Here is what to expect in a rapidly changing ESG reporting landscape: Views from the corporate reporting framework setters
At the online panel under the theme “The present and future of ESG reporting”, the panelists addressed questions such as what the interrelation between frameworks is, how should companies approach ESG reporting, and what are the panelists’ expectations for the evolution of ESG reporting in the next two years.
After years of discussions on how to best move forward, consensus among the major reporting framework setters (aka the “Group of 5”: CDP, CDSB, GRI, IIRC and SASB) is here. From the Group of 5’s last year published Statement of Intent to Work Together Towards Comprehensive Corporate Reporting to their joint vision towards a comprehensive corporate reporting system as described in the paper: Reporting on enterprise value: Illustrated with a prototype climate-related financial disclosure standard, 2020 left us with significant progress in the much desired “reporting harmonization”.
While the Group of 5 has been actively working to address these challenges and provide greater clarification on how the different frameworks support each other, yet there is still some significant level of confusion among practitioners in the market and keeping up with these changes often requires resources that organizations are finding difficulties to deploy or to find. Causing ESG professionals to feel like they are stirring and digesting an ‘ESG alphabet soup.’
At CSRone, where I serve, we recently hosted a webinar to address this knowledge gap in Taiwan and the APAC region and convened four influential thought-leaders and executives representing four major reporting framework setter organizations to share in-depth guidance and views on these critical issues.
Source: CSRone – 7th International Conference on Trends of Sustainability 2021
At the online panel under the theme “The present and future of ESG reporting”, the panelists addressed questions such as what the interrelation between frameworks is, how should companies approach ESG reporting, and what are the panelists’ expectations for the evolution of ESG reporting in the next two years. This article summarizes some of the key takeaways from the session.
1. How do reporting frameworks complement each other
Gennie Yen, CSRone’s Founder and co-host of the session, opened the discussion by highlighting the recent significant changes in ESG reporting and asking panelists to provide a general outlook of the interrelation among frameworks. In short, there are two main big perspectives on materiality: “inwards impacts” and “outwards impacts”.
- Inwards impacts (aka financial materiality): Where a company focuses on those ESG issues that influence the so called “enterprise value creation.” Its main audience are internal and financial stakeholders (such as investors, lenders, rating agencies, among others) and their associated disclosures are covered by the taxonomies and definitions of CDSB, SASB and the TCFD recommendations. While CDSB and the TCFD recommendations are targeted at disclosures within the mainstream annual report and financial filings, SASB disclosures are being implemented by companies in a variety of ways ranging from stand-alone report, to using a SASB index in the integrated report or sustainability report.
- Outwards impacts (aka multistakeholder materiality): Where a company focuses on those ESG issues that influence “overall sustainable development”. Its main audience are external stakeholders (such as governments, consumers, civil society groups, employees, impact investors, local communities, vulnerable groups, the wider society, among others) and their associated disclosures are covered by the taxonomies and definitions of the GRI Standards. GRI disclosures tend to be implemented within a stand-alone corporate sustainability report accompanied with disclosures in a micro-site or as part of an integrated report.
Taking the issue of climate change as an example, financial materiality would see climate change through a lens of how it impacts a company, while multi-stakeholder materiality would see climate change through a lens of how the company is contributing to (or harming) progress on climate action. These double-sided perspectives could be applied to other ESG issues as well.
Both perspectives, constitute the concept of ‘double materiality’－as best popularized by the EU’s approach to mandatory ESG disclosures－and provide two important pillars and concepts to effectively understand a company’s true value creation process, and its associated impacts (including potential risks and opportunities.) Jurisdictions like Taiwan are also following suit on this kind of reporting requirements by requiring its largest public companies, and those in high-impact sectors to report on both sides of materiality.
2. How to report if my organization has limited resources for ESG reporting
Regardless which perspective you take, every organization has limited resources and is certainly very challenging (if not almost impossible) to manage the entire universe of ESG issues. But for SMEs in particular this challenge is more acute compared to their larger peers. Hence, companies are best advised not to report on all ESG issues, nor use all the reporting frameworks, but rather prioritize those ESG issues of utmost importance for the companies themselves and their key stakeholders, take those issues as a starting point.
Mardi McBrien, Managing Director of CDSB suggests that before companies start to report, they should focus on clarifying the story that they want to tell, and the audience they want to reach, then select the corresponding reporting frameworks. If an organization has less clarity on what materiality is, a great way to identify materiality for their industry is starting from the SASB Materiality Map.
These words were very much echoed by Katie Schmitz Eulitt, Director of Investor Outreach of The SASB Foundation, who recommends to take SASB as a starting point and over time build on that, while gradually addressing other key stakeholder concerns. The WEF IBC Stakeholder Capitalism Metrics, which are a subset of others (mostly the GRI Standards) are also interesting to explore for companies as they provide a comparatively small number of metrics, which by design can be used by companies of all sizes, regions, and industries.
3. Materiality is dynamic. Today’s multi-stakeholder materiality could be tomorrow’s financial materiality.
According to Eric Hespenheide, Chairman of the Board of Directors at GRI, there has been a prominent realization among investors regarding some of the sustainability-related issues that are going to drive future valuations of companies, which ultimately will create new winners and losers. Hespenheide also notes that while it is much welcomed news that companies are actively addressing investors needs on ESG reporting, it is important not to stop there and to seek the multi-stakeholder perspective into account. Only by understanding this information we could effectively address global sustainable development challenges like the SDGs or the Paris Agreement targets.
“There is going to be a continuing threshold of emerging ESG issues, such as biodiversity and human capital-related that will emerge in the short-time as a financially material topics very much the same as climate change has done in the last 20 years. Understanding this kind of information as a society can help us to learn of other issues out there and inform governments and regulators to take action before it’s too late” Hespenheide concluded. Mandatory reporting requirements on ‘double materiality’ such as those in the EU and Taiwan would increasingly become critical to be replicated in other jurisdictions.
Eliza Li, Leader of Sustainability & Climate Change Services at PwC Taiwan, and co-host of the session, supplemented Hespenheide’s words by noting that ESG reporting is neither the goal nor the purpose, but rather a vehicle to bridge companies and stakeholders and help them to make more informed decisions.
4. How to overcome the challenges of scenario analysis-related disclosures
Many companies see scenario analysis as the toughest element to implement from the TCFD recommendations, and often tend to automatically assume disclosing on scenario analysis forces them to disclose confidential business information.
In his role as Member of the TCFD, Maasaki Nagamura recommended that for companies with those concerns, taking a “stepwise approach” with broader qualitative information disclosed initially and more specific, quantifiable information disclosed over time can help companies to start the journey, as scenario analysis is of the most needed and useful pieces of information by investors.
Although currently there are not perfect examples of using climate scenario analysis in disclosure of climate-related risks and opportunities, the approaches are constantly evolving, and it is important for data preparers and users to start soon in order to understand their level of resilience. New entrants can refer to the existing work of industry peers and pioneers.
5. What leaders from the reporting framework organizations hope to see in the next two years
At the end of the session the panelists mentioned some of the developments they would like to see in the next two years, including a clearer roadmap from the IFRS Foundation on its upcoming global sustainability reporting standard, with the same rigor of those in financial accounting with the pace that we need for spurring global collective action and they are optimistic on the direction of these developments.
The speakers also mentioned that while some jurisdictions might not be ready, it would be optimal to have ESG reporting widely mandated across industries and territories and that the growing expectation for the financial sector to disclose its “finance emissions” will further accelerate the adoption of corporate ESG disclosures. There was also consensus and words of encouragement for companies to move from disclosures to transformational actions and positive impacts.
While these rapid changes are still ongoing and will require continuous adaptation and on-the-go learning, there are many free resources that reporters can benefit from. The CDSB-developed The Reporting Exchange and the TCFD Knowledge Hub, are great examples of this, with the former providing comprehensive information on ESG reporting requirements and resources across more than 70 countries, and the later providing access to a range of practical content to implement the TCFD recommendations.
Source: CSRone/NCCU College of Commerce, Xinyi School