ESG Reporting

The Growing Demand for Environmental, Social and Governance Information

AFTER YEARS of implementing changes in financial accounting standards, the topic of environmental, social and governance (“ESG,” also known as sustainability reporting) seems to be ubiquitous in recent months. The increasing demand for information regarding ESG is coming from many stakeholders. 

The variety of stakeholders interested in ESG reporting includes all of the following:








As sustainability reporting is not nearly as mature as financial reporting, the ecosystem is quite complicated and fractured, but evolving very rapidly. The fast-moving hot topic is generating a plethora of questions, two of which include:

• What do I need to know about the ecosystem of organizations promulgating recommended ESG disclosures?
• What are the regulators contemplating around sustainability disclosures?

ESG Ecosystem 

As a set of broad, mandated sustainability disclosures are not yet in place, there are unsurprisingly a dizzying number of organizations that provide recommendations, ratings, data and the like. The ecosystem is often referred to as an “alphabet soup” of acronyms. Many organizations cite the fragmentation as a barrier to enhanced ESG reporting; the lack of clarity results in additional time to determine how to start the reporting journey.
It might be a bit easier to understand the landscape by putting the different organizations into categories (see chart below).



With respect to the reporting standard setters category, GRI has been around the longest and has many proponents around the world. SASB was founded in 2011 in the U.S. and has been adopted more widely in the last two years as the standards were first codified in 2018. The TCFD framework was developed from a workstream of the Financial Stability Board in 2015.

To distinguish among them, it’s important to understand that reporting standards and frameworks are designed with particular audiences in mind. To that end, both SASB and TCFD were designed to enhance ESG communication between preparers and an investor audience. On the other hand, GRI is intended to help companies speak to a broader audience, including investors, employees, regulators, suppliers, customers and even society as a whole. As such, it is possible for preparers to use GRI, SASB and TCFD, as they complement each other and in part speak to different stakeholders. 

As SASB is more focused on ESG issues relevant to investors, they have developed different recommendations for 77 different industries; the idea is that an industry lens is critical to help filter the universe of ESG issues into the dozen or so ESG items most likely to be important to investors in that industry. GRI is generally industry agnostic, which is in line with an objective to enhance communications to a broader stakeholder audience.

It should be noted that the IFRS Foundation is moving forward toward the creation of a global sustainability standards board, sitting alongside the IASB, with an expected launch in the fall of 2021. The Foundation has stated that the intent is to focus on a climate change disclosure standard first, before expanding to broader ESG topics. Also, they expect to consider the primary users for their standards to be investors, rather than the broader stakeholder audience described above. 

Regulatory Update 

The United States Securities & Exchange Commission (SEC) has been quite active recently regarding ESG reporting, building upon momentum that began with mandated human capital disclosures in 2020. 

In February 2021, Acting SEC Chair Allison Lee directed the Division of Corporation Finance to focus on climate-related disclosure by reviewing the extent companies address matters identified in the SEC’s 2010 guidance on climate change disclosures. The Division was also tasked with considering if and how to update that guidance to reflect developments since its initial release.

In early March 2021 the SEC announced establishment of an Enforcement Division task force to “proactively identify ESG-related misconduct.” The initial focus is meant to look for gaps or misstatements around climate change. On March 15, 2021, Acting Chair Lee published her speech “A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC” followed by a detailed request for comment on climate disclosures, seeking feedback on a broad range of ESG reporting questions regarding what should be disclosed and whether assurance should be required, among other things. The comment period ended mid-June.

In April 2021, the European Union (EU) proposed a new Corporate Sustainability Reporting directive. In it, the EU estimates the number of companies required to disclose sustainability information would increase from 11,000 to approximately 50,000. Not only would it impact EU-domiciled entities, it could also scope in as non-EU companies that are listed in the EU or that have unlisted but large subsidiaries operating in the EU. Importantly, assurance over this information would be required, though at first starting with “limited assurance.” If agreed by Parliament, the requirements could be effective for years ending December 2023. 

Conclusion

The activity in the non-financial reporting landscape has been extensive. It will be important for finance professionals at companies to not only stay abreast of the updates, but also to engage with others in their companies to help enhance the reliability of ESG information irrespective of where it ends up being published. Lastly, it will be important to engage with policy makers and standard setters to help influence the ecosystem of ESG reporting for the future.  

The views expressed above are not necessarily those of Ernst & Young LLP or other members of the global EY organization. The information is for educational purposes only and are not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.