As the importance of sustainability issues and their relevance to corporate interests continues to become more widely recognized, so too will the demand for organizations to be transparent about their sustainability and environmental performance. Stakeholder and investor pressure for sustainability disclosures to show whether climate risk is integrated into a company’s long-term strategy is mounting. Various socioeconomic crises like rising energy costs, resource depletion, and climate change weather anomalies increasingly highlight the connections between sustainability and everyday business decisions.
Financial reporting alone no longer satisfies the needs of stakeholders in understanding overall company performance. Through sustainability or climate reporting, organizations share progress and metrics relating to performance goals not only for economic achievements but for environmental protection, social well-being, and associated risk.
Smaller companies and under-represented industries in the reporting sphere that have not yet prepared sustainability disclosures will inevitably face greater pressure to do so, not least because the US SEC and the state of California have each put forth new rules on climate disclosure that may take effect soon. Ultimately, this is a crucial time for climate reporting. Whether you’re subject to regulated disclosure or reporting voluntarily, you’ll need to be ready to meet a new high bar of reporting.
In this article, we’ll provide an in-depth overview of sustainability reporting, including:
- What sustainability reporting is
- Sustainability frameworks, standards, and regulations
- The importance of sustainability reporting
- Challenges with sustainability reporting
What is sustainability reporting?
Sustainability on the whole deals with the concept of sustainable value creation at the corporation level (efficiency) and sustainable development at the system level which is concerned with preserving resources and generating value for future generations (generating positive externalities and impact).
Sustainability reporting is the process of sharing your organization’s progress toward sustainability goals and compliance. It involves disclosing financial and non-financial data, including qualitative and quantitative environmental, social, and governance (ESG) metrics.
These reports publicly discuss the specific initiatives that reflect an organization’s commitment to sustainability and the steps they’re taking to follow through. They also disclose specific figures, such as Scope 1, 2, and 3 emissions, which an organization may be required or encouraged to disclose.
GRI (Global Reporting Initiative) defines sustainability reporting as the practice of companies disclosing the most significant economic, environmental, and social impacts that arise from their corporate activities, and thereby being held accountable for these impacts and responsible for managing them. Sustainability can encompass a broad range of factors that contribute to a business’s long-term value creation and its impact on the environment, society, and its own governance structure, including diverse aspects, such as carbon emissions, water usage, labor practices, diversity and inclusion, ethical supply chains, and corporate governance practices.
Clearly and accurately communicating these impacts, as well as exposure to climate risks and opportunities through sustainability reporting, provides multiple stakeholders with the comparable information they need to understand and evaluate the performance of companies on a wide range of issues and inform their assessments and decision-making processes. By showcasing sustainability initiatives, companies can enhance their reputation, meet regulatory requirements, and drive long-term value creation.
Sustainability frameworks, standards, and regulations
To engage in sustainability reporting, companies may choose to craft a unique internal corporate sustainability report that cross-refers key information from several reporting frameworks as a useful guide. These reports are meant for marketing purposes, public audiences, and stakeholders. Whether it is on a voluntary basis or mandated by relevant governing bodies, companies will also report information to specific frameworks, standards, rating agencies, or government departments with the appropriate requirements met for the framework(s) or regulation in question.
Many investors are losing confidence in the widely varying sustainability reports of firms and will increasingly demand adherence to a common set of standards, like financial reporting. Closely following the most common and widely recognized standards available for use today is important for companies that want to ensure their readiness for possible compliance standards or to set their sustainability reports apart as qualified and mature.
Sustainability frameworksSustainability frameworks contextualize information, outlining a set of overarching principles for “how” a sustainability report is structured and guidance to shape thoughts on a set of broad topics. This allows for more flexibility than a standard on choosing “what” to report on. Examples include the Global Reporting Initiative (GRI), and the United Nations Global Compact (UNGC).
Sustainability standards
Sustainability standards aim to align organizations with a set of specific and replicable requirements that outline “what” should be reported for each topic, including sustainability metrics. These are often more prescriptive, actionable, and in-depth than sustainability frameworks. Examples include the Sustainability Accounting Standards Board (SASB) standards, the Carbon Disclosure Project (CDP) reporting guidelines, the Task Force on Climate-related Financial Disclosures (TCFD), and the International Sustainability Standards Board (ISSB).
Sustainability regulations
Sustainability regulations are mandatory requirements imposed by governments or regulatory bodies. They ensure that companies disclose certain sustainability-related information. Examples include the European Union’s Non-Financial Reporting Directive (NFRD) and the U.S. Securities and Exchange Commission (SEC) climate disclosure rules.
Sustainability rankers and raters
These indices give scores on ESG compliance data values of an organization, rank peers against one another, and often look to reporting standards and frameworks to create the rating system and analytics. Sustainability ratings measure the degree to which a company’s economic value is at risk due to ESG factors and therefore how investable it is. Companies publish ESG scores from organizations such as Bloomberg, S&P Dow Jones Indices (S&P DJI), and others.
Materiality and impact
A reporting framework may focus exclusively on sustainability risk factors and metrics that are materially relevant to enterprise value and the financial impacts on the company itself. Or frameworks may doubly focus on the external impacts a company is having on society and the environment. Only referencing the former constitutes single materiality, and addressing both concepts is considered double materiality.
Scope of sustainability reporting
A narrow sustainability reporting framework may deal specifically with one aspect of the ESG landscape such as reporting solely on climate/environmental metrics. Reporting schemes of a broader scope address the full range of the ESG umbrella, corporate responsibility topics, and sustainable development goals.
Prescriptive vs. flexible sustainability reporting
If a framework is flexible, companies drafting reports may have more autonomy in choosing what topics to report on based on their own materiality assessments. More prescriptive standards require more rigid adherence to specific reporting information, topics, or questions.
Convergence of sustainability standards
With over 600 estimated sustainability frameworks and regulations available worldwide, choosing the right one for your organization can be extremely difficult. But making that choice is getting easier.
In the last year we have seen unprecedented change and landmark decisions made in the corporate sustainability reporting space—both in regulatory agendas and in the convergence of the plethora of voluntary standards known informally as the ever-confusing “alphabet soup.” Despite the rise in mandatory climate and emissions reporting, ESG reporting is set to become more straightforward for sustainability practitioners due to the standard-setting activities of 2023/2024. The proliferation of new regulations and frameworks can be difficult for corporations and stakeholders to navigate.
Reporting schemas are made to standardize and provide guidance on 1) report content and 2) report/data quality. Detailed on the next page are the most widely used and robust reporting tools as of 2023 that play a role in consolidated universal standards and regulatory measures.
Voluntary sustainability reporting
Choosing to report to or craft reports based on certain standards, frameworks, principles, and ranking institutions is voluntary—unless they get baked into regulations by certain countries or used to inform regulatory proposals. However, certain standards and frameworks may be quasi-mandated for some firms due to intense investor pressure or requirements from lending institutions. The most common voluntary reporting avenues include the following.
Internal Sustainability Reports
Many companies choose to produce standalone sustainability reports that provide detailed information about climate-related risks, initiatives, and performance metrics. These reports are generally released on an annual basis at the discretion of the disclosing company.
International Sustainability Standards Board (ISSB)
The IFRS Sustainability Disclosure Standards were created in 2022 by the International Sustainability Standards Board (ISSB) to establish a comprehensive global baseline for sustainability disclosures.
Greenhouse Gas Protocol (GHGP)
The GHGP was the first and remains the most used and recognized carbon accounting framework. It provides guidelines for organizations to develop inventories for greenhouse gas (GHG) emissions.
Task Force on Climate-Related Financial Disclosures (TCFD)
The TCFD is a foundational framework designed to help companies better understand and manage their climate-related risks in their financial filings, and to provide investors with more transparent and consistent information. However, the TCFD is now being replaced by ISSB standards. In January 2024, the Financial Stability Board—the body responsible for the formation of the TCFD—officially sunset the entity, passing the baton to ISSB. The ISSB will now carry on TCFD’s legacy in providing the primary framework for climate disclosure.
CDP (formerly Carbon Disclosure Project)
CDP provides a platform for companies to disclose their environmental performance, including their greenhouse gas emissions, water management, and forest conservation CDP has announced that, from 2024, it will incorporate the ISSB climate disclosure standard [S2] into its disclosure system.
Global Reporting Initiative (GRI)
GRI’s Sustainability Reporting Standards are the most widely used sustainability reporting framework globally, helping organizations of all sizes and sectors communicate their ESG performance with a common and universally applicable reporting language. Provides a broad set of sustainability indicators that can be used to report on a wide range of sustainability issues, including environmental, social, and governance (ESG) factors
Sustainability Accounting Standards Board (SASB)
SASB provides guidelines for investors on what financially material information companies should report, as well as frameworks that identify what ESG information (including climate-related information) is relevant to a subset of 77 industries
GRESB (Global Real Estate Sustainability Benchmark)
GRESB is a specialized sustainability reporting, rating, and ranking schema for real estate portfolios, infrastructure, and investors.
Mandatory sustainability reporting
Companies must first consider whether they need to adhere to any mandatory reporting regulations within their industry and at scale (global, national, and local). This might include national compliance laws for reporting or local environmental reporting requirements and standards like green building codes or building performance standards. Disclosure regulations like the European Unions’ new CSRD and the U.S. SEC climate-related disclosure rules, mandate the disclosure of specific sustainability information, creating a level playing field for corporations and sectors within a jurisdiction and ensuring transparency and accountability when it comes to measuring, managing, and analyzing an organization’s carbon footprint.
U.S. Securities and Exchange Commission Climate Disclosure Rule
The US Securities and Exchange Commission finalized its long-anticipated rule on March 6, requiring thousands of publicly traded companies to disclose certain climate-related information. While the final rule titled The Enhancement and Standardization of Climate-Related Disclosures for Investors takes a much narrower approach than what the SEC proposed in 2022, it marks a significant change in the level of climate-related information publicly listed companies must disclose in the US. The rule requires companies to disclose details related to climate targets, plans for meeting those targets, their oversight and governance practices, and climate-related financial expenditures. Some larger companies will be required to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions — or the emissions associated with their operations and with their purchased energy — but only if the companies deem those emissions to be material.
California SB 253
California’s Corporate Data Accountability Act mandates that any company generating annual revenue of over $1 billion that does business in the state measure and publicly report Scope 1 and 2 greenhouse gas emissions starting in 2026 and begin disclosing Scope 3 emissions starting in 2027. It is important for covered entities, as well as those that may see extraterritorial effects of the ruling, to know that SB 253 sweeps more broadly in scope than the SEC proposal in some significant respects.
Corporate Sustainability Reporting Directive (CSRD)
Under the European Union’s Corporate Sustainability Reporting Directive, all organizations listed in an EU-regulated market with 500 or more employees must start reporting in 2025 with data for the 2024 financial year. Other large companies will be required to do the same in subsequent years, followed by small and midsize enterprises, including organizations with subsidiaries in Europe. Under the ESRS, companies are required to disclose material environmental, social, and governance impacts and risks within their upstream and downstream value chains – for example, Scope 1, 2, and 3 emissions as well as total greenhouse gas emissions.
International Sustainability Standards Board (ISSB)
In 2023, the ISSB finalized two new global standards — General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2). While the ISSB can’t impose requirements on any jurisdiction or company, its new standards are designed to serve as a foundation for regulations across international borders, and many countries are already incorporating them into their reporting regimes.
The importance of sustainability reporting
Financial institutions have increasingly recognized that climate risks and opportunities pose financial risks and opportunities to their businesses, primarily in the form of physical risk from weather-related disasters and transition risk due to regulations. Therefore, there is increasing pressure for extensive and transparent climate disclosures, and it has become a key component of sustainability risk management.
Information producers must now begin to meet these expectations and provide more granular and accurate climate disclosures in line with the relevant standards and frameworks. Those that can adapt will improve the sustainability of their companies, allowing them to reap many opportunities and financial benefits from doing so. Organizations that are slow to adopt sustainability reporting increase their chances of regulatory sanctions, reputation damage, and exposure to climate risk.
Sustainability risk management
By systematically assessing and reporting on ESG factors, businesses can identify potential sustainability risks and opportunities, allowing them to manage these aspects more effectively with action plans and improve their long-term resilience.
Sustainability compliance and readiness
Complying with rapidly changing sustainability rules and regulations helps organizations avoid fines, penalties, and potential litigation, all of which can harm an organization’s position with investors, the market, and the public.
Investor transparency
Effective disclosure of climate-related risks and emissions data enables stakeholders to make more informed asset allocation decisions about their investments, purchases, and employment choices when they can better understand a company’s position.
Brand reputation
Reporting demonstrates a company’s commitment to responsible business practices, which can enhance more intangible benefits such as stakeholder confidence and trust, corporate reputation, and the dialogue between companies and consumers. It is important, however, to carefully construct and audit any sustainability reports put out by your company within a system of controls and clear messaging to take control over any greenwashing accusations or narratives that could arise.
Keeping up with competitors
Around 80% of companies worldwide now voluntarily report on sustainability, according to KPMG. Organizations that provide the greatest transparency and demonstrate the most significant progress toward sustainability initiatives look better to investors and prospective employees.
Achieving sustainability goals
Emissions or other KPI goals are nearly impossible to meet or track without consistently reporting on them to measure progress over time. Sustainability reporting provides a regular checkpoint for organizations to determine whether they’re making adequate progress toward their goals.
Informed decision making
Sustainability reporting provides new information to support management decision-making and employee education, as well as expose gaps in operational efficiency such as energy saving. Sustainability reporting helps stakeholders keep key organizational decisions aligned with sustainability goals and regulations by giving them consistent high-level attention.
ROI opportunities
Sustainability reporting frameworks can help businesses realize opportunities presented by the global energy transition and identify long-term strategic priorities for greater return on investment over time. Shifting societal preferences and investing patterns are resulting in increased capital flows toward sustainable assets with huge swaths of money flowing toward the transition to a low-carbon economy, including through the Inflation Reduction Act and through private capital.
Challenges with sustainability reporting
While the benefits of sustainability reporting are widely known, many organizations are still struggling to incorporate it into their regular processes. There are several major barriers to implementation, and every business has to overcome these challenges for itself.
Inconsistent sustainability standards
With hundreds of sustainability standards and frameworks to choose from, it’s understandably difficult for organizations to decide what to include in their sustainability reports and how to format them. Investors want to see consistency to make it easier to compare investment opportunities, but even within the same industry, sustainability reports may vary widely from one organization to another, with each business believing they’ve been thorough and provided sufficient information.
As regulating bodies continue to consolidate accepted and recommended standards, this problem will largely resolve itself. But for now, the best practice is to adhere to any required standards in your industry or region, and choose the most comprehensive frameworks available for voluntary reporting.
Lack of accurate sustainability data
Depending on the scope, sustainability reporting can take on average 12–18 months for companies to prepare for partial disclosure, and 2–3 years for full disclosure. One of the crucial steps in preparing for effective sustainability reporting is the accurate and reliable collection of data, particularly when it comes to carbon emissions.
Companies must gather data from various sources, including internal operations, supply chains, and external stakeholders. As pressure grows to measure more often, more accurately, and more extensively, data collection and reporting of increasingly complex climate data has become a growing issue.
The more physical locations an organization has, and the more distributed they are, the harder it becomes to analyze aggregate data. Each location may have its own utility providers and data collection processes, and manually standardizing and organizing this data carries the risk of introducing human errors. Additionally, each data set tends to have common errors like duplicate billing periods, gaps, and erroneous charges, all of which make an organization’s data unreliable at scale, and put greater importance on data auditing processes.
According to EY’s 2024 Corporate Reporting Survey, “Nearly all finance leaders (96%) report some problems with the nonfinancial data they receive for reporting, from varying data formats (39%) to data inconsistencies (35%).”
Legal risks
If regulating bodies have mandated that your industry or operations are required to adhere to specific sustainability reporting standards, then your compliance is tied to fines, penalties, and other legal complications. But even if you’re reporting voluntarily, sustainability reporting carries legal risks.
Before the widespread adoption of sustainability standards, frameworks, and metrics, it was difficult to prove whether an organization was really following through on its public sustainability claims. But today, companies that publicly make claims about their sustainability practices, environmental impact, or commitment to green initiatives have to support those claims with data, or else run the risk of being sued for “greenwashing” and misleading consumers or investors.
But what’s perhaps more concerning for business leaders is the legal risks of even setting sustainability goals in the first place: not making adequate progress toward a sustainability target for 2030 or 2035 could result in legal trouble as well. And while regulators and financial institutions apply mounting pressure for organizations to establish sustainability goals, business leaders cannot predict the future. A sustainability goal set at a particular point in time can’t account for major industry disruptions like the global demand for AI. Business leaders and regulators alike will need to balance the increasing importance of sustainability with the flexibility to react to other emerging industry opportunities.
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