Global ESG reporting frameworks converge after years of fragmentation

As companies integrate environmental, social, and governance (ESG) issues into their operations, an unexpected problem emerges: which metrics should be measured to determine progress on sustainability goals? The market is flooded with frameworks that overlap and have different focuses, yet lack consensus among companies, industries, and countries, leaving users confused.

Until global consensus is reached or clear regulatory guidance is issued by countries, companies must decide for themselves which metrics to include in disclosures to stakeholders. Data that one company considers critical to operations may be insignificant to another.

"In the ESG space, there are too many subcategories under frameworks and standards," David Ly, CEO of monitoring technology company Iveda, told ESG Dive. "Every country is different, and due to differing priorities, there is no consistency yet."

A glimmer of clarity may be emerging. In recent years, major standard-setting bodies merged to form the International Sustainability Standards Board (ISSB), which in July released a set offirst reporting standards. Overseen by the International Financial Reporting Standards Foundation (IFRS), the standards cover frameworks for companies to report climate risks and other sustainability-related factors that could pose financial risks.

Support is gradually growing. Several countries have announced they will voluntarily adopt the standards starting in January next year, with mandatory implementation in 2026. The framework has also received additional endorsements from global market regulators, such as the International Organization of Securities Commissions (IOSCO), whose members oversee 95% of the world's securities markets.

"This is a key moment for advancing IOSCO's goal of improving investor climate risk disclosures," IOSCO Chair Jean-Paul Servais said in July when announcing the endorsement. "Through a rigorous process, the ISSB has determined that these standards can serve as an effective and proportionate global framework for disclosing sustainability and climate-related risks and opportunities that are material to investors."

Reducing fragmentation

In the past, companies seeking best practices for sustainability or climate risk reporting often struggled to clarify their obligations. The ISSB was established in 2021 to address this issue—after IFRS members expressed a need for an organization that could develop a global framework.

Founded in 2001 to set global accounting standards, IFRS members believed the organization was uniquely positioned to consolidate the work of multiple organizations under one framework.

The new board absorbed the UK's Climate Disclosure Standards Board (established 2007), the US-based Value Reporting Foundation and its Sustainability Accounting Standards Board (established 2011), the International Integrated Reporting Framework (established 2013), and the Task Force on Climate-related Financial Disclosures (TCFD), set up by the Swiss-based Financial Stability Board in 2015.

Each of these frameworks had been voluntarily adopted by companies, but together they created a fragmented landscape that was difficult for companies to navigate.

"In the ESG space, there are too many subcategories under frameworks and standards. Every country is different, and due to differing priorities, there is no consistency yet."

—David Ly, CEO of Iveda

The ISSB's first standards aim to consolidate and distill these frameworks, while incorporating indicators from the World Economic Forum, to create a unified baseline for companies reporting material sustainability and climate risks. The board also took on oversight responsibilities for companies previously following older standards, recently bringing the TCFD's portfolio under its remit.

"By consolidating and inheriting resources from other investor-oriented initiatives... the ISSB has been able to reduce fragmentation and align broad international support for a global baseline of sustainability-related financial disclosures," ISSB Vice Chair Sue Lloyd told the German Banking Association in August.

The standards released in July include IFRS S1 (sustainability-related disclosures) and IFRS S2 (climate-related disclosures).

The S1 standard includes disclosure requirements on governance processes, strategy, and performance, covering sustainability risks that could "reasonably" affect a company's cash flows. The disclosure framework also requires companies to explain how they monitor and assess sustainability risks.

The IFRS S2 standard works in tandem with IFRS S1, focusing more on the impact of climate risks on a company's bottom line. It requires companies to disclose Scope 1, Scope 2, and Scope 3 greenhouse gas emissions, as well as climate-related targets they have set or are legally required to meet.

The framework also requires companies to disclose the amount and percentage of assets or activities exposed to physical climate or climate transition risks; the portion of their assets and activities aligned with climate initiatives; and how they invest in climate risk mitigation and opportunities.

"Effective implementation and application of the ISSB reporting framework is crucial to providing a global baseline of sustainability-related disclosures to capital markets and ensuring the information provided is high-quality and comparable," IFRS said insupporting materials for implementing the two standards.

"These decisions change over time"

Now, the ISSB needs to promote its standards, convincing companies and governments that its framework should become the global gold standard—or at least the foundation for other frameworks.

The release of the standards has been supported by multiple groups in the global financial community, including IOSCO, the Financial Stability Board that established the TCFD, and leaders of the G20 and G7 intergovernmental forums.

Chris Fidler, head of industry standards at the CFA Institute, told ESG Dive that while the ISSB has garnered significant global support, there are still detractors. According to Fidler, part of the issue is that the ISSB focuses on providing a framework based on information it deems material to investors and their portfolio decisions, while other frameworks attempt to clarify what information is useful to a broader set of stakeholders. Which metrics fall into which category depends on perspective.

"If your perspective is 'I'm investing... over a five-year horizon, aiming for dividends or capital appreciation,' then you'll judge whether information is relevant to that goal," Fidler said. "If you're a policymaker responsible for looking after society as a whole, your perspective will be quite different."

"It's also dynamic," he added. "These decisions change over time. What was material yesterday may not be tomorrow, and vice versa."

The Global Reporting Initiative (GRI) framework from the Global Sustainability Standards Board (GSSB) aims to provide a broader perspective. According to KPMG data, as of October 2022, GRI is themost widely used sustainability reporting framework. More than 10,000 organizations in over 100 countries, including 78% of the world's 250 highest-revenue companies, use the GRI reporting framework.

The framework uses a modular system of universal, sector-specific, and topic-specific standards. According to apresentationmade by GSSB Chair Carol Adams to the ISSB on Tuesday, the GSSB is working to develop standards on topics such as biodiversity, labor, climate change, pollution, and economic impacts over the next year.

Rather than competing for market share, the ISSB and GRI signed a memorandum in March 2022 to coordinate and align their activities. If companies wish to use ISSB standards to disclose sustainability risks to investors, GRI standards can be used in tandem to expand disclosures to a broader audience.

"The GSSB is committed to working with global, national, and other jurisdictional standard-setters to ensure complementarity and interoperability between standards,"the GSSB's two-year work planstates. "Such collaboration can take the form of coordinated work plans, joint standard-setting, or the development of guidance materials (including mapping or bridging documents) to clarify complementarity and connections between standards."

Some governments and regions have expressed willingness to broadly align with ISSB sustainability standards at the local level. The European Commission has confirmed that there is"a high degree of consistency"between ISSB standards and the EU's new climate reporting standards. Meanwhile, Nigeria, Singapore, Brazil, Hong Kong, Japan, Canada, the UK, and Australia have all begun considering adoption approaches in their jurisdictions, ISSB Chair Emmanuel Faber said on a podcast in September.

"Now that the standards are released, the international perspective on their application will be crucial—we are finalizing adoption strategies and need to focus on supporting jurisdictions in their own processes," Faber said.

Brazil went further, announcing it willvoluntarily incorporate ISSB standards into its regulationsstarting in January, with mandatory adoption from 2026. On the same podcast, Faber said the organization expects to publish an adoption roadmap by the end of this calendar year.

In the US, Securities and Exchange Commission (SEC) Chair Gary Gensler has said his office wouldconsult the ISSBwhen crafting the SEC's climate disclosure rules, but would ultimately go its own way. The rule was originally expected to be finalized this month, but no timeline has been given. However, Gensler believes the investment industry needs mandatory disclosures to obtain the information it requires.

"I believe that only through mandatory disclosure can investors benefit from consistency and comparability," Gensler said in 2021. "When disclosure remains voluntary, it can lead to a wide range of inconsistent disclosures."