3.1 Overview of the Structure of ESG Regulations
Businesses today face a dynamic landscape of reporting frameworks and standards for demonstrating their environmental, social, and governance (ESG) performance. It can get confusing! Let's break down the most important ones:
Frameworks provide the flexible principles and structure for ESG reporting, while standards offer the precise, nitty-gritty requirements for disclosures.
At the top level, the International Financial Reporting Standards (IFRS) Foundation, a non-profit organisation that oversees the establishment of financial reporting standards, oversees sustainability standard-setting through two boards: the International Sustainability Standards Board (ISSB) and the Sustainability Accounting Standards Board (SASB).
- The ISSB develops global sustainability disclosure standards focused on investors.
- The SASB provides industry-specific standards identifying financially material sustainability factors.
- The Task Force on Climate-Related Financial Disclosures (TCFD) operated under the IFRS Foundation umbrella, offering widely endorsed climate risk reporting recommendations.
- The Climate Disclosure Standards Board (CDSB), which hosts the Carbon Disclosure Project (CDP) reporting platform, is consolidated under the Value Reporting Foundation along with the Integrated Reporting Framework.
- The Value Reporting Foundation sits under the IFRS Foundation as well.
- Outside of IFRS, the Global Reporting Initiative (GRI) offers a pioneering and comprehensive sustainability reporting framework.
3.2 Frameworks
- TCFD - The Preferred Climate Reporting Framework
The Task Force on Climate-related Financial Disclosures (TCFD) provided a widely endorsed framework outlining recommended disclosures related to climate risks, opportunities, targets, and adaptation plans. It was the preferred framework for climate reporting, however the monitoring responsibilities of the TCFD have been transferred to ISSB from 2024.
- GRI - The Benchmark Framework for Holistic Sustainability
As a pioneering framework, the Global Reporting Initiative (GRI) offers comprehensive standards across environmental, social, and governance factors. It remains a benchmark for overall sustainability reporting.
- CDP - A Specialised Environmental Disclosure Framework
The Climate Disclosure Project (CDP) provides a framework enabling disclosures tailored to climate, water, and forests via customised questionnaires. It focuses on ecosystem impacts and integrates with the CDSB framework.
- IRF - Connecting ESG Performance to Financial Value
The International Integrated Reporting Framework (IRF) promotes integrated thinking to explain links between ESG performance and financial value using multi-capital reporting.
- SBTi - Science-Based Emissions Target Setting
The Science-Based Targets initiative (SBTi) assists companies in setting emissions reduction goals that align with the Paris Agreement, which seeks to limit global warming to below 2 degrees Celsius, and ideally 1.5 degrees Celsius, above pre-industrial levels.
3.3 Standards
- GHG Protocol - The Cornerstone of Carbon Accounting
Developed by the World Resources Institute and World Business Council for Sustainable Development, the GHG Protocol outlines carbon accounting methodologies. Its Corporate Standard covers requirements such as upstream/downstream emissions in scopes 1, 2, 3 emissions. It underpins hybrid emissions calculation approaches that will be explored in later modules.
- SASB - Industry-Specific Sustainability Accounting Standards
The Sustainability Accounting Standards Board (SASB) identifies financially material ESG metrics for 77 industries, providing sustainability accounting standards tailored to specific sectors. It is part of the IFRS Foundation along with ISSB.
- ISO 14064
The ISO 14064 family of standards provides specifications for quantifying, monitoring, reporting and validating organisational and project-level greenhouse gas emissions.
- PAS 2060
Developed by the British Standards Institute, PAS 2060 is a specification that establishes requirements for demonstrating net-zero carbon emissions across scopes 1, 2 and material 3.
- ISSB - New Global Sustainability Disclosure Standards
Launched in 2021, the International Sustainability Standards Board (ISSB) within the IFRS Foundation is developing IFRS Sustainability Disclosure Standards to serve as a global baseline for investor-focused sustainability reporting. The ISSB made a groundbreaking move with the introduction of IFRS S1 and IFRS S2, setting the stage for a significant transformation in sustainability-related disclosures across global capital markets. As these standards prepare to take centre stage in January 2024, the business landscape is poised for a paradigm shift, impacting companies both large and small.
As mentioned, following the publication of the IFRS S1 and IFRS S2, the IFRS Foundation took over the monitoring of the progress on companies’ climate-related disclosures from the TCFD in 2024. The IFRS S1 and IFRS S2 fully incorporate the recommendations of the TCFD. These standards will be explored in detail in a later module.
To summarise, the International Financial Reporting Standards (IFRS) Foundation oversees sustainability standard-setting through boards like the International Sustainability Standards Board (ISSB) and the Sustainability Accounting Standards Board (SASB). The Task Force on Climate-Related Financial Disclosures (TCFD), endorsed for climate risk reporting, has transitioned its monitoring to the ISSB, while the Global Reporting Initiative (GRI) remains a comprehensive benchmark. Various frameworks like the TCFD, GRI, and CDP cater to specific reporting needs, while standards such as the GHG Protocol and SASB provide detailed methodologies and industry-specific metrics, ensuring transparent and consistent ESG disclosures.
