Globally Consistent ESG Reporting

What is ESG reporting and why is it important for business?

Environmental, Social and Governance (ESG) information can include a broad range of issues, for example: greenhouse gas emissions, energy, water and waste management/recycling, biodiversity (environmental), health and safety, diversity and inclusion, human rights, data security, selling practices, product safety (social) and business ethics and culture (governance).

Sustainability reporting standards and frameworks have been developed to help companies enhance transparency and communicate sustainability information. These address the varying objectives of users of this non-financial information, which can be summarized as:Factors driving enterprise value, to gain insights into the resilience of companies’ business models and supply chains, as well as the broader risks they face (for example, for use by investors)Companies’ role in sustainable development, to understand the impact companies have on people, the economy and the planet, and their wider contributions towards the United Nations Sustainable Development Goals (SDGs)

Today, we have the unique opportunity to establish global sustainability reporting standards, with a sense of urgency. Reliable, consistent and comparable sustainability information is essential to help:

  • Direct capital to sustainable enterprise and to make global capital markets resilient and efficient
  • Address urgent world issues—climate change and the SDGs

Why do we need global sustainability reporting standards?

Currently, there is a profusion of sustainability reporting standards, frameworks and initiatives. As a result:

  • Voluntary sustainability reporting standards and frameworks have proven insufficient to promote consistent and comparable ESG performance information
  • There is a lack of consistent and comparable information (including period to period, company to company, within sectors) and inconsistent quality in the governance and controls over information, as well as the type and extent of third-party assurance provided over that information. Selective reporting that does not connect narrative information and financial information can lead to greenwashing

Although 90% of S&P companies were reporting ESG metrics by the end of 2019[1], according to a 2020 BlackRock survey of clients, 53% of global respondents cited “poor quality or availability of ESG data and analytics” and another 33% cited “poor quality of sustainability investment reporting” as the two biggest barriers to adopting sustainable investing.[2]

A global standard-setting approach based on principles of legitimacy, independence, transparency, public accountability and oversight, and thorough due process enables the development of high-quality sustainability reporting standards. This results in consistent, comprehensive, and comparable information.

Global sustainability reporting standards are necessary because:

  • Climate change and the SDGs require a global approach
  • Businesses have global value chains, face global risks, and access capital from global investors
  • Investors, companies and other stakeholders benefit from a common language for sustainability reporting standards, facilitating comparisons

ESG considerations may also apply to existing financial reporting requirements. Educational materials published by the IASB and the FASB remind preparers that many current accounting standards already require an entity to consider ESG matters when they have a material effect on the financial statements, especially where judgement and estimates are required, for example in assessing impairment of long life assets.

  • Climate change is an urgent existential issue that is relevant to companies in all sectors and across all jurisdictions. Consistent and comparable information is vital to investors and other stakeholders, including how companies are managing the transition to a low carbon economy
  • Much of the value of a business today is non-financial, represented by technology, intellectual capital, human capital and the social license to operate. Investors and others need insight into these factors in order to understand how enterprise value is created and sustained
  • Investors and other users of corporate information are increasingly demanding comparable and reliable information because long-term returns are affected by global economic growth and wider societal and environmental issues, which have direct impacts on the performance and prospects of companies
  • Today’s corporations see themselves as serving ends that go beyond financial success and many are adopting a purpose-led approach. It is important that corporations measure and report on the results of their efforts to live up to the purpose they define for their enterprise. This enhances integrity and authenticity of the environmental and social strategic goals companies are setting out

What is the landscape? Who are the standard-setters for ESG disclosure?

Traditionally, financial information has been published in corporate reports and sustainability information in separate sustainability reports. However, as it has become clearer how sustainability issues can affect the ability of companies to create enterprise value over time, users increasingly expect to see disclosure of ESG information that relates to enterprise value creation in mainstream corporate reporting. The front and back half of annual reports are intrinsically linked. There are many ESG initiatives, but the leading standard-setters and framework providers are set out below.

  • CDP (formerly the Carbon Disclosure Project) runs a disclosure system on environmental impacts that can be aggregated for use in data analytics
  • The Climate Disclosure Standards Board (CDSB) offers a framework for reporting environmental information with the same rigor as financial information
  • The Global Reporting Initiative (GRI) develops standards that relate to companies’ impacts on the economy, the environment, and society
  • The Task Force on Climate-related Financial Disclosures (TCFD),set up by the Financial Stability Board, provides a framework for companies to report on the effects of climate change on their business
  • The Value Reporting Foundation[3] brings together the Integrated Reporting Framework, which sets out principles for communication on how value is created over time, and the Sustainability Accounting Standards Board (SASB) Standards, which offer enterprise value-relevant sustainability metrics by sector and industry

At the end of 2020, the ‘Group of 5’ leading sustainability bodies (CDP, CDSB, GRI, IIRC and SASB) set out a vision for a comprehensive corporate reporting system and made a commitment to work together and with the International Financial Reporting Standards Foundation (IFRSF) to achieve this. They subsequently published a prototype climate-related financial disclosure standard to illustrate how their different frameworks and standards, together with TCFD, could form the basis of a global standard.[4]

The landscape is now changing fast. Last year the IFRSF issued a consultation on establishing an International Sustainability Standards Board (ISSB) that would sit alongside the existing IASB. It is on track to announce the creation of the ISSB by COP26 in November 2021. IFRSF have confirmed they will use the above prototype as a ‘potential basis’ for global sustainability reporting standards under the ISSB and have set up a Technical Readiness Working Group to take this work forward.

The International Organization of Securities Commissions (IOSCO) is an important player in global sustainability reporting standards. It stands ready to play the same role it did for financial reporting standards 20 years ago. The IOSCO Board has committed to work with the IFRSF to develop an effective system architecture for setting sustainability reporting standards under a new ISSB. It sees this as a route to developing sustainability reporting standards that can serve as a “baseline for consistent and comparable approaches to mandatory sustainability-related disclosures across jurisdictions”.

There are also important developments at the jurisdictional level.

  • In Europe, the proposal for a Corporate Sustainability Reporting Directive (CSRD) includes plans for new EU sustainability reporting standards by 2022/2023. The European Commission (EC) recognizes that it is in the interests of companies and investors to have standards that are globally aligned, and that EU standards should take account of the essential elements of globally accepted standards currently being developed. EU standards should go further where necessary to meet the EU's own ambitions and be consistent with the EU's legal framework
  • In the US, the SEC has recently consulted on climate-related disclosures. Furthermore, the US President’s international climate finance plan explicitly includes a commitment for the US to support and shape the work being undertaken by the IFRSF and IOSCO towards “consistent, comparable, and reliable climate-related financial disclosures”. The SEC is co-chair of IOSCO’s Technical Expert Group charged with undertaking technical work to assess the viability of the IFRSF’s sustainability reporting standards initiative

In addition, in 2020, The World Economic Forum’s (WEF) International Business Council (IBC) published 21 core ESG metrics for measuring stakeholder capitalism, which leverage existing standards and metrics. The project highlights that business wants to be part of the solution, and acts as a catalyst towards global standards.

See Appendix for a timeline and details on the organizations referenced.

What is Deloitte’s role in the move to global ESG standards?

  • Deloitte strongly supports the proposals by IFRSF
  • Deloitte has acted as a facilitator, together with WEF and the Impact Management Project (IMP), to the joint work of the ‘Group of 5’ on both their Statement of Intent and prototype climate-related financial disclosure standard
  • In addition to supporting the development of metrics on stakeholder capitalism as part of the WEF/IBC project, Deloitte is leading its work to convene and accelerate moves to global standards
  • Deloitte is a global signatory to TCFD and reports in line with its recommendations and is directly represented on the TCFD taskforce

Deloitte supports corporations disclosing high-quality, transparent, relevant, and comparable non-financial information that is connected to financial information within mainstream corporate reporting. This will help direct capital to long-term sustainable business, by showing how corporations are creating long-term value and by providing insights into their business models, the broader risks they face and the impact they have on people, the economy and the planet.

The standards should be global. The issues at stake are global, investors and other stakeholders are often global, and many companies operate and source through global value chains.

Deloitte supports a baseline global reporting standard for sustainability to be developed by the IFRSF, which jurisdictions can further supplement. We, therefore, encourage the closest collaboration between jurisdictions, the future ISSB and other international sustainability standard-setters to achieve the greatest possible international convergence. This is consistent with statements by the G7 and G20 ministers of finance and central bank governors.

To achieve disclosures of the necessary quality, companies need to implement high-quality mechanisms for oversight, controls and verification, including assurance, applying the same rigor as for financial reporting. Independent assurance can enhance the credibility and reliability of information that corporations disclose.

[1] Governance & Accountability Institute, Flash Report S&P 500: Trends on the sustainability reporting practices of S&P 500 Index Companies

[2]BlackRock, Sustainability goes mainstream: 2020 Global Sustainable Investing Survey

[3]In June 2021, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) merged to form the Value Reporting Foundation (VRF)

[4]The work of the ‘Group of 5’ has been facilitated by Deloitte, the World Economic Forum and the Impact Management Project.

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