Emerging ESG Reporting Frameworks
A comprehensive look at the major ESG frameworks—including GRI, SASB, TCFD, and ISSB—along with their relevance to assurance engagements and stakeholder decision-making.
22.1 Emerging ESG Reporting Frameworks
Environmental, Social, and Governance (ESG) reporting has emerged as a prime consideration for organizations worldwide due to growing expectations from investors, regulators, and the public at large. In this section, we explore the fundamental concepts of ESG, discuss the leading ESG reporting frameworks, and highlight the relevance of independent assurance for nonfinancial disclosures.
1. Understanding ESG: Environmental, Social, and Governance
ESG refers to three central factors in measuring an organization’s sustainability and ethical impact:
-
Environmental (E):
• Climate change and carbon emissions
• Energy efficiency and resource management
• Waste management and pollution control
• Biodiversity and land use -
Social (S):
• Labor practices and employee well-being
• Occupational health and safety
• Community relations and human rights
• Diversity, equity, and inclusion (DEI) -
Governance (G):
• Board composition and structure
• Executive remuneration and compensation policies
• Shareholder rights and transparency
• Anti-corruption and whistleblower policies
By assessing these factors, an organization’s stakeholders—including socially responsible investors—evaluate its resilience, ethical practices, and long-term viability. Particularly in recent years, ESG has become an integral part of financial decision-making, prompting companies to integrate broader sustainability considerations into their corporate strategies.
2. Popular ESG Reporting Frameworks
Several organizations have developed standardized frameworks and guidelines to harmonize ESG disclosures. While these frameworks share broad sustainability objectives, each offers unique metrics and focuses on different aspects of ESG performance.
2.1 Global Reporting Initiative (GRI)
The Global Reporting Initiative (GRI) has been at the forefront of sustainability reporting since its inception. GRI Standards guide organizations in disclosing a wide range of social and environmental impacts, ensuring consistency and comparability across different sectors.
• Sector-Specific Standards: GRI publishes sector supplements tailored to industries such as mining, financial services, and agriculture.
• Emphasis on Stakeholder Inclusiveness: GRI encourages organizations to consider the information needs of various stakeholder groups.
• Material Topics: Companies identify material ESG topics through stakeholder engagement and feedback processes.
2.2 Sustainability Accounting Standards Board (SASB)
The Sustainability Accounting Standards Board (SASB) focuses on financially material sustainability topics for more than 70 industries. SASB’s standards are closely aligned with U.S. capital market expectations.
• Industry-Focused: Each industry has specific metrics that link ESG factors to potential financial outcomes.
• Investor Perspective: SASB’s approach addresses investor needs, highlighting material information that can influence investment decisions.
• Quantitative Disclosures: Metrics often specify quantitative measurements, leading to more data-driven ESG reporting.
2.3 Task Force on Climate-related Financial Disclosures (TCFD)
The Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board, provides a framework to disclose climate-related risks and opportunities.
• Risk Management Focus: Recommends disclosures covering governance, strategy, risk management, and metrics/targets.
• Climate-Centric: Concentrates on the financial implications of climate change, guiding businesses on integrating climate scenarios into planning.
• Integration with Mainstream Reporting: Encourages disclosures in annual or integrated reports to enhance transparency for investors.
2.4 International Sustainability Standards Board (ISSB)
The International Sustainability Standards Board (ISSB)—launched under the IFRS Foundation—strives to unify global sustainability disclosure standards.
• Consolidation of Frameworks: Building upon the work of existing bodies, including GRI, SASB, and TCFD, to create a single, consistent reporting standard.
• Global Reach: Seeks international adoption to harmonize sustainability reporting worldwide.
• Investor-Focused and Decision-Useful: Emphasizes financial materiality and comparability to meet the needs of capital market stakeholders.
3. Audit and Assurance Relevance
As ESG reporting continues to gain prominence, many organizations seek external assurance to enhance the credibility of their sustainability disclosures. The auditor’s role may include:
- Validating Nonfinancial Data: Ensuring that reported environmental and social metrics—such as greenhouse gas (GHG) emissions, employee turnover rates, or community investments—are complete and accurate.
- Assessing Alignment with Frameworks: Verifying whether disclosures meet the requirements of selected reporting frameworks, such as GRI or SASB.
- Evaluating Narrative Consistency: Checking qualitative disclosures (e.g., board policies on diversity) and confirming alignment with underlying documentation or internal policies.
- Providing Limited or Reasonable Assurance: Depending on the engagement scope, assurance can be limited (negative assurance) or reasonable (positive assurance). In either case, stakeholders benefit from increased reliability of ESG information.
This assurance not only builds trust with investors but also encourages internal process improvements that can foster long-term organizational resilience.
4. Nonfinancial Data and the ESG Glossary
In the realm of ESG reporting, several terms recur frequently. Below is a concise glossary.
• Nonfinancial Data:
Information that reflects an organization’s impact or risk in environmental and social domains without direct monetary quantification. Examples include carbon footprint, water usage, employee satisfaction, and diversity ratios.
• GRI (Global Reporting Initiative):
A widely recognized pioneer in sustainability reporting, offering detailed standards across environmental, social, and governance matters.
• SASB:
Focuses on financially material ESG matters unique to each industry, aiding investor decision-making in U.S. capital markets.
• TCFD:
Provides guidelines on climate risk disclosures crucial for understanding how climate change could affect an organization’s financial health.
• ISSB (International Sustainability Standards Board):
Aims to create a global benchmark for sustainability reporting, bringing together existing frameworks into a coherent set of standards.
5. Practical Examples and Real-World Scenarios
Implementing ESG reporting frameworks can be complex. Below are two short examples of how organizations might adopt these standards:
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Case Study: Manufacturing Company Using GRI
A large manufacturing company with factories across different continents might adopt GRI Standards to address a broad range of impacts. Beyond offering aggregated carbon emissions data, it discloses metrics like supplier audits for social compliance and invests in local community training programs. -
Case Study: Financial Institution Using SASB and TCFD
A global bank may choose SASB standards for industry-specific metrics (e.g., lending practices, cybersecurity, and data protection) while integrating TCFD guidelines to communicate its exposure to climate-related risks, such as the carbon intensity of its loan portfolio.
Both cases highlight the importance of sector- and risk-based approaches to ESG, underlining how ESG disclosures can be tailored and relevant to stakeholders.
6. Visual Overview of ESG Frameworks
Below is a simplified mermaid diagram illustrating the interplay among the major ESG standards:
flowchart LR
A[GRI] --> E[Company ESG Report]
B[SASB] --> E[Company ESG Report]
C[TCFD] --> E[Company ESG Report]
D[ISSB] --> E[Company ESG Report]
E[Company ESG Report] --> F[Stakeholders/Investors]
F[Stakeholders/Investors] --> G[Decision-making]
• GRI, SASB, TCFD, and ISSB each influence a company’s ESG report, shaping disclosures that feed into investor and other stakeholder decision-making.
• As these frameworks evolve, they increasingly intersect, leading to more harmonized reporting standards.
7. Key Considerations for Auditors
Auditors engaged to provide assurance on ESG data need to be aware of:
• Framework Selection: Understanding the unique requirements, metrics, and underlying assumptions of each framework.
• Data Collection and Integrity: Assessing internal controls over nonfinancial data, including data quality, data governance, and IT systems.
• Materiality Determination: An ESG matter may be material due to significant stakeholder interest or potential financial implications.
• Documentation and Evidence: Collecting sufficient and appropriate evidence for the conclusions reached, particularly for reasonable assurance engagements.
• Emerging Standards: Staying updated on evolving standards from ISSB and other bodies, which may cause frequent changes in reporting requirements.
8. References and Further Exploration
• Official Institutions & Resources:
• Further Reading:
- “ESG: Do You Know the Standards?” in the Journal of Accountancy
- AICPA resources and toolkits for sustainability assurance
• Online Courses:
- Coursera’s “Sustainable Finance and ESG Investing”
- “IFRS Sustainability Disclosure Standards Updates” on IFRS.org
By consulting these materials, auditors and financial professionals can stay informed about developments that shape ESG reporting requirements and assurance engagements.
ESG Assurance Knowledge Check
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