There are currently so many different initiatives, requirements and standards that it can be hard to sift through the noise and work out what’s what.
Issues with greenwashing and inconsistency have led to many questioning the integrity of not just ESG reporting, but ESG as a whole. And these attacks are increasingly coming from people in high places.
Elon Musk tweeted that ‘ESG is a scam’ after Tesla got removed from a major ESG index for a lack of disclosure around key environmental and social issues and allegations of racism on the factory floor.
Noted venture capitalist and PayPal founder, Peter Thiel, said in a speech that ‘ESG is a hate factory’ and equated it to the Chinese Communist Party
Former U.S. Vice President, Mike Pence, tweeted that ‘liberal activist investors are forcing private companies to abide by ESG investing principles, elevating left-wing environmental, social, and corporate governance goals over the interests of the business.
Is ESG just a scam? Of course not, but there is undoubtedly a lot of work to be done to move the industry forwards.
In response to an EY survey, 89% of investors said they would like the reporting of ESG performance – measured against a set of globally consistent standards – to become a mandatory requirement.
It’s time to move towards a more transparent reporting framework that builds trust and improves collaboration.
1. Global Reporting Initiative (GRI)Mostly used in Europe, the GRI is an international independent standards organization that helps all stakeholders to understand and communicate their impacts on issues like climate change, human rights and corruption.
2. Sustainability Accounting Standards Board (SASB)The SASB is an independent non-profit, whose mission is to develop and disseminate sustainability accounting standards that help public corporations disclose useful information to investors. It’s the most widely used reporting standard in the US.
3. Integrated Reporting (IR)Integrated Reporting (IR) has been developed and promoted by the International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, standard setters, accounting professionals and non-governmental organizations.
4. Task Force on Climate-Related Financial Disclosures (TCFD)The TCFD was created in 2015 by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.
5. World Economic Forum (WEF)In September 2020, the WEF and its International Business Council (IBC) released the Stakeholder Capitalism Metrics, a set of ESG metrics and disclosures that measure long-term enterprise value creation for all stakeholders. It’s not a standard, but a set of practical recommendations identified from existing standards like GRI and SASB.
6 European Financial Reporting Advisory Group (EFRAG)The EFRAG’s Sustainability Reporting Board is currently drafting the European Sustainability Reporting Standards (ESRS), which are due to be submitted to the European Commission by October 2022.
This means that their respective standard-setting boards – the International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB) – will start to coordinate their work.
Their aim is to create a comprehensive global reporting system that can be used by companies, investors, markets and stakeholders. The first standards are expected to be published by the end of 2022 – we will be keeping our eyes peeled for that!
In the US, the Securities and Exchange Commission (SEC) has made steps to streamline ESG reporting and make information more readily available to investors.
In March 2022, it announced an initiative that requires all US-listed companies to report on an annual basis about how climate change affects their business, including:
Environmental risk management
Climate-related factors with a direct impact on the company and its finances
Greenhouse gas emissions
Objectives set out in the company's sustainability policy and the strategy defined to achieve them
The cost of climate-related events – like natural disasters and storms – will also need to be explained as a forecast in the company's future annual accounts.
If the proposal is adopted, it will have a massive impact on listed companies in the US, as only a third of them reported on this type of information in 2019 and 2020.
The Corporate Sustainability Reporting Directive (CSRD) is the new EU legislation requiring all large companies to publish regular reports on their non-financial performance. This is a big step in the right direction for the EU to transition to a more sustainable economy.
As of 1st January 2024, companies will need to publish detailed, standardized data about:
Environmental protection
Social responsibility and treatment of employees
Respect for human rights
Anti-corruption and bribery and
Diversity on company boards
They will also need to disclose their sustainability targets and green transition plans in line with the Paris Agreement.
There’s a limited assurance requirement for the information to be audited, ensuring the reports are accurate and reliable.
The first set of rules was adopted by the Parliament in November 2022, and applies to large companies, listed and unlisted:
EU companies with over 500 employees and net €150 million worldwide turnover
EU companies with over 250 employees and net €40 million worldwide turnover in high-impact sectors, including textiles, agriculture, mining and minerals
Non-EU companies with substantial activity in the EU (with a turnover over €150 million euro in the EU) will also have to comply.
This means that around 50,000 companies will need to publish reports, a whopping five times more than before!