Editor’s note: This story originally appeared in the ESG issue of Workflow Quarterly.
Companies worldwide face rising pressure to help people, society, and the planet. To meet this challenge effectively, leaders must choose from a confusing array of frameworks and standards to measure their environmental, social, and governance (ESG) programs.
These frameworks are meant to standardize reporting and disclosure of ESG performance, so that investors, regulators, and other stakeholders can get a transparent, apples-to-apples view. The challenge is that no standard ESG reporting framework exists. Instead we find an alphabet soup of standards that vary widely in focus and recommended metrics (see below).
“We’re at an inflection point as discrete voluntary reporting standards move toward something that’s more harmonized and mandatory, but we’re not there yet,” says Adam Fishman, associate director at nonprofit sustainability consultancy BSR. “Every company will still need to report in line with their stakeholders’ information needs. But we’re starting to see the field converge around a streamlined and interoperable set of standards.”
Meanwhile, the lack of common standards often leaves decision-makers in the dark. Nearly three-quarters of CEOs feel standardized metrics would help their decision-making, according to PwC’s 2021 Annual Corporate Directors Survey. And board directors across industries say ESG is the No. 1 topic that investors want to discuss during shareholder engagements. Yet only 25 percent of directors surveyed say their board understands the company’s ESG risks very well.
Spoiled for choice
Today, companies must choose from at least a dozen ESG reporting frameworks, each with its own methodology, metrics, and scoring system. Some frameworks address only environmental concerns. Others focus on the S and G legs of the stool. They range from the oldest and broadest framework—the 25-year-old Global Reporting Initiative (GRI)—to one of the newest and most focused—the Climate Disclosure Standards Board Framework, released in 2015.
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Robert Half, a global talent solutions and business consulting firm based in Menlo Park, California, has been producing a corporate citizenship report since 2011 primarily aligned with the Sustainability Accounting Standards Board framework (SASB). This year the company plans to release an ESG report based on both GRI and SASB, said Stephanie Dolmat, the company’s senior director of ESG.
“As the ESG universe moves toward greater transparency, stakeholders are looking for accountability,” she says. “We look at it as a chance to discover where we can do better. It can be easy to get swept up in the regulations. But ESG has moved beyond just compliance into a strategic opportunity.”
Management teams and boards must take note: the ESG moment is accelerating in the United States.
One reason for the multiplicity of frameworks is the wide variety of companies that now participate in reporting. Different industries have varying ESG impacts and risk exposures, so they need to report on a variety of metrics. Similarly, different stakeholders—investors, regulators, and customers—are interested in different types of information.
Because of these varying needs, many companies choose multiple frameworks and standards as they develop their ESG reports. In 2020, five leading ESG standards bodies published a joint statement outlining their intent to work together toward more unified reporting. In December 2020 they released a prototype climate-related financial disclosure standard that may ultimately contribute to the development of a common standard to be issued by the International Sustainability Standards Board (ISSB).
“I don’t think ISSB is going to make life any easier for reporters such as myself,” says Tonie Hansen, senior director of corporate social responsibility at chipmaker NVIDIA. But she acknowledged the importance of frameworks to help make ESG reporting more relevant to stakeholders. NVIDIA adopted the GRI standards 12 years ago, and now uses a total of five frameworks to prepare its annual ESG report.
Hansen adds that a dozen years of ESG reporting informed NVIDIA’s recent decision to create a digital twin of the planet by building Earth-2, which it claims will be the world’s most powerful AI supercomputer to predict climate change. “We’d like to have a more significant impact in the climate change space,” she says. “We’d like to do well financially and do good at the same time.”
While regulatory standards vary from country to country, numerous governments are in the process of developing ESG reporting mandates. The EU has proposed mandatory reporting based on the European Commission’s draft Corporate Sustainability Reporting Directive, whose first set of standards would apply to large EU companies. Adoption of those standards, which are based in part on the GRI framework, is expected in October. New Zealand has already adopted mandatory climate risk disclosures. India, Singapore, and the United Kingdom are each at various stages of introducing compulsory disclosures.
In March, the U.S. Securities and Exchange Commission started the 60-day review clock on a 490-page set of disclosure rules to compel public companies to reveal how they affect the climate— and how a changing climate will affect them.
Observers believe this new transparency will help hold companies accountable for their role in climate change.
“The SEC’s action underscores the imperative for businesses to understand likely reporting requirements and connect them to their strategy and operations,” says Scott Flynn, vice chair of the U.S. audit practice at consulting giant KPMG. “Management teams and boards must take note: the ESG moment is accelerating in the United States.”
While much of the conversation around ESG focuses on environmental impact reporting, many companies place as much or more weight on diversity, equity, and other social issues. “We’re a people-focused business helping people get hired, so we emphasize social responsibility,” said Hannah Erickson, senior ESG program manager at talent marketplace platform Upwork. “We’re very focused on social issues.”
Upwork’s third annual Impact Report, released in March, incorporated several different ESG standards and frameworks, including the CDP (formerly the Carbon Disclosure Project), SASB, and the Task Force on Climate-Related Financial Disclosures (TCFD). While Erickson sees these frameworks as helpful tools, she encourages companies new to ESG reporting to look past the acronyms.
“People get lost in the alphabet soup, but it’s not as complicated as it looks at first blush,” she says. “For companies crafting ESG reports, the frameworks are really getting at: Can you back up claims of being good corporate citizens? Can you disclose the numbers and follow up from year to year?”
These claims can relate to how ESG issues affect a business and how companies impact the world. Fishman at BSR wants companies to look beyond financial materiality—potentially significant losses caused by climate change—to also report on their outward impacts, “not just because it’s the right thing to do but also because, from a strategic perspective, those outward impacts tend to become more financially material over time. There’s interconnectivity between those two dimensions.”
Balancing the reported numbers with a narrative about what the company is doing to effect change can turn an impersonal, data-heavy ESG report into one that stakeholders of all stripes can relate to, says Erickson.
“As long as you have the right questions in the back of your mind—What’s the impact? What’s important? What can we address?—you have the most important pieces covered,” she says. “And that should guide you more than all of the acronyms and the noise.”
A beginner’s guide to ESG reporting frameworks
No single standard or framework exists to help companies measure their ESG performance. The entities below represent some of the biggest names in ESG reporting today.
- CDP: Formerly known as the Carbon Disclosure Project, founded in 2000, CDP prepares thematic questionnaires used today by more than 9,600 companies and 800 cities, states, and regions to disclose their environmental impacts.
- CDSB: The Climate Disclosure Standards Board, founded in 2007 at the World Economic Forum, released the CDSB Framework in 2015. Unlike CDP, it seeks to integrate climate change–related disclosure into mainstream financial reports to encourage connections between sustainability and corporate strategy. Used by 374 companies across 32 countries and 10 sectors, it will merge this year with the IFRS Foundation described below.
- GRI: More a reporting standard than a framework, the Global Reporting Initiative was launched in 1997, becoming the first global standard for sustainability reporting. Around three-quarters of the world’s 250 largest companies use GRI. To date, more than 13,000 organizations in 90 countries have used GRI for their sustainability reporting and the standards have been translated into a dozen languages.
- IFRS: The International Financial Reporting Standards Foundation historically has been the body that produces financial reporting standards for much of the globe, but not the U.S., which instead uses GAAP, or Generally Accepted Accounting Principles. Today the foundation has an expanding role as it absorbs various frameworks and prepares to create a new set of ESG standards to be known as ISSB.
- IIRC: The International Integrated Reporting Council first released its International Integrated Reporting Framework (IRF) in 2013. About 1,600 companies in 64 countries have used the framework for integrated reporting. In June 2021, the IIRC joined with SASB (described below) to form the Value Reporting Foundation (VRF), which in turn was acquired by the IFRS Foundation; VRF’s merger into IFRS is expected to be concluded in June.
- ISSB: Under the auspices of IFRS, the International Sustainability Standards Board has been tasked with developing international sustainability reporting standards to co-exist alongside the IFRS financial reporting standards used by much of the world. After VRF’s upcoming merger with IFRS, the SASB standards are expected to inform and feed into the new ISSB framework.
- SASB: The Sustainability Accounting Standards Board offers a set of 77 industry standards that companies can use to identify and report financially material sustainability information across all three pillars of ESG. Because SASB looks at sustainability impacts through a financial lens, while GRI focuses on broader organizational impacts, many companies report with both SASB and GRI. As noted above, SASB merged with IIRC last year to form VRF, which in turn is merging with the IFRS Foundation in June.
- SDGs: The United Nations’ Sustainable Development Goals make up a framework that provides a common language, ambition, and set of universal goals and targets. Intended more for governments and policymakers, it is not itself a corporate sustainability reporting standard.
- TCFD: The Task Force on Climate-Related Financial Disclosures was set up in 2015 by the G20’s Financial Stability Board (FSB) to develop voluntary guidelines for companies, banks, and investors to use when disclosing to stakeholders climate-related financial risks and opportunities. TCFD-based reporting became mandatory in 2020 for all asset owners and managers signed on to the UN Principles for Responsible Investment (PRI). It is expected that TCFD will inform some aspects of the upcoming ISSB standards.