive
Short term or long term
Intended or unintended

(Source: GRI)

GRI (Global Reporting Initiative) is an international framework for sustainability reporting on impact materiality in line with SDGs, developed by the Global Sustainability Standards Boards (GSSB).

GRI offers guidelines and indicators for organizations to measure and disclose their economic, environmental, and social / Human Rights performance. GRI reporting promotes transparency, accountability, and stakeholder engagement in sustainability practices.

Key reporting principles associated with GRI

Accuracy: Ensure that the information included in the report is precise, reliable, and based on accurate data. This principle emphasizes the importance of data quality and reliability in sustainability reporting.
Balance: Present a balanced view of the organization's performance, considering both positive and negative aspects. This principle encourages transparency and fairness in reporting, avoiding bias or selective disclosure.
Clarity: Communicate information in a clear and understandable manner. Use plain language and visuals when necessary to make the report accessible to a wide range of stakeholders.
Comparability: Enable stakeholders to compare the organization's performance over time and with other entities. This principle ensures that reporting standards and metrics are consistent and standardized.
Accuracy: Ensure that the information included in the report is precise, reliable, and based on accurate data. This principle emphasizes the importance of data quality and reliability in sustainability reporting.
Balance: Present a balanced view of the organization's performance, considering both positive and negative aspects. This principle encourages transparency and fairness in reporting, avoiding bias or selective disclosure.
Clarity: Communicate information in a clear and understandable manner. Use plain language and visuals when necessary to make the report accessible to a wide range of stakeholders.
Comparability: Enable stakeholders to compare the organization's performance over time and with other entities. This principle ensures that reporting standards and metrics are consistent and standardized.

The system of GRI 2021 Standards

Universal Standards

The GRI Universal Standards are a foundational set of guidelines designed to enhance the transparency and consistency of sustainability reporting.

Outline the key concepts and requirements for using the GRI Standards.

Reporting alternatives:

in accordance with the GRI Standards (more complete)
with reference to the GRI Standards

Reporting in accordance with the GRI Standards

Reporting with reference to the GRI Standards

Company "anagraphic" data.

Requires organizations to disclose information about their practices and performance on a range of sustainability issues.

Provides guidance on identifying and reporting material topics

"Material topics are those that represent the organization's most significant impacts on the economy, environment and people, including impacts on human rights"

GRI3: Material topics

Impacts are grouped into topics to contribute to cohesive reporting
Organizations can refer to the GRI Sector Standards and Topic Standards to understand the range of impacts that can be covered by each topic
Material topics can cover more than one dimension

Assessing the significance of the impacts

Sector Standards

Sector Standards are designed to provide detailed guidelines for sustainability reporting specific to various sectors. These standards ensure that organizations within the same industry report on their economic, environmental, and social impacts in a consistent and comparable manner.

The GRI Sector Program will develop standards for 40 sectors, starting with those that have the highest impact.

Topic Standards

The Topic Standards in the Global Reporting Initiative (GRI) framework are designed to guide organizations in reporting on specific economic, environmental, and social impacts.

Materiality Matrix

The Materiality Matrix in the Global Reporting Initiative (GRI) framework is a tool used to identify and prioritize the sustainability issues that are most significant to an organization and its stakeholders. It helps in visualizing the relative importance of various topics from both an internal and external perspective.

Source: https://www.linkedin.com/pulse/what-materiality-analysis-matrices-why-important-esg-antonio-insana/

The matrix is typically structured to reflect the following:

Importance to Stakeholders - This axis represents how critical each issue is perceived to be by external stakeholders, such as customers, investors, regulators, and the community.
Impact on the Organization - This axis indicates the significance of each issue based on its potential impact on the organization's operations, strategy, and performance.

By plotting issues on these two dimensions, organizations can prioritize their sustainability efforts and reporting, focusing on the topics that matter most to both stakeholders and the company itself.

Financial Materiality

Sustainability information is considered financially material if omitting or misrepresenting it might substantially alter the risk profile of a company or influence capital allocation.

Financial materiality is a concept in accounting and finance that refers to the significance of financial information or events that could influence the decision-making of an informed investor.

Materiality is a principle under Generally Accepted Accounting Principles (GAAP) that requires all important financial information likely to impact investors' decision-making need to be disclosed.

The main points include:

Impact on Financial Performance - It involves identifying and assessing factors that can significantly affect a company’s financial performance and should be reported to stakeholders.
Influence on Decision-Making - Events or facts that could affect the judgment of an informed investor are considered material and must be disclosed publicly.

In sustainable investing, financially material ESG (Environmental, Social, and Governance) factors are those that could have a significant positive or negative impact on a company's business model and value.

Sustainability Accounting Standards Board (SASB) guides the disclosure of financially material sustainability information by companies to their investors.

Industry-Specificity

SASB provides 77 industry-specific standards that address sustainability-related risks and opportunities relevant to financial performance, grouped into broader categories:

Focus areas
The sustainability issues are categorized under five main dimensions, sometimes referred to as the SASB index:

Investor-Oriented
SASB standards enable companies to provide consistent and comparable Environmental, Social, and Governance (ESG) data that helps investors make informed decisions.

Financial Materiality
The standards focus on financially material information, which refers to data that could impact the financial condition or operating performance of companies.

Consistency and Comparability
They ensure that corporate ESG data is consistent and comparable across industries, enhancing transparency for stakeholders.

Common Language for Sustainability
SASB helps businesses and investors develop a common language regarding the financial impacts of sustainability, improving communication and understanding.

Global Application
While primarily used in the U.S., SASB standards are applicable globally, supporting international businesses in their sustainability reporting efforts.

SASB Materiality Finder

Example: Resource Transformation/Cointainers & Packaging.

Source: SASB

SASB Materiality Map

Source: IFC

Double Materiality

European Sustainability Reporting Standards
(ESRS)

In April 2021, the European Commission adopted a legislative proposal for a Corporate Sustainability Reporting Directive (CSRD) that requires companies within its scope to report using a double materiality perspective in compliance with European Sustainability Reporting Standards (ESRS).

The European Financial Reporting Advisory Group (EFRAG) was mandated by the European Commission to develop the first set of disclosure standards in ESRS.

ESRS is estimated to cover approximately 50,000 companies, a significant increase from the 11,000 under the NFRD.

ESRS - Scope of application & timing

Companies Affected

Applies to all large companies and all companies listed on EU regulated markets, excluding micro-enterprises.
Estimated to cover approximately 50,000 companies, a significant increase from the 11,000 under the NFRD.

Timeline

LSME and VSME Standards

Simplified sets of standards to make sustainability reporting more accessible and manageable for SMEs.

LSME: Mandatory framework for listed SMEs.
VSME: Voluntary framework for non-listed SMEs.

Source: CRSD Institute

First Set of draft ESRS

General disclosures ESRS 2

ESRS Sector Standards

Development Timeline: 40 sector-specific standards delayed from June 2024 to June 2026.

Coverage: Mandatory disclosures tailored to sectors such as Agriculture, Construction, Food and Beverages, Energy Production, Financial Institutions, Real Estate, and Mining.

Source: IFC