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December 20, 2021

The Maze of Corporate ESG Reporting Standards

The Maze of Corporate ESG Reporting Standards

TCFD, GRI, SASB, IIRC, PCAF, CSRD, ISSB – the list of acronyms in the world of Sustainability Reporting Standards is… long. And growing. 

In part this is a recognition of corporate leadership in assuming responsibility for their environmental, social, and governance (ESG) impacts. Widespread reporting certainly has the potential to increase our understanding and insight into how to improve sustainability. Yet, the status quo isn’t delivering on its aspirations.

The Limitations of Current Sustainability Reporting Standards

As the acronyms above indicate: There are several reporting standards that companies can choose to follow – and the vast majority are voluntary. The most common ones include the Task Force on Climate-Related Financial Disclosures (TCFD), the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Partnership for Carbon Accounting Financials (PCAF), and more. Independent groups, such as investor collectives, nonprofits, or consortiums of NGOs develop and run these standards. 

There are several challenges, which broadly fall into three categories: 

  1. Comparability: Since companies can pick any framework, reporting remains inconsistent. Moreover, scopes and boundaries of what is included in any given report differ – often widely. Without shared context, clear methodologies, and a lack of third party auditing, neither regulators nor consumers are in a position to truly compare reported efforts, which limits the ability to hold companies accountable.
  2. Rising Emissions: The private sector is responsible for roughly 80% of global greenhouse gas emissions, which is why there has been a lot of attention on improving transparency around their environmental impact. The pressure from both investors and consumers has incentivised thousands of companies to voluntarily disclose. Yet, the focus on ESG reporting distracts from the fact that global emissions continue to rise. In other words, increased reporting is not a proxy for actually reducing negative impacts.
  3. Greenwashing: Since reporting is largely voluntary, doing so is often presented in and of itself as a leadership initiative. By emphasising selected environmental or social efforts, corporate actors capitalise on the growing demand for sustainability. However, polished, marketing-focused pitches are primarily directed at maximising profits instead of genuinely driving necessary change. The Science Based Targets initiative (SBTi) recently sharpened its net-zero definition to ensure that carbon neutral claims cannot be achieved by solely investing in carbon offsets – precisely to ensure that sustainable businesses put people and the planet before mere profit.

Harmonised ESG Standards Are on the Horizon. Climate Action is Needed Now.

The challenges with the status quo of corporate sustainability reporting are well known. During COP26 in November 2021, the call for more harmonised and transparent ESG reporting standards was not only reiterated but addressed by both the European Commission and the International Financial Reporting Standards (IFRS) Foundation. 

The EU proposed a Corporate Sustainability Reporting Directive (CSRD), which aims to make reporting and auditing of environmental, social, and governance issues for about 50,000 EU-based companies mandatory. However, a fist set of standards are only to be expected at the end of 2022 and consultations may well push adoption out to 2023. All, while the clock on climate action is ticking.

Similarly, the IFRS unveiled the creation of the International Sustainability Standards Board (ISSB), which is meant to develop “a comprehensive global baseline of sustainability-related disclosure standards”. While set to build on and in close collaboration with existing standards bodies, which indeed promises increased transparency and comparability of corporate reporting, we are unlikely to see a draft before 2023. And, after that, the proposal would still need to be adopted by national governments.

There is no doubt: We do need widespread, comprehensive, and standardised corporate sustainability reporting. But what we need even more is decisive and meaningful climate action. Not in a few years, but now.