ESG and sustainability reporting are becoming a big deal to companies and the stakeholders asking them for the disclosures in these documents.
In this Q&A, Alyssa Rade, Sustain.Life chief sustainability officer, discusses the details investors and the public ask for and how to choose among the sea of reporting frameworks. She also peers into the pending Securities and Exchange Commission (SEC) rule on climate and what it means for publicly traded companies.
Waste360: What is the difference between ESG disclosure and sustainability reporting?
Rade: Sustainability is about looking at your company’s impact on stakeholders who can be consumers, shareholders, the community you do business with, the community your supply chain does business with, your employees … This is a broad model approach to provide these stakeholders the information they want in order to understand how your business model, products, and associated activities impact the world.
The ESG disclosure model has taken the sustainability model and shown how all topics that fall under environmental, social, and governance are financially material to a company. A central goal of ESG is for capital markets and other financial stakeholders to understand environmental- and social-related risks. It’s about pricing those risks, so the markets know how to react.
What are trends in sustainability reporting and ESG disclosure?
Rade: A whole alphabet soup of reporting standards has evolved, and it can be confusing to know which to use and how many to use. So, we are seeing an effort to harmonize and coalesce these distinct standards into one unified, global standard whereby sustainability information is disclosed within the same reports and structure as financial information.
Waste360: What is ESG Risk?
Rade: ESG risk is the potential financial impacts to a company across various ESG topics. On the environmental side it can be anything from emissions, energy and water consumption, wastewater and effluence, hazardous chemicals, etc. On the social side it includes things like labor conditions; codes of conduct, including how you interact with your community, customers, and consumers. Under governance it is how you address and provide oversight across these issues. But there is more to it than that.
Here’s a specific example of ESG risk looking through a climate lens: If you are a car manufacturer and make cars with internal combustion engines (ICE), there are two ways to assess climate-related risks. One is physical risk, which considers the physical risks to your operations and supply chain, primarily through the lens of increased extreme weather events like flooding, droughts, etc.
The second risk type is transitional risk which reflects potential impacts to your business from changes in policy, regulation, and shifting consumer sentiment. If you are an auto maker and are not paying attention to shifting consumer demands towards electric vehicles, that would represent a risk to your financial model because now a huge segment of the market won’t want to buy gas-consuming, combustive vehicles. Similarly, from the regulatory perspective, places like California and England ban the sale of new ICE cars after 2030. These are transitional ESG risks on the environmental side that represent material financial impact to a business.
Waste360: What are some of the main reporting frameworks?
Rade: There are about 50 different reporting standards. Among the most common ones is the Global Reporting Initiative (GRI). It is impact-driven, looking across a broad range of topics across environment, social, and governance pillars. GRI provides a framework where companies can elect to disclose according to topics their stakeholders deem most important. It’s about engaging with your stakeholders and understanding what they want to know about your business.
The ESG disclosure frameworks focus more on financial materiality, and guide businesses to disclose sustainability-related risks and opportunities that could impact long-term resilience.
One of the frameworks is the Sustainability Accounting Standards Board (SASB), which provides sector-specific guidance on what ESG metrics to disclose. Another is the Task Force on Climate-related Financial Disclosure (TCFD), which focuses exclusively on climate-related risks and opportunities. Both of these are investor-driven, developed by the investment community. These two frameworks have consolidated under the IFRS umbrella into a single standard: the International Sustainability Standards Board (ISSB). The ISSB is intended to harmonize global disclosure frameworks across jurisdictions and countries.
We often get asked about CDP (formerly the Carbon Disclosure Project). This is not a reporting framework like those mentioned above that would guide disclosure in an ESG report or public filing. This is a questionnaire-based survey that companies are asked to disclose against by their investors and customers.
What differentiates CDP is that a governing body reviews your answers and provides a score. There are three distinct disclosures across the categories of climate, forest, and water. CDP dives deeper into the environmental disclosures than the broader ESG frameworks; for example, requesting information not only on emissions by scope and category, but also specific reduction projects and decarbonization impacts.
Waste360: Which reporting or scoring tool should a company choose?
Rade: What’s most important to remember is to engage with stakeholders to understand what information they want you to disclose and if they have certain frameworks they want you to disclose against.
For example, with CDP, companies disclose against it because they are asked to by their buyers or investors. If your investors are asking you to disclose, they likely want you to disclose against a framework that anchors on financial materiality. In the U.S. that would be SASB and the TCFD (soon to be IFRS S1 and S2 via ISSB). Investors ask you to disclose against these because they provide the most industry-specific financially materially information. They are essentially saying: “We deploy capital and need to understand the risk of what deploying that capital might represent to our fund and stakeholders.”
You also need to understand if you are covered by regulations in different countries and jurisdictions. Europe is ahead of the U.S., with more regulations governing sustainability disclosures around more topics. Europe has a law called Corporate Sustainability Reporting Directive (CSRD), which is largely influenced by the GRI.
It’s tricky because you can be headquartered in the U.S. but if you operate in Europe, you can be covered by the CSRD, which is expected to impact about 10,000 U.S. companies.
So, understand if you are mandated to report against disclosure requirements and understand what frameworks those requirements are based on.
Waste360: How do companies start?
Rade: In choosing a framework and in understanding best practices, look to leaders in your sector that have done this for some time.
CDP is a public site where you can see who disclosed to them. ESG reports are public disclosures. Read and see what companies are sharing about their business.
Also, engage with support. There are knowledgeable consultants as well as sustainability SaaS platforms like Sustain.Life that give companies the roadmap and tools to understand what they are being asked to do and the ability to do it in a more automated, repeatable way so it can be integrated into the way you do business. Sustain.Life specializes in supporting companies just starting their sustainability and climate journeys, often compiling their first emissions baseline or looking to automate a manual practice to more easily meet these increasingly complex stakeholder expectations.
Waste360: What is the proposed U.S. Securities and Exchange Commission (SEC) rule and its status?
Rade: The proposed SEC rule on climate disclosure is essentially codifying into law the TCFD, which I explained earlier. It's asking companies to disclose their risk management process around climate, their strategy in navigating climate issues, their carbon emissions and impact, their targets, and whether they are science-based targets.
It will be the biggest change to public reporting since we put guardrails around financial statements and disclosures after the Great Depression. The SEC is conveying that climate risks and opportunities represent a significant impact on our economy and the ability to operate as a stable country. This law applies to any publicly traded company and there will be a three-year phase-in, with large, accelerated filers expected to disclose first. There will be exclusions for microbusinesses.