Making Sense of ESG Reporting Standards

John A. Wheeler


December 1, 2023

Three people in meeting with one holding up clipboard with recycle sign

Although climate disclosure reports are not yet federally mandated in the United States, many companies have chosen to proactively issue them due to pressure from sustainability-focused shareholders, consumers and international regulators. In 2021, 99% of the S&P 500 reported ESG-related information, according to the Center for Audit Quality. This trend reflects the growing importance of managing environmental, social and governance (ESG) risks, which can significantly impact a company’s finances and reputation.

Companies navigating ESG risks and reporting have long faced challenges in choosing among different standards created by an array of global standard-setting organizations. Fortunately, as countries work to formalize financial reporting standards around ESG risk, there is clear momentum toward integrating general sustainability reporting standards. The International Financial Reporting Standards (IFRS) Foundation and its sustainability standard-setting board, the International Sustainability Standards Board (ISSB), have emerged as global leaders in the consolidation.

The evolution and consolidation of international ESG standards, along with a resulting shift to integrated reporting and integrated risk management (IRM), will drive significant changes in ESG and sustainability reporting, offering significant short- and long-term benefits to businesses and stakeholders. With new ESG regulations being implemented globally, it is increasingly urgent for companies to ensure that they are well-equipped to navigate the compliance maze.

The ESG Standard Landscape

Making sense of the numerous ESG ­standards-setting organizations can be daunting, as entities have originated, rebranded, merged or partnered across local and global jurisdictions, adding to the complexity and confusion.

In recent years, the IFRS Foundation consolidated various sustainability-related organizations under its governance with the goal of streamlining, harmonizing and standardizing the global sustainability reporting landscape. The primary standard-setting organizations charting the way forward for ESG reporting include:

1. International Financial Reporting Standards (IFRS) Foundation: The IFRS Foundation is an independent nonprofit organization that oversees the development and promulgation of financial reporting standards to promote consistent and transparent financial reporting worldwide.

2. International Sustainability Standards Board (ISSB): The IFRS Foundation established the ISSB to develop sustainability reporting standards that will create a “high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.” It aims to bring consistency, comparability and transparency to sustainability reporting, allowing for better decision-making and improved capital allocation.

3. Climate Disclosure Standards Board (CDSB): The CDSB is a nonprofit organization that promotes the integration of climate change-related information into mainstream financial reporting. With the formation of the ISSB, the CDSB’s work and intellectual property will be consolidated under the IFRS Foundation to contribute to the development of global sustainability reporting standards.

4. Sustainability Accounting Standards Board (SASB): SASB is an independent nonprofit organization that sets industry-specific sustainability accounting standards to help businesses disclose financially material sustainability information. As part of the ISSB consolidation, SASB will contribute its expertise and work on sustainability reporting under the IFRS Foundation.

5. Global Reporting Initiative (GRI): The GRI is an international independent standards organization that promotes sustainability reporting to help organizations be transparent about their economic, environmental and social impacts. The GRI will continue collaborating with the IFRS Foundation and other organizations to improve and harmonize sustainability reporting at the international level.

6. Task Force on Climate-Related Financial Disclosures (TCFD): TCFD is a market-driven initiative that develops voluntary climate-related financial risk disclosures for companies to provide information to investors, lenders and insurers. As of January 1, 2024, the IFRS Foundation will assume the TCFD’s responsibilities of monitoring and managing companies’ progress on TCFD-related disclosure standards in accordance with current and future IFRS standards.

7. Carbon Disclosure Project (CDP): The CDP is an international nonprofit organization that helps companies and cities disclose their environmental impact and drives sustainable action. The organization will integrate its disclosure framework into the ISSB’s efforts to create a consistent and transparent global sustainability reporting system.

8. Value Reporting Foundation (VRF): The VRF is a global nonprofit organization formed by the merger of the International Integrated Reporting Council (IIRC) and SASB. The VRF focuses on advancing integrated thinking, strategy and reporting and will work closely with the IFRS Foundation to support the ISSB’s goal of streamlining global sustainability reporting.

ISSB S1 and S2: Moving Toward Compatibility

The ISSB issued its first two reporting standards in June 2023—IFRS S1: General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2: Climate-Related Disclosures.

IFRS S1 requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, access to finance or cost of capital over the short-, medium- or long-term. IFRS S2 requires organizations to disclose the same information about all climate-related risks and opportunities.

The ISSB also focuses on ensuring compatibility with other sustainability standards, including enhancing the SASB standards so that companies can use them to prepare S1 disclosures. In alignment with the ISSB’s stated goals, these efforts aim to make sustainability-related financial data more consistent, comprehensive, comparable and verifiable, increasing transparency and accountability to benefit various stakeholders.

IFRS S1 will take effect for annual reporting periods starting on or after January 1, 2024. However, the ISSB has baked transition relief into IFRS S1, allowing companies to report only climate-related risks and opportunities in the first year. Reporting on other sustainability-related risks and opportunities would be required in the second year of using the standards.

The Value of Integrated Reporting

Another important element of the ESG landscape is the Integrated Reporting Framework (IRF). The IRF is a vital component of IFRS Foundation and ISSB efforts and provides a guide for sustainability reporting. Published in 2013 and updated in 2021, the IRF encourages integrated thinking by considering the full range of interconnected factors influencing an organization’s ability to create value over time. It distinguishes itself from other reporting methods by incorporating both financial and non-financial information, focusing on value creation in the short-, medium- and long-term. The VRF has played a critical role in developing the IRF, but the IFRS Foundation assumed responsibility for the IRF following its 2022 merger with VRF.

According to the IFRS Foundation, leveraging the IRF can help businesses to better connect environmental risks and opportunities with financial statements, improving the quality of available information to enable “more efficient and productive” capital allocation.

The push toward integrated reporting requires embracing IRM and its enabling technologies, which help connect risks and reporting across the business by bringing together enterprise risk management (ERM); operational risk management (ORM); IT risk management (ITRM); and governance, risk and compliance (GRC). Integrating organization-wide risk and controls data necessitates consolidating various groups’ data (including policies, issues and frameworks like the IRF) into a centralized system of record that is accurate, reliable, auditable and accessible.

The IFRS Foundation’s consolidation efforts and creation of the ISSB have the potential to provide significant benefits to companies and their stakeholders, from investors, customers and employees to regulators and communities. By adopting the ISSB’s S1 and S2 standards and the Integrated Reporting Framework, as well as leveraging IRM approaches and technologies, businesses will be able to ensure the accuracy, integrity, completeness and auditability of ESG data, reporting and disclosures. This will ultimately lead to improved risk management, decision-making and value creation. In addition, the development of common sustainability reporting standards better positions companies to address increasing global regulatory requirements more efficiently and effectively, enabling them to thrive in a rapidly evolving risk landscape.

John A. Wheeler is senior advisor of risk and technology at AuditBoard.