Decoding the Alphabet Soup of ESG Standards and Frameworks

Understanding the hurdles

Navigating the landscape of sustainability reporting is becoming increasingly challenging for both report creators and report users. Firstly, governments worldwide are enforcing ESG reporting, but the rules differ significantly depending on where a company has its operations. For instance, the EU has strict regulations like the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (RiskSphere’s Principal Consultant Marijn Hiemstra recently assessed the what, how, and why of CSDDD) while the US mostly sticks to voluntary guidelines (the SEC’s climate disclosure rules could potentially be a gateway to more regulations in the future). Meanwhile, countries like China and Japan are still working on their ESG regulations, thus creating a patchwork of expectations for companies with global operations. This mix of rules drives up compliance costs and risks, with non-compliance potentially leading to legal disputes, reputational hits, or loss on investments.

When it comes to data, the different ESG frameworks don’t always agree on what companies should report, creating yet another hurdle. While one framework might entail reporting absolute GHG emissions, another may require emissions intensity data (which measures the amount of GHG emissions produced per unit of economic activity), making it challenging to consolidate and compare information. Furthermore, some frameworks offer limited support on how to gather and report this information, increasing the risk of “greenwashing,” wherein companies overstate their sustainability efforts because the standards are vague, or “greenhushing,” wherein companies intentionally downplay or withhold information about their environmental sustainability efforts to avoid scrutiny or backlash.

Finally, ensuring the accuracy of ESG data is a big issue. With so many frameworks, companies often need third-party verification, but even that process isn’t standardised. Some frameworks require audits, while others rely on self-reported data, which can shake stakeholder confidence on the reliability of ESG disclosures.

What are some common ESG reporting frameworks and standards?

In this article, we will be focusing on some of the key ESG standards and frameworks that are primarily applicable to companies with operations in the EU.

• The  IFRS Sustainability Disclosure Standards, spearheaded by the International Sustainability Standards Board (ISSB);

• The  European Sustainability Reporting Standards (ESRS) established by the European Financial Reporting Advisory Group (EFRAG) and lays the foundation of CSRD reporting;

• The  Global Reporting Initiative (GRI) standards, a “catch-all” framework that broadly captures multiple corners of ESG and has also laid the foundation for the ESRS and IFRS standards;

• The  Carbon Disclosure Project (CDP). As the name suggest, this focuses on the “E” in ESG and aims to standardise information related to climate risks and impacts;

• The  Sustainability Accounting Standards Board (SASB) standards which focus on all three pillars of ESG and are closely connected with the IFRS standards above.

As the IFRS and ESRS standards are the most comprehensive and expected to be the most commonly used worldwide, we’ve chosen to detail on them a bit more.  

IFRS Sustainability Disclosure Standards

To make sustainability reporting clearer, comparable, and usable, especially for investors, the IFRS Foundation, through the ISSB, introduced two new standards, IFRS S1 and IFRS S2 in June 2023. These standards are considered the holy grail of ESG frameworks, as they integrate elements from various existing frameworks and standards.

These standards can be used for annual reporting from January 1, 2024, and while they’re not mandatory just yet, this is likely to change in the near future. For instance, Brazil plans to adopt these standards, moving from voluntary use in 2024 to mandatory in 2026. These standards are particularly important for businesses and investors in places like the US, where regulations are on the horizon but yet to be strictly mandated.

• IFRS S1: This standard requires companies to share important information about sustainability risks and opportunities that could affect their cash flows, access to financing, or cost of capital in the short, medium, or long term. Additionally, companies are required to disclose how current and expected sustainability risks impact their business model and value chain.

• IFRS S2: This standard is meant to complement IFRS S1 by requiring companies to disclose climate-related information, focusing on physical risks, transition risks, and climate-related opportunities. It builds on existing frameworks such as CDP, TCFD, and CDSB. While IFRS S1 is applicable to any industry, IFRS S2 specifically calls for reporting on metrics that are unique to each industry.

For businesses, the IFRS standards are expected to make the disclosure process easier while also allowing for better benchmarking and cost savings. Investors are likely to find these standards helpful for guiding their investment decisions, supporting sustainability and climate-related due diligence, and tracking and analysing how portfolio companies perform compared to their peers.

European Sustainability Reporting Standards

Adopted by the European Commission in 2021, the ESRS lays the foundation for Corporate Sustainability Reporting Directive (CSRD)-compliance and is therefore mandatory for certain companies. The ESRS is considered a big step toward standardised and better non-financial reporting across the EU for several reasons. First, the ESRS pushes companies to dig deeper into their sustainability performance, often requiring them to cover issues related to their supply chains and product lifecycles. Second, since the CSRD requires ESG metrics to be audited, this imposes a higher degree of due diligence on companies. Third, with the CSRD’s emphasis on double materiality, companies have to look at sustainability issues beyond just the financial implications and also assess the impact to stakeholders. Finally, the ESRS makes it mandatory for companies to disclose whether they’ve made progress in their sustainability efforts over time, ensuring that they’re not just ticking boxes but actually monitoring their performance.

 The ESRS comprises 12 ESRS standards as depicted below. All standards, (except for ESRS 2) are subject to a materiality assessment and companies are required to determine which sustainability issues in terms of information (standard, disclosure requirement, or data point) should be considered material for them.

Interoperability between IFRS and ESRS

As an increasing number of companies are required to report on sustainability-related information through either the ISSB Standards and/or ESRS, questions arise as to the extent of interoperability between the two. To address these concerns, the IFRS Foundation and the European Financial Reporting Advisory Group (EFRAG) in May 2024 published an interoperability guidance in order to reduce the burden of complexity and duplication of work on reporting entities. While both the IFRS Foundation and the EFRAG offer the most comprehensive frameworks on the market, a few key differences remain. For example, the definition of materiality in IFRS S1 as well as ESRS, focuses on what is decision-useful to investors. However, per the ESRS, companies are required to conduct a double materiality assessment and report on what is considered decision-useful for both investors and other stakeholders. Additionally, while all of the IFRS S2 metrics are included in the ESRS requirements, the latter requires more detailed disclosures, under various sustainability topics ranging from biodiversity and ecosystems to workers in the value chain. Further similarities and differences can be accessed through the guidance document.

Carbon Disclosure Project

CDP is a UK-based nonprofit that is the most widely used sustainability and carbon disclosure rating system globally. This framework is specific to the environmental dimension and helps companies measure and manage their risks and opportunities on climate change, water security and deforestation. As of October 2024, participation remains voluntary. CDP scores range from A to F, based on criteria such as verifiability, detail, engagement with value and supply chains, and how well companies address climate risks. The grading system reflects levels of engagement and the questionnaires are tailored by industry and company size, aligning with the TCFD to cover sustainable finance and climate risks. Additionally, while most entities share climate data, they can also include information on water, forests, and supply chain issues.

Global Reporting Initiative

Created by the Global Reporting Initiative in 2016, the GRI standards are aimed at promoting transparency, accountability, and sustainable development. GRI standards continue to be the most frequently used by companies worldwide and have contributed to the development of both the ESRS and IFRS standards. They’re completely voluntary, so any organisation, big or small, can report on these standards, regardless of location. Unlike the ESRS, where companies have to explain why certain metrics may be excluded, the GRI standards let businesses pick the ESG topics that are the most relevant to their business model. The standards are divided into three main categories: universal standards, topic-specific standards, and sector-specific standards. The universal standards focus on key sustainability issues related to a company’s impact on the economy, society, and the environment; the topic standards cover all potentially important issues identified by GRI; as of September 2024, GRI has developed the sector standards for the ones that have the highest impact (such as oil and gas, mining, and agriculture). Once their reports are finished, companies can either share them publicly on the GRI website or go for a third-party review for additional credibility.

Sustainability Accounting Standards Board

The SASB standards are a set of voluntary industry-specific guidelines for companies to disclose financially material sustainability information. These standards focus on ESG issues that impact financial performance, and the metrics are tailored to 77 different industries. Given their industry-specific nature, these standards are considered a baseline for sustainability reporting and are expected to be integrated into ISSB in the future.  SASB standards are applicable to companies looking to integrate ESG factors into their reporting for investors and other stakeholders. The benefit of SASB lies in enhancing transparency, enabling companies to identify and manage risks, and improving decision-making. This standardised reporting also facilitates better comparability across industries.

Conclusion

Navigating the multitude of ESG frameworks can be tough, with challenges like high implementation costs, a lack of technical know-how, transition planning, and limited data availability. The absence of standardisation, mixed regulatory expectations, inconsistent data metrics, and the resource demands of verification all make ESG reporting even trickier. However, companies that take the time to understand and adapt to these frameworks are expected to be in a stronger position to embrace sustainable practices, comply with regulations, and attract mindful investors.

While we can expect a move toward more standardised ESG frameworks in the future, companies need to juggle various expectations while staying committed to their sustainability goals. At RiskSphere, we specialise in tackling these complexities and can offer insights into requirements, limitations, methods, scenarios, and regulatory best practices. Whether you need to evaluate ESG risks at a detailed level or look at it from a broader perspective, we can help you create a strategy that fits your organisation’s needs and capabilities. The answers might not be obvious yet, but we can guide you in finding them—or at least help you ask the right questions to get started!