January 30, 2023
ESG reporting 101: Guide to ESG standards and sustainability frameworks
23 Min Read
While some organizations can still voluntarily disclose information regarding their ESG performance, it’s already mandatory for many companies. This trend is likely to accelerate as investors, governments, customers, partners, and employees demand more accountability from businesses. It’s no longer enough to simply maximize short-term profits for the benefit of shareholders. Internal and external stakeholders expect organizations to be held accountable for, and transparent about, the impact of their operations on people and the planet. Regulated or not, many companies have already turned to ESG reporting to demonstrate corporate responsibility and build stakeholder trust. As of 2020, 93% of S&P 500 companies issued a non-financial report using one or more ESG framework or standard. But whether you are moving to ESG reporting voluntarily or due to legal requirements, you’ll face a complex landscape of ESG standards and sustainability frameworks. There are more than 2,200 ESG reporting provisions that can affect how organizations disclose non-financial matters. This can make it difficult to determine which ESG standards and frameworks are right for your organization. To make it easier, this guide will walk you through all you need to know about the most common ESG reporting standards and frameworks and how to get started.
To learn how to set up your ESG program and reporting for success, download the Ultimate guide to ESG management essentials
What’s ESG reporting?
ESG reporting is what a company discloses on its performance and activities related to environmental, social and governance issues. ESG reporting is central to building trust – with investors, customers, employees, partners, and regulators. It’s becoming an increasingly important data set relied upon by stakeholders to gauge the value and long-term viability of an organization. For example, shareholders and customers are seeking to make more sustainable and socially responsible investment and purchasing decisions, now and in the future. Businesses use ESG ratings to find ethical, sustainable partners that will be an asset to their brand reputation. And employees want to be affiliated with organizations that are aligned with their values and are sensitive to gender, pay, and racial equality.
ESG reporting key terms and definitions
Understanding key terminology will help you decide what ESG reporting structure makes the most sense for your organization. Here are some basic terms and definitions you may encounter:
Financial vs. non-financial reporting
Financial reporting is the process of documenting and communicating financial activities and performance over specific time periods, typically on a quarterly or yearly basis. Companies use these reports to measure the financial health of a business. By contrast, non-financial reporting is the disclosure of key non-financial activities and topics that can impact an organization, including financially. This most often focuses on ESG topics. Increasingly, investors rely on both financial and non-financial data to evaluate companies in which they are considering investing.
Materiality vs. double materiality
Materiality, or more specifically financial materiality, is an accounting principle first introduced in the US Securities Act of 1933. It refers to any information about an enterprise that would affect an investor’s decision to invest. Material information should be publicly disclosed, and businesses use materiality assessments to identify those issues. Traditionally, materiality is applied to financial information, but increasingly, investors are demanding that companies also include ESG considerations in their assessments.
To date, most ESG ratings have been based on the concept of “single materiality,” e.g., that a changing world can have a material impact on a company’s profits and losses. There is a growing debate among European regulators, however, around a concept known as “double materiality,” which describes a two-way flow of cause and effect between a company and the external world. Double materiality considers both “outside-in” effects (ESG impacts and risks on business value) and “inside-out” effects (the impact of a business on people and the planet).
ESG reporting regulatory drivers
As the shift to mandatory ESG disclosures continues to gather speed, it’s helpful to keep an eye on major regulatory drivers as you plan your ESG reporting strategy. While some rules allow flexibility on which ESG standards and frameworks can be used, others like the EU CSRD may stipulate specific reporting standards. These are some of the major regulatory drivers impacting corporate ESG reporting in different regions:
TCFD: The Task Force on Climate-related Financial Disclosures (TCFD) is an international initiative that provides an ESG framework for corporate disclosure of climate-related risks and opportunities. It is required by law in ten countries and provides the necessary information to investors to assess the potential financial impact of climate-related risks.
IFRS: The International Financial Reporting Standards (IFRS) Foundation is developing a set of common, global ESG disclosure standards. Currently 145 jurisdictions around the world require IFRS standards for all or most companies in their public capital markets.
European Union (EU)
SFDR: (Applies to financial market participants) The Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants (asset managers, pension funds, etc.) to disclose how they integrate ESG risks into decision-making. It also requires them to disclose the sustainability risks and characteristics of their financial offerings and how they manage those risks. It was introduced by the European Commission to provide investors more details on the sustainability risks and characteristics of financial products, so they can make more informed decisions.
NFRD/CSRD: (Applies to companies) The Corporate Sustainability Reporting Directive (CSRD) amends and expands the Non-Financial Reporting Directives (NFRD). Approved on November 28, 2022, it aims to make ESG disclosures more standardized for companies operating in the EU. The new disclosure requirements are expected to take effect in January 2024, with first reports due by 2025. The CSRD introduces more stringent ESG reporting requirements and third-party assurance for reported information. Companies must also use the European Sustainability Reporting Standards (ESRS) to prepare their reports.
EU Taxonomy: The EU taxonomy is a classification system that establishes a list of environmentally sustainable economic activities for companies, investors, and policymakers. It is designed to protect investors from “greenwashing,” motivate companies to become more climate friendly, and help shift investments to activities with the most enduring environmental impact. The SFDR and CSRD require alignment with the EU Taxonomy.
CSDD: The European Commission’s Corporate Sustainability Due Diligence (CSDD) directive aims to foster sustainable and responsible corporate behavior throughout global value chains. Companies will be required to identify and, where necessary, prevent, end, or mitigate adverse impacts of their activities on human rights and on the environment.
TPT Disclosure Framework: The UK already requires ESG disclosures to be aligned with the TCFD. The recently proposed Transition Plan Taskforce (TPT) Disclosure Framework aims to build on this with a disclosure framework for private sector climate transition plans. It will require businesses and asset owners to set and follow concrete, standardized net zero transition plans or explain if they have not done so.
SEC: The proposed Securities Exchange Commission (SEC) climate disclosure rules for companies and fund managers are based on broadly accepted disclosure frameworks and accounting methodologies, such as TCFD and the Greenhouse Gas Protocol. The intention of these proposed rules is to enhance and standardize climate-related disclosures by improving the consistency, transparency, and comparability of corporate ESG performance. The new requirements will help stakeholders get a clearer picture and make more informed decisions when comparing ESG investment, purchasing, and partnering options.
Inflation Reduction Act: The Inflation Reduction Act introduces several environmental incentives and penalties, including a minimum 15% corporate tax to help pay for climate measures. The latter applies to companies generating at least $1 billion in earnings annually.
Federal: The proposed Federal Supplier Climate Risks and Resilience Rule will require major suppliers to the US government to disclose greenhouse gas (GHG) emissions and set science-based emissions reduction targets.
Guide to ESG standards and sustainability frameworks
Even if your organization is not yet affected by mandatory ESG disclosures, choosing the right reporting standard or framework can help you prepare you for future regulatory changes. Existing ESG reporting standards and frameworks have been refined over time with input from multiple private and public sector stakeholders and represent best practices for sustainability reporting. There’s also a growing trend toward consolidation of ESG reporting standards and frameworks – the IFRS standards are one example.
ESG reporting standards vs. ESG frameworks vs. ESG ratings
Before diving into common ESG reporting standards and frameworks, let’s look at the difference between standards vs. frameworks vs. ratings. According to the Global Reporting Initiative (GRI):
- ESG standards contain specific and detailed criteria or metrics for what should be reported on each ESG topic to meet a specific level of quality requirements. Overall, corporate reporting standards include these features: a public interest focus, independence, due process, and public consultation, generating a stronger basis for the requested information.
- ESG frameworks help provide context for information and may be used in the absence of well-defined standards. These principles deliver guidance on setting the direction for ESG initiatives without defining reporting requirements.
- ESG ratings and rankings assess the level of an organization’s ESG maturity based on information disclosed by companies and based on reporting standards and frameworks. Comprised of a quantitative score and a risk rating, ranking and ratings are increasing in importance.
The following infographic illustrates these distinctions.
Common ESG standards and frameworks
Now that we’ve covered those important differences, we’ll walk through the most common ESG standards and frameworks. To make it easy, we’ve organized it into three broad categories: Target setting, ESG reporting standards, and ESG frameworks. For each one, we provide a summary of the major requirements, audiences, and benefits.
Target setting ESG standards and frameworks
Many companies begin their ESG reporting journey by adopting science-based targets (SBTs) to reduce their environmental impact. The Science Based Targets initiative (SBTi) aims to facilitate and strengthen business participation in the shift to a carbon-neutral (net-zero) economy through SBTs and the Net-Zero Standard.
Who: As of January 2023, there are more than 4,500 companies working with the SBTi to set and track their science-based targets.
What: SBTs are goals that organizations voluntarily set to reduce their greenhouse gas (GHG) emissions in line with the goals of the Paris Agreement to limit global warming. The SBTi Net-Zero Standard provides corporations with a clearly defined, common pathway for setting their net-zero targets through best practices guidance, criteria, and recommendations. Businesses of all sizes and sectors (except oil and gas) are eligible to use the Net-Zero Standard. The standard includes the basic steps businesses can take to set SBTs, as well as requirements for reducing GHG emissions and neutralizing the impact of any remaining, unavoidable emissions.
Why: SBTs help make corporate climate action consistent, comparable, and credible. By setting a science-based target, businesses can more easily demonstrate their long-term commitment to combating climate change to their stakeholders. Additional benefits include reducing costs, increasing resilience for regulatory changes, boosting investor confidence, improving innovation and competitive advantage, and strengthening brand reputation.
How: There are five basic steps organizations should follow to set a science-based target (Commit, Develop, Submit, Communicate, Disclose) and SBTi provides a guide to help companies get started. Currently, there are no set rules on how or where companies need to disclose, but reports should uphold these five principles: relevance, completeness, consistency, transparency, and accuracy. Targets should also be reviewed and recalculated every five years as applicable to ensure consistency with the latest climate science.
The United Nations Sustainable Development Goals (UN SDGs) offer another useful framework for both setting goals and ESG reporting.
Who: While it is voluntary, more than 18,000 companies are active participants in the UN Global Compact.
What: Adopted in 2015 as part of the 2030 Agenda for Sustainable Development, the 17 UN SDGs are an urgent global call to action to end poverty, promote individual well-being, and protect the planet. The SDGs provide a great lens through which shareholders can see how a company is addressing and contributing positively to global societal and environmental issues.
Why: Aligning with the SDGs can positively impact the bottom line. According to research by S&P Global, 49% of revenues of the 1,200 largest global companies come from business activities that support the SDGs.
How: The UN Global Compact provides a guide to help companies integrate SDGs into their reporting. The basic steps companies must take to participate are:
- Adopt/integrate the UN Global Compact and its Ten Principles into business operations
- Advocate for the UN Global Compact and the Ten Principles in public communications
- Provide an annual Communication on Progress (CoP) to their stakeholders.
ESG reporting standards
The International Financial Reporting Standards (IFRS) Foundation is leading the way toward establishing common, global ESG disclosure standards.
What: In 2021, the IFRS Foundation created the International Sustainability Standards Board (ISSB) to develop a globally consistent set of ESG disclosure standards for companies to use. The proposed standards integrate the work of other major ESG standards and sustainability frameworks, including CDSP, SASB, WEF, GRI, and TCFD. The first proposal (IFRS S1) outlines requirements for general sustainability-related disclosures, while the second (IFRS S2) specifies climate-related disclosure requirements.
Why: The IFRS sustainability disclosure standards will allow investors to easily compare “apples to apples” when evaluating enterprise values. While the proposed standards are voluntary, opting in could help companies get ahead of any regulatory changes that may require them in the future.
How: The final IFRS Standards are expected to be issued in June 2023. To help companies prepare, the IFRS has published draft versions of the two standards (S1 and S2), as well as guidance on what should be included in reporting to align with the standards.
Part of the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS) expand the scope of sustainability reporting currently required under the EU’s Non-Financial Reporting Directive (NFRD).
Who: Under the CSRD, approximately 50,000 EU businesses will be required to provide sustainability disclosures aligned with the ESRS. This is more than 4x the number of companies (approximately 11,700 organizations) currently providing non-financial reporting under the NFRD. For a quick comparison of which companies will be affected and how, download the infographic “NFRD vs. CSRD.”
What: The ESRS are a set of sustainability reporting standards developed by the European Financial Reporting Advisory Group (EFRAG). They are designed to ensure that sustainability information is reported in accordance with the CSRD, can be easily navigated, and has maximum comparability across sectors while allowing flexibility for sector-specific information. The ESRS were released as a set of exposure drafts that outline reporting requirements across 13 ESG issues categorized into four areas: (Cross-cutting, Environment, Social, Governance).
Why: The goal of the ESRS standards is to strengthen corporate accountability by improving the quality, consistency, and comparability of ESG information disclosed. According to the European Commission, the reason for the expanded reporting scope is to ensure “that all large companies are publicly accountable for their impact on people and the environment. It also responds to demands from investors for sustainability information from such companies.”
How: The European Commission adopted the final draft of the ESRS in November 2022. Companies formerly subject to the NFRD will need to start applying the standards in 2024 for their ESG reports publishing in 2025. Other requirements include preparation of the required information in a digital format that is machine readable and audited assurance of the reported information. More details on the reporting process are available in EFRAG’s “Appendix I – Navigating the ESRS.”
The Sustainability Accounting Standards Board (SASB) standards are accounting standards designed to help companies disclose financially-material ESG information to their investors. As of August 2022, the SASB standards are part of the IFRS and will be incorporated into IFRS standards going forward.
Who: In 2022, there were 2,230 companies applying SASB standards to their ESG reporting.
What: The SASB standards identify and enable reporting on ESG issues most relevant to financial performance across 77 industries. Any company can use SASB standards, and they are free for non-commercial use (including corporate disclosure). The standards are organized by: (a) sustainability dimensions (broad ESG themes), (b) general issue categories (industry-agnostic topics), (c) disclosure topics (industry-specific versions of general issue categories), and (d) accounting metrics (performance measurements for each topic).
Why: Using SASB standards is voluntary but has strong support from some of the largest investment companies in the world. By leveraging the standards, businesses can more easily address investor demand for consistent, comparable data on financially material ESG issues across an industry. This information helps investors and other stakeholders gauge the impact of ESG risks on a company’s financial performance. SASB standards are also complementary to other standards and frameworks including CDP, CDSP, GRI, the <IR> Framework, and TCFD.
How: Companies can use the SASB seven step process to implement the standards.
- Establish a foundation
- Choose the right tools for the job
- Decide where to disclose
- Understand SASB standards
- Assess readiness
- Develop disclosures
- Enable continuous improvement
The Global Reporting Initiative (GRI) provides widely adopted ESG reporting standards that follow an independent, multi-stakeholder process to help organizations be transparent and take responsibility for their impacts.
Who: More than 10,000 companies in 100 countries use the GRI standards to disclose ESG opportunities, risks, and progress. GRI standards are also referenced or required in more than 160 policies in over 60 countries.
What: GRI is an independent, international standard setting institution and collaborating center of the United Nations Environment Program (UNEP). Free for any company to use, the standards are organized by: (a) universal standards that apply to all organizations, (b) sector-specific standards for 40 high-impact industries, and (c) topic standards for specific topics such as waste, health and safety or tax.
Why: Used globally by most large companies to disclose ESG performance, GRI standards provide a comparable, credible, interconnected system that organizations can use for their impact reporting and/or decision-making. The standards help organizations demonstrate transparency and accountability to their stakeholders.
How: Organizations can use the standards to report on all material topics and related impacts or just specific topics. Reports using the GRI Standards must contain a GRI content index, but they can be published in different formats (standalone report, website, etc.).
The basic steps for GRI reporting are:
- (GRI 1) Understand the GRI Standards system and key elements
- (GRI 2-3, GRI Sector Standards) Identify and assess impacts
- (GRI 3, GRI Sector Standards) Determine material topics
- (GRI 2-3, GRI Sector Standards, GRI Topic Standards) Report disclosures
CDP, formerly the Carbon Disclosure Project, is an investor-led nonprofit that motivates companies and governments to disclose their environmental impacts and take action to reduce them. While using the CDP reporting framework is voluntary, companies can be asked to respond by their stakeholders.
Who: 13,000+ companies worth over 64% of global market capital disclose through the CDP, typically to respond to a request filed by investors or customers, or to voluntarily disclose (self-selected). Investors, companies, and governments use CDP insights to inform decision making, reduce risk, and identify opportunities. In 2022, over 680 investors, representing $130 trillion+ in assets, requested disclosures from nearly 10,400 companies. And in 2021, 200+ major companies, representing $5.5 trillion in procurement spend, requested information from over 23,000 suppliers.
What: CDP collects and reports information on the environmental performance of organizations through specific questionnaires on climate change, water, forests, and the supply chain. The information is collected through a global disclosure system, known as the CDP Online Response System (ORS) that organizations use to disclose the information requested by their stakeholders. Due to the volume of organizations responding, CDP has established one of the richest, most comprehensive databases on GHG emissions and corresponding climate action strategies.
Why: CDP uses the data supplied to score companies from A to D on each area upon which they were requested to disclose. Organizations that do not respond after receiving a request receive an F. Companies and cities that receive an A are published in CDP’s annual A-list report that showcases environmental leaders. Additional business benefits of using the CDP framework include building stakeholder trust through transparency, getting ahead of regulations, boosting competitive advantage, uncovering ESG risks and opportunities, tracking progress against others in your industry, cultivating employee pride, and more.
How: After collecting the environmental data needed, companies respond to the questionnaire through the ORS. The reporting period runs from April – July/Aug each year, and CDP provides guidance and workshops throughout the year to help organizations through the process. Once the data is submitted, CDP then scores organizations and publishes the results later in the year. As a CDP gold accredited solution provider, OneTrust can help you meet CDP requirements with streamlined data collection and automated reporting.
The Task Force on Climate-related Financial Disclosures (TCFD) was established by the G20 Financial Stability in 2015 to develop recommendations on the type of climate risk information that companies should disclose to their stakeholders.
Who: As of November 2022, more than 4,000 organizations from 100+ countries have pledged support for TCFD. Governments around the world are also beginning to integrate the TCFD framework into climate disclosure policy, and at least ten countries have adopted or announced TCFD-aligned reporting requirements. TCFD will be especially relevant for large public companies.
What: TCFD is a reporting framework for improving corporate transparency around climate risks in financial disclosures. It outlines reporting recommendations for climate-related financial disclosures around four thematic areas of business operations: governance, strategy, risk management, and metrics/targets. Each area has specific recommended disclosures that organizations should include in their financial filings for decision-useful information.
Why: With clear, consistent guidelines for climate-related disclosures, TCFD provides investors and other stakeholders with a better understanding of the potential financial implications of climate-related risks and opportunities. This puts them in a better position to make informed financial and underwriting decisions, allowing for more efficient allocation of capital. Benefits for companies include meeting stakeholder demand for transparency on material climate risks, better access to capital, and an improved ability to identify, monitor, and reduce climate risks.
How: The TCFD recommendations include guidance for all sectors on how to implement the recommended disclosures. Supplemental guidance is also provided for sectors most affected by climate change such as insurance companies, energy, transportation, etc. Companies can also refer to the TCFD Knowledge Hub to learn more through online training, reporting examples, case studies and more.
WEF Stakeholder Capitalism Metrics
In 2020, at the annual meeting of the World Economic Forum (WEF), 120 of the world’s largest companies collaborated to develop a common set of ESG disclosure standards. The resulting WEF Stakeholder Capitalism Metrics (WEF SCM) were designed to align with the UN SDGs and be based on existing standards whenever possible.
Who: Over 130 companies now include the Stakeholder Capitalism Metrics in their annual reporting.
What: The WEF SCM framework is organized into four pillars – People, Planet, Prosperity, and Principles of Governance – that align with the essential elements of the UN SDGs. Each of these pillars includes themes based on existing reporting standards and frameworks, such as GRI, SASB, TCFD, CDP, etc. It is comprised of 21 core and 34 expanded metrics that companies can use to measure and communicate sustainable value creation and impact.
Why: WEF SCMs provide a way for companies to measure and communicate sustainable value creation and contribution to the SDGs in a clear, consistent, and comparable way. By building on existing standards and frameworks, WEF SCMs are also helping to accelerate the consolidation of the same into a set of simplified, globally consistent ESG disclosure standards.
How to report on ESG
As you begin to create your ESG program and reporting strategy, evaluate the high impact factors in your industry as well as those of your specific organization. Remember that these will be both internal and external, spanning your upstream and downstream supply chain. These resources can help you get started:
- The ESG program checklist and ESG management essentials white paper: refer to these guides for foundational know-how on setting up your ESG program and reporting for success.
- Metrics to get started on your ESG journey: assess which ESG issues are material for your organization.
- The Benefits of ESG reporting eBook: download this guide for some examples of ESG reporting benefits and what to include in your ESG report.
Remember that it’s not a one-size-fits all process, and you can decide how to disclose your ESG information, even when using a reporting standard. However, there are some general best practices that you can follow such as:
- Use an ESG standard or framework: As noted above, existing standards and frameworks represent best practices for ESG reporting. They also help ensure that companies are reporting on relevant issues for their stakeholders and that the reporting is consistent and comparable.
- Be transparent: To build trust, be transparent and honest in your reporting and disclose accurate information, both positive and negative.
- Report progress over time: Show how you’ve improved or plan to improve in different areas compared to your baseline ESG performance.
- Involve stakeholders: Include internal and external stakeholders in your ESG reporting process as they can provide valuable insights and feedback.
- Choose ESG reporting software: Leverage ESG reporting software to help with collecting and organizing data related to your ESG performance. ESG software can also help you create reports and visualizations to benchmark and communicate your ESG performance, as well as identify ESG risks and opportunities.
- Review and verify: Review all reported information before publishing to ensure accuracy. This may include third-party assurance.
How OneTrust can help
ESG reporting that reflects a deep company commitment to sustainability is no longer a novel, “nice to have” part of your enterprise. Investors, employees, partners, customers, and other stakeholders are demanding it. In a time when the world is facing existential challenges of climate change and societal upheaval, stakeholders expect much more than just stellar financial performance. They expect to do business with trusted organizations that align with their broader purpose, reflect their ethical priorities, and advance their corporate reputation.
ESG reporting provides a proven path for companies to address these stakeholder needs. But determining which ESG reporting standard or framework to use is just part of the journey. You’ll also need to identify which topics are material for your organization and who is accountable, as well as collect/analyze the data and disclose according to the requirements. The OneTrust ESG and Sustainability Cloud can help streamline this process with real-time intelligence and integrated workflows. The ESG Cloud is a flexible, cloud-based platform that enables you to build and execute your ESG and sustainability strategy for success. It supports all the major ESG standards and sustainability frameworks, allowing you to pinpoint your preferred metrics, create custom data visualizations, and produce engaging annual reports. Empower your organization to demonstrate impact and build trust with key stakeholders today.
You may also be interested in requesting a demo to see how you can simplify your ESG reporting and streamline disclosures.