A Deep Dive Into Sustainability Reporting for Businesses

What pops into your mind when you hear sustainability? Most people may think of the environment, water usage, or similar.

However, the United Nations' Sustainable Development Goals (SDGs) cover a wider set of environmental, social, and governance (ESG) areas, like greenhouse gas (GHG) emissions reductions, good health for all, eradication of hunger, reduction in inequalities, sustainable economic growth, decent work for all, and more.

In this article, learn about:

• Why reporting on all these sustainability areas is essential for businesses and society
• What sustainability reporting standards are available and how they compare
• The challenges in sustainability reporting and how to solve them

What Is Sustainability Reporting?

Sustainability and ESG have become interchangeable terms, even in official regulatory documents. While the former is a bit vague and may suffer from subjective interpretations or unintentional omissions, the latter is much more precise and reminds all stakeholders about their wider scope.

After governments, businesses have the biggest impacts on ESG concerns. Sustainability reporting, or ESG reporting, seeks to make businesses accountable on ESG aspects just as financial reporting makes them accountable to financial regulators, shareholders, and investors.

Sustainability reporting covers business activities and actions related to:

• Environmental aspects: Like climate change mitigation, biodiversity, pollution, and similar concerns
• Social aspects: Like human rights, non-discrimination, diversity, social impacts of commercial activities, and corporate social responsibility (CSR)
• Governance aspects: Like business ethics, compliance, and employee well-being

But why do we need sustainability reporting?

Why Is Sustainability Reporting Important?

Sustainability reporting seeks to explore two main perspectives about a business:

• Impact materiality: What are the impacts of that business on ESG aspects of society and the planet?
• Financial materiality: What are the impacts of ESG concerns on that business itself? But remember that a company's impact materiality eventually gives rise to financial materiality in itself.

Each perspective has different sets of stakeholders. We can appreciate the importance of sustainability reporting better by looking at it from the eyes of various stakeholders:

• Businesses themselves: By foreseeing ESG impacts on their stakeholders and financial performance, businesses can navigate future risks and potential opportunities better to preserve or discover competitive advantages.
• Local communities: Sustainability information helps people understand the impacts of businesses on their local economies, communities, and environment.
• Governments and regulators: Using the sustainability data and metrics reported by companies, they ensure that their economies and markets remain stable while helping their societies with non-discrimination, employment opportunities, and lawful ethical behavior.
• Shareholders and other investors: Along with financial disclosures, sustainability disclosures related to risk management, business models, and sustainability performance help shareholders, asset owners like pension funds, asset managers, and insurance companies understand a company’s performance and risks better.
• Civil society and other non-governmental organizations: Activists and media organizations are important conscience-keepers in sustainable development. The transparency that sustainability reporting brings helps them prevent corporate misconduct like corruption, greenwashing, exploitation of vulnerable groups, and destruction of natural resources.
• Suppliers and other third parties: Sustainability reporting helps to identify ESG risks in supply chains and improve the actions of suppliers and other third parties.
• Employees and other workers: Knowing the sustainability strategy of their employer helps employees and other workers assess the risks in their lives and avoid unemployment or exploitation.
• Customers: Surveys say customers want better sustainability from businesses. Non-financial reporting aids the decision-making of customers with regard to what to buy and from where.

6 Popular Sustainability Reporting Standards

With so many stakeholders and ESG concerns, sustainability reporting has to be broad and deep. To organize and structure this information meaningfully, many organizations have created reporting standards along with recommendations and guidelines for companies.

In the following sections, we explore some of the important sustainability reporting standards.

1. GRI Standards

The Global Reporting Initiative (GRI) standards are among the most mature standards for sustainability reporting.

The GRI standards are categorized into three groups:

• Universal standards: The three universal standards — GRI 1-3 — ascertain that the primary requirements and principles of reporting are satisfied, that disclosures about the business and its activities are included, and that the business has identified all the material topics relevant to its activities. 
• Sector standards: The sector standards set the reporting requirements for 40 high-impact sectors like oil and gas, banking, insurance, and food.
• Topical standards: The topical standards address specific ESG topics like anti-corruption and emissions.

Some quick facts about the GRI standards:

• Popularity: According to the 2022 KPMG survey on sustainability reporting, GRI is the most popular framework around the world with about 78% of the largest 250 global companies adopting it.
• Focus: The GRI standards focus only on impact materiality. They don't address financial materiality directly.
• Standard-setting body: The Global Sustainability Standards Board (GSSB) publishes the GRI standards.
• Granularity: The GRI standards' reporting requirements are at a highly granular level. For example, one requirement says that the organization must report the total weight or volume of renewable and non-renewable materials used to produce and package its primary products and services.
• SDG equivalents: The GRI covers the SDG goals, targets, and indicators. If your company uses the GRI standards, you've effectively reported the SDG targets as well.

2. IFRS Sustainability Disclosure Standards

A quick overview of the International Financial Reporting Standards (IFRS):

• Focus: They focus only on financial materiality aspects, answering how ESG concerns impact the financial outlook of a company.
• Standard-setting body: These are published by the International Financial Reporting Standards Foundation's International Sustainability Standards Board (ISSB).
• Granularity: The IFRS standards expect medium-granularity information and data.
• Relationship to GRI: The GSSB and ISSB have an agreement that ensures that GRI and IFRS standards are interoperable and complementary. The GRI focuses on impact materiality and the IFRS on financial materiality.

The IFRS standards consist of two published standards so far:

1. IFRS S1 — General requirements for disclosure of sustainability-related financial information: The IFRS S1 standards disclose information about an entity's sustainability-related risks and opportunities, which are useful for investing or other typical financial purposes. They include any risks and opportunities that affect cash flows, access to finance, or capital expenditures over the short, medium, or long term.
2. IFRS S2 — Climate-related disclosures: The IFRS S2 standards focus only on climate-related risks (both physical and transition) and opportunities.

3. SASB Standards

The Sustainability Accounting Standards Board (SASB) standards provide industry-specific guidelines, disclosure topics, and metrics for around 77 industries.

The SASB standards at a glance:

• Focus: They focus only on financial materiality aspects to help stakeholders make responsible investment decisions.
• Popularity: According to the 2022 KPMG survey on sustainability reporting, the SASB standards are the leading reporting standard among companies in the U.S., Canada, and Brazil.
• Standard-setting body: They were earlier published by the SASB. They're now published by the ISSB. However, they're still called SASB standards.
• Granularity: The SASB standards expect medium-granularity information and data.
• Relationship with ISSB's IFRS standards: The SASB standards will continue as independent standards, and ISSB recommends businesses continue with them. The SASB was recently aligned with the IFRS S2 climate-based disclosure standards.

4. European Sustainability Reporting Standards

The European Sustainability Reporting Standards (ESRS) are the reporting standards required by the European Union (EU) Corporate Sustainability Reporting Directive (CSRD) regulation. Unlike the standards above, these are regulatory reporting standards and, therefore, mandatory for any qualifying business with an EU presence.

They consist of 12 published standards — two general standards, five environmental, four social, and one governance. Plus, some sector-specific standards are in the pipeline.

Some quick facts about the ESRS:

• Focus: The ESRS have a double materiality perspective, covering both impact and financial materiality. As a result, they have the broadest and deepest coverage among all the reporting standards.
• Standard-setting body: They are published by the European Financial Reporting Advisory Group (EFRAG).
• Granularity: The ESRS reporting is at a highly granular level. This helps ensure uniformity and comparability across companies and over time.
• Relationship to GRI: GSSB and EFRAG work closely to ensure both standards are interoperable. Additionally, since the GRI standards are mature while the ESRS are new (in 2023), they suggest starting with the GRI to prepare for ESRS reporting.
• External auditing: The CSRD mandates external auditing of ESRS reports to assure stakeholders of their accuracy.

5. TCFD Recommendations

The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations are a set of 11 disclosures that focus specifically on climate-related impact and financial materiality. The disclosures are under four groups:

• Governance
• Strategy
• Risk management
• Metrics and targets

Some quick facts about the TCFD:

• Focus: They focus only on climate-related impacts, risks, and opportunities. From a materiality perspective, they cover both impact and financial materiality but are only related to climate.
• Standard-setting body: They are published by the TCFD that's set up by the Financial Stability Board.
• Relationship with other standards: All the other standards — GRI, IFRS, and SASB — are aligned with the TCFD's disclosures.
• Granularity: The TCFD disclosures are low-granularity and not as comprehensive or comparable as the others. Since the others are far more granular, you can use them to simultaneously conform with the TCFD recommendations too.

6. Climate Disclosure Project

The Climate Disclosure Project (CDP) publishes guidance and questionnaires for companies on three sustainability areas — climate change, forests, and water security — and scores them based on those answers.

Here are some useful details about the CDP:

• Focus: They focus on the impact materiality of climate change, water usage, and forest resources.
• Standard-setting body: They are published by the CDP.
• Granularity: The CDP questionnaires are fairly high-granularity. They are also comparable, by design, across companies and time.

Which Standard Should You Choose?

At first glance, these reporting standards resemble the XKCD Standards cartoon. However, unlike tech bros, the sustainability community has taken care to keep them all interoperable and aligned.

Some key facts:

• TCFD and CDP are mostly climate-focused, but sustainability trends are moving toward wider ESG coverage. Plus, all the others cover the TCFD.
• SASB and IFRS report sustainability-related risks and opportunities for businesses.
• GRI focuses on the sustainability impacts of businesses.
• ESRS covers both impacts of and impacts on businesses and has the widest and deepest scope.

You can opt for the GRI in combination with a complementary standard like the IFRS or SASB to cover both materiality perspectives. Alternatively, you can go for the ESRS to get both perspectives in one standard. Either approach will put you on a good footing for all your sustainability reporting needs.

Sustainability Reporting Challenges

Sustainability reporting involves several challenges:

• Data complexity: The requirements of all the standards are complex and often highly granular. You must have robust internal data collection and analytics to collect them.
• Data availability: The necessary sustainability data has to bubble up through all levels of the organization, from the operational units up to the compliance team that creates the reports. For industries like manufacturing, asset owners, and asset managers, this is exponentially harder because the data has to bubble up from all the investee companies or supplier companies.
• Business alignment for sustainability: Your board, management, and compliance second line of defense must first come up with business strategies, operational strategies, and enterprise risk management for your sustainability impacts, risks, and opportunities. Only then can the reporting that follows be accurate.