The US ESG Landscape
The movement around ESG and sustainability reporting in the United States has been growing for years with a significant number of independent players in the space. In hopes of providing consistency and simplification to the crowded arena, the International Financial Reporting Standards Foundation (IFRS) announced in March 2021 that they are moving ahead on a proposal to consider setting up an International Sustainability Standards Board (ISSB) which would draw ESG metrics and standard insights from many of the familiar players including standard setters and key jurisdiction. For now, it is unclear what is coming, though these actions could be the beginning of sweeping changes in the standardization of reporting in the United States with global consequences.
Collaboration Amongst Key Players
We work with many of our clients to develop strategies and report to the top corporate standards and guidance related to ESG frameworks that often overlap in requirements.
|GRI||Global Reporting Initiative||As the official reporting standard of the UN global compact, it’s the oldest and most widely used sustainability reporting framework.|
|SASB||Sustainability Accounting Standards Board||An investor-led reporting framework specific to each industry and its unique financially material topics.|
|IIRC||International Integrated Reporting Council||A coalition that promotes the use of its Integrated Reporting framework to help companies integrate non-financial disclosures into financial reporting.|
|VRF||Value Reporting Foundation||IIRC and SASB are merging into VRF, a unified standard-setting organisation.|
|IFRS||International Financial Reporting Standards Foundation||A non-profit accounting organisation that develops and promotes international financial reporting standards through the IASB.|
|IASB||International Accounting Standards Board||The independent, accounting standard-setting body of the IFRS Foundation. The global equivalent of FASB and SASB thatsets reporting standards.|
|FASB||Financial Accounting Standards Board||An organisation that establishes financial accounting and reporting standards.|
|CDSB||Climate Disclosure Standards Board||A collaborative forum for 8 organisations including CDP and WRI that works to improve reporting practices and standards.|
|DJSI||Dow Jones Sustainability Index||Indices that assess the performance of a company’s ESG criteria to support investor decision making.|
|SFDR||Sustainable Finance Disclosure Regulation||An EU standard that imposes mandatory ESG disclosure obligations in the finance industry.|
|CDP||Formerly the Carbon Disclosure Project||An investor-led global disclosure system that focuses on three topic areas: carbon, water and forestry.|
|TCFD||Task Force on Climate-Related Financial Disclosures||An investor-led body of recommendations to help companies better account for climate-related risks in their disclosures.|
For years, a varying portion of the organisations responsible for ESG standards & guidance frameworks have been threatening to collaborate or converge standards. In September 2020 a subset of them (CDP, CDSB, GRI, IIRC, SASB) – sometimes referred to as the Alliance or the group of five – issued a statement of intent, outlining a vision for a comprehensive corporate reporting system, and their commitment to work together to achieve it.
In early 2021, the Alliance (CDP, CDSB, GRI, IR, SASB) published a high-level prototype for what reporting under a theoretical harmonized standard might look like. It is not a final solution but an example of how a combination of existing frameworks and governing bodies could, through collaboration, standardize ESG reporting. It was also a call to action to the global financial accounting community to pick up the ball and run with it.
What might a standard look like?
At present the most likely path for the development of a global ESG reporting standard would be from the proposed new International Sustainability Standards Board (ISSB) developed under the IFRS Foundation which would build on the existing IASB Conceptual Framework for Financial Reporting. This new standard would almost certainly borrow from the prototype concepts provided by the Alliance, WEF’s white paper on measuring stakeholder capitalism, and other perspectives on how to define and report ESG value creation. Consolidating frameworks and recommendations could result in a global ESG reporting standard and metrics that highlight value creation and enable comparability.
This kind of harmonization could be a step toward making integrated reporting a viable solution. Integrated reporting is more than just combining ESG and financial reporting. The intent is to describe how an organization creates value over time based on what it affects or transforms through its activities or outputs. IIRC refers to this as the Six Capitals model (financial, manufactured, intellectual, human, social and relationship, natural) that define an organization’s value creation. A challenge is that companies tend to do a poor job of prioritizing (focused materiality) and communicating (KPIs) information related to ESG value creation.
What is next?
The IFRS plans to make decisions about the potential formation of a new International Sustainability Standards Board (ISSB) before COP26, scheduled for November 2021. This will provide more clarity on whether the IFRS is intending to take on this challenge and if so, what form it might take. Over time, a system that integrates ESG into financial accounting could dramatically change the reporting and accounting space. For now, sustainability professionals should hold tight until there’s more visibility into tangible outcomes.