In the realm of responsible investing, Environmental, Social, and Governance (ESG) reporting has emerged as a pivotal tool for companies to communicate their sustainability endeavors and performance. ESG reporting frameworks provide a structured approach for organizations to disclose their ESG-related information, aiding stakeholders in making informed decisions. This article will delve into a comprehensive comparison of five notable ESG reporting frameworks: the IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2), the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the European Sustainability Reporting Standards (ESRS), highlighting their distinctive features and shared objectives.
IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2)
Adoption in Nigeria: On 8 November, 2022, the Financial Reporting Council of Nigeria (FRCN) announced Nigeria’s adoption of IFRS sustainability disclosure standards. On 26 June 2023, the International Sustainability Standards Board (ISSB), which was set up in 2021 by the International Financial Reporting Standards (IFRS) Foundation, issued its inaugural standards, IFRS S1 and IFRS S2. Both Standards are effective for annual reporting periods beginning on or after 1 January 2024, with earlier adoption permitted. Listed companies and Public Interest Entities in Nigeria are required to adopt the IFRS Sustainability Disclosure Standards. No effective date has yet been announced for Nigeria.
Basis: The IFRS standards build on the existing Sustainability Accounting Standards Board (SASB) Standards. They however, allow for adoption of other sources of guidance on sustainability disclosures, e.g. SASB (see below), CDSB, GRI and European Sustainability Reporting Standards (ESRS), where these last three do not conflict with the provisions of the IFRS sustainability disclosure standards, in which case the IFRS’ will supersede.
Focus and scope: IFRS S2 focuses majorly on disclosures of information on climate related risks (physical and transition risks) and opportunities that is useful to primary users of general purpose financial reports in making decisions relating to providing resources to the entity. IFRS 1 however allows for guidance from other sustainability frameworks on other ESG metrics. The climate related financial disclosures (on risks and opportunities) are to focus on governance, strategy, risk management, metrics and targets. ‘The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004)‘ is the acceptable method / guide for measuring greenhouse gas emissions.
Integrated Reporting: IFRS S1 and IFRS S2 provide a globally consistent and investor-oriented approach to sustainability reporting, closely integrated with financial reporting. This integration underscores the interdependence of financial and sustainability performance.
Financial Materiality: The IFRS Sustainability Disclosure Standards are anchored on financial materiality, aiming to establish links between ESG factors and financial performance. It identifies ESG topics that are likely to exert a material impact on a company’s financial condition.
Investor Relevance: Developed with investors and capital markets in mind, these standards focus on providing information that is pertinent to investors’ evaluation of the impact of sustainability issues on a company’s financial performance.
Standardization: They maintain uniformity across industries, providing cross industry metrics (for 11 sectors with 77 industries) that simplify the task of investors comparing ESG performance across companies within the same sector.
GRI: Global Reporting Initiative
Scope and Focus: GRI stands out as one of the most widely recognized ESG reporting frameworks, emphasizing the significance of comprehensive sustainability reporting. It encompasses a broad spectrum of topics, ranging from environmental impact and labor practices to human rights, society, and governance.
Materiality: GRI’s approach encourages companies to report on matters that hold material relevance to their business and stakeholders. The focus is on offering a holistic perspective of the company’s influence on diverse ESG aspects.
Flexibility: GRI enables companies to customize their reporting according to their specific industry, size, and geographical context. This adaptability empowers organizations to address ESG concerns pertinent to their operations.
SASB: Sustainability Accounting Standards Board
Industry-Specific Reporting: SASB excels in offering industry-specific standards for divulging financially material ESG information. Its primary focus lies in furnishing information that investors can employ to make informed investment decisions.
Financial Materiality: SASB’s foundation is anchored in financial materiality, aiming to establish links between ESG factors and financial performance. It identifies ESG topics that are likely to exert a material impact on a company’s financial condition.
Standardization: SASB’s standards maintain uniformity across industries, simplifying the task of investors comparing ESG performance across companies within the same sector.
TCFD: Task Force on Climate-related Financial Disclosures
Climate Focus: TCFD takes a distinctive approach by primarily addressing climate-related risks and opportunities. It advocates for companies to divulge information concerning their governance, strategy, risk management, and metrics and targets concerning climate change.
Financial Implications: TCFD’s emphasis is placed on comprehending how climate-related issues can give rise to financial implications for companies. Its overarching goal is to enhance the transparency of climate-related risks within the financial system.
Forward-Looking Approach: TCFD goes a step further by encouraging the disclosure of forward-looking information, motivating companies to factor in the potential impact of climate change on their forthcoming operations and financial performance.
European Sustainability Reporting Standards (ESRS)
Harmonization and Consistency: ESRS sets its sights on establishing a unified set of sustainability reporting standards for companies operating within the European Union. Its primary goal is to achieve harmonization and consistency in ESG reporting practices.
EU Alignment: The ESRS framework is aligned with the objectives of the European Green Deal, underscoring the importance of sustainability and environmental preservation within the European Union.
Comparing and Contrasting Frameworks
Scope and Coverage: GRI offers a wider scope, encompassing ESG topics across social and governance aspects. In contrast, SASB, TCFD, IFRS S1, and IFRS S2 each have more specific focal points, whether it is financial materiality, climate change, or integrated reporting.
Materiality and Investor Focus: SASB, TCFD, IFRS S1, and IFRS S2 place a central focus on financial materiality, aligning with investors’ interest in understanding how ESG factors influence financial performance.
Forward-Looking Approach: TCFD uniquely emphasizes the disclosure of forward-looking information about climate-related risks and opportunities.
Stakeholder Engagement: GRI and ESRS stress the importance of stakeholder engagement in identifying material ESG issues, contributing to transparency and accountability.
Conclusion: The Quest for Comprehensive ESG Insights
Selecting an ESG reporting framework hinges on a company’s industry, objectives, and stakeholders. GRI furnishes a comprehensive view of sustainability practices, while SASB hones in on financially material ESG factors. TCFD and IFRS S1/S2 target climate-related risks and opportunities, acknowledging the pivotal role of climate change in financial decision-making. Additionally, ESRS, region-specific, aligns with the European Union’s drive for sustainable progress. The convergence of these frameworks reflects the collective endeavor to harness the power of ESG reporting for a more responsible and sustainable business landscape. As companies and investors continue their journey towards sustainability, the diversity of reporting frameworks offers a comprehensive toolkit to drive positive change on multiple fronts.