Is That Convergence (on ESG Reporting) I See?
October 25, 2022
The objective of ESG reporting
The primary objective of reporting on environment, social, and governance (ESG) performance is to allow investors, regulators, and stakeholders a means to understand how businesses are addressing the risks, and taking advantage of the opportunities, related to ESG issues, including climate change. For example, businesses that can demonstrate they have mitigated the physical and transitional risks of climate change, or have invested in solutions addressing climate change, create long-term value for their organizations and shareholders. That value will be rewarded by continued access to capital, less regulatory burden, and acceptance in the marketplace.
The challenge with ESG reporting
While the objective seems relatively straightforward, good reporting practice is riddled with complexity and challenges. There are multiple and competing reporting frameworks, standard setters, disclosure platforms, software providers, and rating agencies. Just consider the acronyms of the major reporting standards and frameworks: GRI, CDP, IIRC, SASB, TCFD, ISSB, TNFD, UN SDGs. Providing guidance and clarity to businesses on which frameworks bring the most value is a challenge that companies, their reporters, and users face on a consistent basis.
Is that light I see at the end of the tunnel?
Last week the global consulting firm KPMG published its survey of sustainability reporting for 2022 – “Big Shifts, Small Steps” (October 2022) (link) – in which summarizes its exhaustive review of global sustainability reporting practices.
KPMG found that the Global Reporting Initiative (GRI) is the most commonly used reporting standard, with increased adoption by the largest companies for non-financial reporting. They found that nearly half of the world’s largest 250 companies by revenue are utilizing Sustainability Accounting Standards Board (SASB) standards for financial-related components of reporting, with growing adoption outside of the Americas. And finally, they noted a massive growth in the adoption of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations, with almost two-thirds of the same largest companies observing and adopting TCFD with its focus on governance, strategy, risk management and metrics and targets.
Convergence is good for business
Ultimately, we have the ingredients in place to provide for clear, consistent, comparable reporting for businesses worldwide to report meaningful ESG-related information to their stakeholders and providers of capital: TCFD, with its focus on climate-related risks and opportunities at the strategy, governance, metrics/targets and management levels; GRI, with its focus on the material impacts of the economy, environment, and people; and SASB and ISSB taking that information and formulating the financial impact on long-term corporate value creation.
While there is still a long way to go, we seem to be on the right path.
Sustrio ESG Advisors helps clients make sense of the reporting frameworks by bringing clarity to the complexity.