It is through sustainability reports that companies can publish their influence on different sustainability concepts such as resource allocation, the environment, society and corporate governance policies (ESG). However, sustainability reporting is different from the ESG framework, as it solely looks at the influencing power of the company and does not account for the power that the environment has or could potentially have on the company.
The advantages of sustainability reporting are many, which is why more and more companies have been resorting to it over the past 30 years. As per the ICTSD (International Centre for Trade and Sustainability Development), 96% of the world’s 250 largest companies (G250) have curated reports on their sustainability performance and according to a survey conducted by PwC, 57% of the FTSE 100 companies have a clearly identified sustainability strategy in place.
While financial reporting is undertaken according to different standards followed by different companies in different parts of the world, sustainability reporting is yet to incorporate the same level of uniformity and clarity. Currently, there are more than 600 sustainability standards, different industry initiatives, frameworks and guidelines, which makes it complex for companies to report on their ongoing practices.
Standardising sustainable reporting
To standardise sustainability reporting, the IFRS (International Financial Reporting Standards) Foundation created the ISSB (International Standards Sustainability Board) in 2022. This Board is responsible for developing a global sustainability reporting standard that will be investor-centric, transparent and focus on financial-related sustainability reporting by companies.
The Value Reporting Foundation had put in place SASB (Sustainability and Accounting Standard Board) standards which help organisations in different industries report on the risks and opportunities specific to them. When IFRS merged with the Value Reporting Foundation in August 2022, the SASB standards came within its purview as well.
The SASB standards
The SASB standards encompass 77 industries and outline their particular environmental, social and governance issues that impact their financial and enterprise values, and the organisations from these industries then focus on them while carrying out their sustainability reporting. These standards were set through a transparent and diligent process which included:
Participation from companies, investors and subject matter experts
Supervision from the SASB
These standards are now recognised by investors the world over and it helps them rank companies in accordance with their sustainability performance as the disclosures made are uniform and enable easy comparisons.
The SASB standards provide companies with a standard format, which enables them to highlight their sustainability performance. The requirements of these standards emphasise the depth of the information that is to be disclosed but they only recommend (not mandate) where this information is to be disclosed and how it is to be shared. This leaves the companies with a lot of flexibility in carrying out their sustainability reporting in the form of their annual reports, CSR reports, ESG reports or curate a separate sustainability report. Regardless of the path followed, a recommended practice is to include a summary of the company’s sustainability initiatives in all these reports — enabling potential investors to proceed with complete clarity.
These standards are soon to be replaced by the IFRS sustainability reporting standards, which are concurrently being developed. Till then, it is recommended that both the companies and the investors support and use the SASB standards.
The IFRS sustainability standards
Released in March 2022, the IFRS sustainability standards began in the form of a proposal and opinions were accepted until July 29, 2022. The Board believes that they will be able to review the comments and issue full initial guidance before the end of CY 2022. Post this issuance, IFRS plans to develop additional future standards and guidance which will incorporate more trending topics and industry-specific requirements.
IFRS has identified 4 key areas on which all organisations should focus for their sustainability disclosures:
Governance – This area would look at the internal functioning of the organisation and measure its impact on the sustainability-related risks and opportunities. In this section, the organisation is expected to report on its leadership team, governance guidelines, controls and processes.
Strategy – This necessitates companies to demonstrate how sustainability topics are integrated within their strategic framework. For instance, if it is given that organisational decision-making will have an impact on climate, the organisation would have to report on what its strategy is to address or mitigate this risk. IFRS also urges companies to release information in their climate transition plans and scenario analysis.
Risk management – This entails the organisation listing down the process it uses in identifying, assessing and managing its climate risk.
Metrics and targets – This standard also includes metrics that help measure the scale of the company’s business, providing operational context to potential investors and quantifying sustainability reporting, which is essential for seamlessly analysing the company’s performance.
The future of reporting
While in the short term there are no major changes in the manner sustainability reporting is carried out, it is advisable for those adopting the SASB standards to enhance the scope of their reports so that implementing the IFRS sustainability standards becomes easier.
However, once the IFRS sustainability standards are published it will become essential for companies reporting on their sustainability to incorporate this framework. The prototypes published by the IFRS inculcate recommendations from the TCFD (Task Force on Climate-related Financial Disclosures), the integrated reporting framework and the SASB standards. Organisations should be prepared to change their reporting frameworks as these standards develop.
In the long term, the standards will be streamlined and closely connected with the organisations’ financial performances. Just like the financial accounting standards, the sustainability disclosing standards will be uniform and enable companies to report on their governance, strategy and risk management of financially material sustainability issues.
Although sustainability reporting is of utmost importance, for that is what aids investment decisions, communicating it in an effective manner could become a challenging task. At Report Yak, our specialised advisory team, content developers and designers specifically cater to generating sustainability reports for corporates and businesses across the globe.
You can have a look at our award-winning work here or get in touch and we’d be happy to discuss your next report.