Sustainability is often used as a holistic term to talk about your company’s impact on the world around it.
There are two key elements:
1. Corporate and Social Responsibility or CSR, is a voluntary framework of organisational policies which inform your internal and external stakeholders whilst achieving a balance of economic, environmental and social requirements (triple bottom line approach). It highlights what you have in place to demonstrate your social and environmental impact on the world and that you are a considerate partner to the communities with which you engage.
Key areas include: company ethics, anti-bribery and corruption, modern slavery, human rights, labour standards, diversity, equity and inclusion, gender balance, responsible sourcing, stakeholder engagement, employee and community relations, environmental management, resource efficiency and good governance.
CSR can be referred to interchangeably as Sustainability.
2. Environmental, Social and Governance or ESG, which has gained momentum in the last two decades, can trace its roots back to Socially Responsible Investing (SRI) in the 70s when investors were looking to find funds which aligned to their own values.
Nowadays investors are keen to understand in much more granular terms how organisations are transitioning themselves to become both environmentally and socially responsible with good governance surrounding their decision-making.
Both CSR and ESG can use the same data however the format and data requirements may vary. CSR is purely voluntary and comprises of environmental, social and economic information of key interest to major stakeholders. ESG reporting is mandatory for organisations of a certain size or turnover. It comprises of information which is material to its business operations, aligns to relevant frameworks and is produced in accordance with appropriate standards. By utilising a framework, organisations are able to demonstrate measurable, operational strategies with evidence which is available for verification by independent auditors.
The frameworks require organisations to report on that which is material to their business. They require an in-depth look at what is important to an organisation and its operations and what’s important to its stakeholders identified using a materiality assessment. This is usually undertaken as a survey, interviews or focus groups; independently from the organisation and repeated regularly to see how opinion has changed.
The areas for review within the framework are typically:
Environmental – Greenhouse Gas Emissions (GHG), energy and water consumption, waste management, biodiversity and air pollution and supply chain engagement and procurement.
Social – workforce relations, human rights, internal and external stakeholder engagement, diversity, equity and inclusion and employee wellbeing.
Governance – Role and makeup of board directors, compensation and oversight, code and values, transparency and reporting, anti-bribery and corruption policies, risk management, cyber-risk and systems.
Common frameworks include:
GRI, TCFD, SASB, CDP, SBTi and UNGC amongst others.
Global Reporting Initiative (GRI) – The GRI standards are a set of principles-based guidelines that provide a framework for sustainability reporting. They cover economic, environmental and social topics and are used by organisations to report sustainability performance and impacts.
Taskforce on Climate Related Financial Disclosure (TCFD) now replaced by International Sustainability Standards Board (ISSB) – disclosures of climate related financial risk.
Sustainability Accounting Standards Board (SASB) – Serves as an environmental, social and governance guidance framework to identify issues that might impact financial performance and enterprise value for companies. ISSB assumed responsibility for SASB standards and committed to maintain, enhance and evolve the SASB standards and encourages investors to continue to use them.
Carbon Disclosure Project (CDP) – Companies disclose environmental information through Corporate and SME questionnaires. The three questionnaires; climate change, water security and forests will be combined into one integrated questionnaire in 2024 – providing benchmarks for organisations and investors.
Science Based Targets Initiative (SBTi) – a science-based commitment process on GHG reduction aligned to the 2015 Paris Agreement.
United Nations Global Compact (UNGC) 10 Principles and SDGs is an initiative to accelerate change through accountable companies and ecosystems. The 10 principles comprise human rights, labour, environment and anti-corruption whilst the SDGs are societal goals with an emphasis on collaboration and innovation.
The ESG Reporting Standards are the disclosure arm which takes the information gathered in the frameworks aligned to the materiality matrix and exhibit these in reporting formats.
Common Standards include:
GRESB, DJSI, SECR, ISSB
Global Real Estate Industry Benchmark (GRESB) – an industry led membership organisation helping investor members to evaluate the ESG performance of their investment portfolio covering the real estate and infrastructure sector. Approximately one third of investor members mandate completion of GRESB Assessments. collection, Portal opens April 1st and the deadline for submission is July 1st.
Dow Jones Sustainability Indices (DJSI) –are float-adjusted market capitalisation (FMC) weighted indices measuring the performance of companies selected with Environmental, Social, Governance and Economic (ESG) criteria using a best-in-class approach. It provides investors with objective benchmarks for managing their sustainability investment portfolios. Key aspects for consideration are ethical governance, resource efficiency and stakeholder engagement. There are 9 indices within three geographical breakdowns: World, Regions and Countries. The indices are World, World enlarged, Emerging markets, Asia/Pacific, Europe and North America the threshold for invited companies is > US $500M. For Australia the threshold for invited companies is > A$ 100M. For Korea and Korea Capped 25% is > US$ 100M. The key factor in selecting constituents for any DJSI index is a company’s S&P Global Corporate Sustainability Assessment (CSA) Score. The annual CSA process begins at the start of April each year with new scores released from September onwards.
Streamlined Energy and Carbon Reporting Regulation (SECR) – UK Government led for large UK organisations and reviews Greenhouse Gas (GHG) emissions, energy consumption and energy efficiency activity. Quoted companies, large unquoted companies and large limited liability partnerships need to report their climate impact if they exceed at least two of the following thresholds in the financial year: £36M t/o, £18M balance sheet total or 250 employees who have consumed more than 40,000 kWh in the reporting period.
International Sustainability Standards Board (ISSB) – cohesive reporting standards to obtain consistency across industries and regions. It is developing standards to deliver a high-quality, inclusive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. ISSB Taxonomy was published on 30th April 2024 to support investors in the efficient analysis of sustainability-related financial disclosures. Investors will be able to search, extract and compare information as ISSB creates its global model of Standards. ISSB Taxonomy will have interoperability with other taxonomies such as EFRAG to help investors and companies immediately identify disclosures required by ISSB.
In the UK the Companies Act 2006 was amended by The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 on April 6, 2022. It largely adopted the recommendations of the TCFD and became the first G20 country to enshrine in law mandatory TCFD-aligned reporting requirements. Those companies affected are those with > 500 employees, have transferable securities trading on a UK regulated market, banking or insurance companies, have securities admitted to AIM with > 500 employees or other large companies with > 500 employees and a t/o > £500M.
Additional sustainability Standards emerging in 2024 include:
EU Taxonomy for Sustainable Activities – directing investment to what’s needed for the transition to meet the EU’s climate and energy targets for 2030; aligned to the European Green Deal objectives.
When will this start and who is affected? - Disclosure on the EU taxonomy is only mandatory for companies that fall within the scope of the NFRD/CSRD. (Source: envoria )
The Corporate Sustainability Due Diligence Directive (CSDDD) – A framework requiring companies to be accountable for their global value chain taking responsibility for their environmental and social impacts and those of their suppliers.
When will this start and who is affected? – Companies based in the EU if they have > 1000 employees and a worldwide t/o > €450M. non-EU based companies with a t/o of €450M in the EU. Franchised EU companies >1000 employees; EU and non-EU t/o €80M and € 22.5M in royalties. (Source ERM.)
The Corporate Sustainability Reporting Directive (CSRD) – Companies must disclose sustainability issues according to ESRS using double materiality, identifying how the issues effect their business and how their business is affecting the environment and the communities in which it operates. (Starting 2024 for large companies extending to all by 2028).
When will this start and who is affected? – Listed and non-listed EU companies with >250 employees, net t/o > € 40M and balance sheet > € 20M. Report on FY 2025 due in FY 2026. SME listed EU companies that do not exceed at least 2 of the 3 following criteria; 10 employees, net t/o of €700,000 or Balance sheet of €350,000. Report on FY 2026 due in FY 2027. Non-EU companies that generate a net t/o of €150M in the EU and either of the following: at least 1 large subsidiary in the EU or at least 1 branch in the EU with net t/o > €40M. Report on FY 2028 in FY 2029. (Source Persefoni.)
European Sustainability Reporting Standards (ESRS) – provides interconnectivity with GRI, ISSB, TCFD systems to avoid double disclosure. It provides guidelines for the information to be provided in Sustainability reports, requires double materiality and extends the company’s reporting boundary to include the entire value chain from end-to-end ie supplier to end user.
When will this start and who is affected? - Starting 2024 for use by all subject to the Corporate Sustainability Reporting Standard.
US Securities and Exchange Commission (SEC) (source Sidley Update 12/3/2024) – Large accelerated companies and accelerated (revenues of more than $100 million) companies that file with SEC will need to participate. The rules broadly align to TCFD (now ISSB) and GHG Protocol but require a shift on climate disclosure from voluntary to mandatory. The rules aren’t restricted to purely climate related physical risks e.g. droughts, floods, snow and wildfires but also transitional risks such as moving away from carbon-intensive products such as fossil fuels, investment costs of new technologies and reputational impacts.
SEC will require
Climate related risks physical or transition, must be disclosed by a large or accelerated registrant if they have materially impacted or are likely to have a material impact on the registrant, including its strategy, results of operations or financial condition.
Any climate related target which had materially affected or likely to materially affect the registrant’s business, results of operations or financial position. Actions taken in decarbonisation strategies plus any assumptions and calculations leading to carbon avoidance, reduction or removal through the purchase of offsets or renewable energy certificates (RECs).
A risk management plan for material climate-related risks, with details of climate scenario planning where used, and material and, the expected material impacts on the registrant under each scenario.
Large accelerated filers and accelerated filers are required to disclose scope 1 and/or scope 2 emissions if material to the registrant.
Climate related risks of the registrant’s value chain are required to be disclosed if the risk materially impacts or is likely to impact the registrant’s business, results of operations or financial condition.
Ratings agencies vary in how they approach the evaluation of a company’s performance. Some focus on social impacts such as labour issues and human rights whilst others concentrate on climate change and environmental impacts. Some use quantitative research focussed on financial and non-financial data whilst others take a more qualitative approach using interviews and on-site visits. Whichever route they use their aim is to provide insight to investors and organisations looking to invest or make an acquisition.
Morgan Stanley Capital International (MSCI) – provides ESG ratings and analysis for investors to assess an organisation’s risks and opportunities with regards to sustainability.
Sustainalytics – analyses company ESG impacts to guide investment decision making.
Standard & Poor (S&P) – a global ratings organisation that incorporates ESG factors which can materially influence the creditworthiness of a rated entity or issue.
EcoVadis – is a ratings agency that is primarily for supply chain partners to understand sustainability performance and risk. The ratings are given through levels of achievement namely platinum, gold, silver or bronze.
FTSE4Good – evaluates data relating to environmental management, social issues, human rights and governance. Since 2023 companies are now required to meet a climate score in addition to ESG.
1st May 2024, © AQUULA 2024.
About the Author | LYNDA SIMMONS - AQUULA MANAGING DIRECTOR
AQUULA is a global leadership and sustainability board advisory agency.
It's increasingly the norm that sustainability is an integral part of all responsible decision-making across every aspect of an organisation’s strategic operation.
Executive Board Directors are required to be more aware and accountable - by their investors, employees, clients, supply chain, communities and Mother Nature - the greatest stakeholder of all.
We bring personal sustainable development experience from international commercial and purpose-led organisations with a focus on delivering excellence and net positive impact on the world’s societies and their ecological footprint.