Sustainability reporting and disclosure can bring many benefits, including greater transparency and increased accountability. But unless coupled with, and closely tied to, the implementation of a clear business strategy for sustainability, reporting and disclosure are unlikely to drive improved ESG performance or financial results. At the same time there is a huge variation in reporting frameworks across the world, with hopes for greater harmonization resting on the uptake of the International Sustainability Standards Boards (ISSB) standards.

Sustainability reporting and disclosure seek to advance sustainability goals by improving decision-making and risk management, fostering stakeholder engagement, and enhancing transparency and accountability.

Sustainability reporting and disclosure help meet those aims when:

• the information covers the material ESG aspects of an organization, reflects their impact and performance in a balanced way, allows for benchmarking and verification, and follows recognised standards and frameworks
• the use of information is widespread and engages stakeholders with the capacity and interest to access, analyze, interpret, and use the information in their decision-making and risk management, and in their collaboration with reporting organizations and stakeholders
• the information leads to improved ESG outcomes for reporting organizations and their stakeholders, and enhances contributions to sustainable development goals and/or decarbonization goals through learning, innovation, and accountability

However, these criteria are not easy to assess. While sustainability reporting and disclosure can provide data and information on ESG impacts, outcomes, and business strategies, they may not necessarily influence the actual ESG performance and outcomes of the business. A 2021 Paper – ESG and Financial Performance by Tensie Whelan, Ulrich Atz, Tracy Van Holt and Casey Clark – reviewed more than 1,000 studies published between 2015 and 2020 and found that there was a positive relationship between ESG and financial performance in 58% of the “corporate” studies, which focused on operational metrics such as stock price and return on equity (ROE), and return on assets (ROA).

The implementation of a well-developed sustainability strategy that drives better financial performance through innovation, higher operational efficiency, and improved risk management is key to a positive relationship. Simply measuring and reporting ESG metrics without an accompanying, robust sustainability strategy is not likely to be a strong performance driver.

An ongoing challenge, however, continues to be the fragmentation among jurisdictions in their regulatory approach to sustainability reporting and disclosure as a result of legal, political, and cultural nuances and differing degrees of ESG integration. For example, many countries in Asia Pacific, and Latin America have introduced green or sustainable taxonomies, or published proposals to do so (according to the Green Technical Advisory Group, there are more than 30 taxonomies in development globally).¹ In the United States, the US Securities and Exchange Commission is developing climate-related disclosure requirements for domestic and foreign registrants. California has recently enacted two laws that require covered entities to disclose greenhouse gas emissions and climate-related risks. Further, different organizations use a variety of approaches and methodologies, frequently resulting in inconsistent and incomparable information.

Looking ahead, the standards developed by the ISSB, released in June 2023, provide an opportunity for greater convergence and harmonization of sustainability reporting and disclosure practices. International Financial Reporting Standards (IFRS) S1 establishes a disclosure framework for companies to communicate their sustainability-related risks across different time horizons, covering aspects such as strategy, governance, risk management, and performance. IFRS S2 complements S1 by providing specific climate-related disclosures, based on the company's greenhouse gas emissions, climate-related risks and opportunities, and climate-related financial impacts.

Both standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This means that companies will not need to apply both the TCFD recommendations and ISSB standards; an entity applying IFRS S2 would also satisfy the TCFD recommendations. The ISSB standards provide a common baseline that jurisdictions can adapt for local needs; among the 30 countries that pledged to adopt or consider them, several expressed an intention to align with the global baseline as much as possible, while factoring in jurisdiction-specific considerations. This will help facilitate cross-border comparability, transparency and accountability of sustainability performance and its impacts.

The uptake of the ISSB standards relies on several factors, for example the endorsement of – and enforcement by – regulators, the availability of verifiable data, the capacity and willingness of companies and stakeholders to apply the standards, and the responsiveness and adaptability of the standards to new and emerging sustainability challenges. Increasing stakeholder uptake depends, among other things (including enforcement), on ensuring that reporting and disclosure obligations are closely tied to performance, do not focus on unnecessary or inconsequential issues, and can realistically be met without unreasonable cost.

Critiques of this new era of transparency often focus on several of the points above, including in particular on cost, data availability and consistency, as well as skepticism about the extent of tangible benefits that reporting can produce. Harmonized sustainability reporting and disclosure standards will not necessarily resolve these questions, but they are likely to reduce the reporting burden and complexity for businesses, especially for those operating across multiple jurisdictions and sectors.

On balance, it is clear that widespread adoption of the ISSB standards should enhance accountability and encourage further integration of ESG factors into investment decisions and risk management. This will better align capital and corporate behaviour with sustainability goals and outcomes. While challenges remain, all signs point to the new ISSB standards having a genuine chance of achieving global acceptance.

Footnote

1. Green Technical Advisory Group, ‘Promoting the international interoperability of a UK Green Taxonomy’ (February 2023) page 1.