The Carbon Border Adjustment Mechanism (CBAM)
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In this article we’ll explore what the CBAM is, why it’s been created, and what importers need to know ahead of its introduction.
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What is sustainability reporting and why is it important?
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Sustainability reporting - a passing trend or a long-term business essential? Far from being a fleeting fad, sustainability reporting is transforming how businesses operate, offering a competitive edge in today’s market. According to a study by KPMG, over 96% of the world's largest 250 companies now publish sustainability reports, underscoring its importance in meeting stakeholder expectations and regulatory demands.
Moreover, research by McKinsey highlights that companies that effectively address environmental, social, and governance (ESG) issues can enhance their competitive position and meet societal expectations, which in turn can lead to increased shareholder value. This isn’t just about compliance - it's about creating value, enhancing transparency, and ensuring long-term business resilience.
So, what exactly is sustainability reporting, and why is it so crucial for modern businesses? How can it help your company not only meet compliance but also drive growth and strengthen your business strategy? Most importantly, how can you start leveraging sustainability reporting to stay ahead of the curve?
👉 In this article, we’ll explore the essence of sustainability reporting, the benefits it delivers, and practical steps to get started.
What is sustainability reporting?
“ Sustainability reporting, also referred to as non-financial reporting, involves disclosing information on environmental, social, and governance (ESG) performance alongside traditional financial metrics. This dual focus helps companies align with evolving regulatory demands and stakeholder expectations. ”
What are ESG goals?
Environmental, Social, and Governance (ESG) goals are strategic objectives that businesses set to effectively manage their impact on society and the environment. These goals encompass three key categories:
- Environmental - This category focuses on a company's ecological performance and its efforts to minimize its environmental impact.
- Social - The social aspect encompasses relationship management with employees, suppliers, customers, and communities affected by the company's operations.
- Governance - Governance goals revolve around analyzing the company's leadership, internal controls, audits, and overall corporate governance practices.
Importantly, there isn't a single prescribed method for conducting sustainability reporting; multiple frameworks exist to cater to different organizational needs. Frameworks such as GRI, TCFD, and CSRD provide guidance on how companies can effectively report sustainability-related information, ensuring consistency and comparability.
Contrary to the perceived rigidity associated with reporting, sustainability reporting offers flexibility in its implementation. However, companies should look to ensure that their report:
- Extends its reach to stakeholders beyond those directly targeted by the integrated report, including financial capital providers.
- Provides details about the company's competitive positioning in the evolving sustainability landscape.
- Offers a comprehensive overview of the company's initiatives relating to social, human, and environmental capital.
By addressing these elements in the sustainability report, companies can effectively communicate their commitment to ESG goals, engage stakeholders, and demonstrate their commitment to creating positive social and environmental impacts.
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Sustainability reporting frameworks
When it comes to sustainability reporting, there are various approaches that companies can consider. These include:
- Established sustainability reporting frameworks - Companies can utilize widely recognized sustainability reporting frameworks such as the Global Reporting Initiative (GRI) or the Carbon Disclosure Project (CDP). These frameworks provide structured guidelines to assess and disclose environmental, social, and governance (ESG) information. 👉 More on these frameworks later.
- Integrating sustainability into overall performance disclosures - Another option is to incorporate sustainability into the company's overall performance disclosures. This involves aligning sustainability metrics and goals with financial reporting and other key performance indicators to provide a comprehensive view of the company's performance.
- International Integrated Reporting Committee (IIRC) Guidelines - The IIRC has developed guidelines for integrated reporting, emphasizing the importance of linking financial and non-financial information. Organizations can adopt these guidelines to present a more integrated and balanced view of their performance, including sustainability aspects.
- The Dow Jones Sustainability Index (DJSI) - The DJSI is a prominent benchmark that assesses the sustainability performance of companies across various industries. By meeting the criteria set by the DJSI, companies can enhance their credibility and reputation in terms of sustainability.
👉 It's important to note that companies do not need to report using all of these standards and benchmarks. Each organization should carefully consider its actions, performance, and stakeholder expectations to determine which reporting model is most relevant and aligned with its goals.
By selecting the appropriate reporting framework or guideline, companies can effectively communicate their sustainability efforts, showcase progress, and demonstrate their commitment to responsible business practices.
Why is sustainability reporting important for a company?
Sustainability reporting creates numerous advantages, including the enhancement of risk management strategies, the optimization of costs and savings, the streamlining of decision-making processes, and the bolstering of corporate trustworthiness and reputation. These effects resonate with both customers and investors alike.
Given that social and environmental risks and opportunities have a strong potential to impact the long-term security and success of a company, it's essential that companies dedicate both time and resources towards sustainable solutions.
Sustainability reporting serves as a strategic cornerstone, enabling organizations to effectively confront and counter these emerging challenges. Viewed through this lens, sustainability reporting transitions from being a simple corporate responsibility tool to a key element in solidifying a company's strategic resilience over the long term.
Sustainability reporting provides an insightful narrative of a company's impact across economic, environmental, and social aspects. Armed with this information, companies will find themselves better equipped to measure, understand, and assess their operational footprint. This understanding supports the formulation of innovative goals and helps companies to implement changes, positioning them more favorably for seamless integration into an increasingly sustainability-centered global economy.
Let's take a closer look at the advantages of sustainability reporting and why your business could benefit from it:
Sustainability reporting advantages
Enhanced risk management
Sustainability is intrinsically linked to resilience. And in today's world, where climate change deeply impacts business, fostering resilience is key. This calls for a comprehensive review of risk management strategies: understanding potential risks and developing preventive measures to safeguard business interests.
Herein lies the value of sustainability reporting. It's not just a tool for present risk management; it's a guide to shape a company's future operational context, foresee changes, and effectively plan for them.
👉 According to the Carbon Disclosure Project (CDP), 52% of companies disclosed exposure to climate-related risks with the potential for significant financial or strategic impact, highlighting the necessity of proactive risk management. At the same time, 63% of companies identified climate-related opportunities that could create substantial value, showing that sustainability reporting not only mitigates risks but also unlocks new growth possibilities.
Optimised costs and savings
Sustainability reporting is also a catalyst for transforming your business model and enhancing operational efficiencies. By prioritizing sustainability, companies can shine a light on existing inefficiencies, paving the way for impactful optimizations.
💡 A well-thought-out sustainability report can help a company re-calibrate its focus on its core mission, enabling a more streamlined approach to achieve objectives and minimize resource dispersion.
“ Today's companies are harnessing sustainability to drive value by trimming operational expenses, refining their value chains, innovating sustainable products or services, reducing their carbon footprint, and promoting efficient natural resource management. Not to mention, sustainability efforts can also enhance social aspects such as employee retention and motivation, fostering a more productive work environment and reducing expenditures linked to employee turnover. ”
The cherry on top? A boost in your financial performance is also attractive to investors. With the increasing popularity of sustainable finance, your company's commitment to sustainability could make it a top choice for investors seeking to support ethical, forward-thinking projects.
👉 A study by McKinsey & Company highlights that companies integrating cost and carbon reductions can achieve up to a 40% reduction in emissions and a 15% improvement in financial performance. This demonstrates that sustainability initiatives not only mitigate environmental risks but also enhance financial resilience.
Supports decision-making
Leadership roles inherently involve navigating complex decisions, especially in the face of an uncertain and unpredictable future. This is why sustainability reporting serves as an indispensable tool in the decision-making arsenal.
While a sustainability report may not foresee the future, it does provide invaluable insights into potential environmental and societal shifts. Engaging in sustainability reporting helps preempt the hurdles that global warming and other such issues may present, helping a company to be more resilient.
Consider the landscape of evolving legal frameworks. Legislation is becoming increasingly stringent towards companies that overlook sustainable development. Given the significant societal challenges we currently face, it's reasonable to expect a continued tightening of these regulations and penalties. Companies that conduct effective sustainability reporting will be much better prepared to deal with these increasing regulatory hurdles.
👉 Undertaking a sustainability report is highly beneficial in business decision-making. It's an essential instrument that could potentially safeguard companies from costly mistakes.
Increased stakeholder engagement
Society has undergone significant shifts recently, including a growing demand for transparency from brands and businesses. This isn't just a passing trend - it's a necessity for those wishing to retain their customers and employees.
Consumers and potential business partners are more discerning than ever, placing great importance on the alignment of their values with the commitments of the brands they support. It's become clear that businesses need to take a stand on ethical, environmental, and social issues.
That's where sustainability reporting comes in. It provides a tangible way to meet this call for transparency. It's no longer sufficient to merely claim sustainability or reliability - companies need to demonstrate it. Their customers, employees, and stakeholders want assurance that the companies they support are not just trustworthy in words, but also in terms of their actions.
👉 According to the Edelman Trust Barometer, 88% of institutional investors believe companies that prioritize ESG initiatives are better long-term investments, highlighting the growing demand for transparency and ethical commitments.
| Benefit | Summary |
|---|---|
| Improves efficiency and reduces waste | Implementing sustainable procurement practices streamlines operations and cuts down on resource wastage. |
| Brand differentiation | Adopting sustainable procurement can set a company apart in the market, enhancing its reputation and appeal. |
| New market opportunities | Sustainable procurement opens doors to new markets and customer bases that prioritise environmental responsibility. |
| Cost reduction | Long-term savings are realised through efficient resource use and sustainable practices, reducing overall costs. |
| Minimises risk | Engaging in sustainable procurement helps mitigate risks associated with environmental and social issues. |
| Future proof | Companies that invest in sustainability are better prepared for future regulatory changes and market shifts. |
| Legal compliance | Sustainable procurement ensures adherence to current and future regulations, avoiding legal repercussions. |
How to select a sustainability reporting framework
Whether you're the Chief Sustainability Officer at your company, or a manager responsible for sustainability initiatives, choosing the right framework for your sustainability report is crucial.
As highlighted earlier in this article, the choice of model is less important than the intent and execution. Remember, a sustainability disclosure (an integral component of sustainability reporting) aims to offer a holistic perspective of a company's performance. Often, it's woven into a comprehensive report that showcases value creation across various aspects such as finance, manufacturing, human resources, etc.
In today's corporate landscape, over 90 percent of the world's largest companies report their sustainability impacts. A significant majority of these organizations opt for the GRI Standards, renowned for their comprehensiveness and flexibility, catering to businesses of all sizes.
However, alternative frameworks are also available. Some companies align their reporting with guidelines set by the International Integrated Reporting Committee (IIRC), while others adhere to the standards of the Sustainability Accounting Standards Board (SASB).
So, how should you determine the best choice for your company? Ultimately, the decision hinges on a company's specific needs and objectives. Let's delve into the nuances of the main sustainability standards to guide your choice:
What are the most common sustainability reporting frameworks?
GRI
The Global Reporting Initiative (GRI) Standards, renowned for their comprehensive approach, provide direction on economic, environmental reporting, and social aspects, appealing to a wide array of stakeholders, including investors. This framework, followed by thousands of organizations globally and forming the standard for the United Nations Global Compact (UNGC), is often regarded as the most well-known and extensively used.
Key Features:
- Comprehensive coverage of a broad range of sustainability issues, including human rights, climate change, and governance.
- Emphasis on stakeholder engagement and transparency.
- Regular updates to reflect the latest sustainability challenges and opportunities.
💡 According to GRI, over 90% of the world's largest 250 corporations report on their sustainability performance using GRI Standards.
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IIRC
The International Integrated Reporting Council's Integrated Reporting Framework (IRF) encourages companies to publish 'concise' integrated reports. These reports combine traditional annual financial information with ESG (Environmental, Social, and Governance) data, detailing value creation over short, medium, and long-term timeframes.
Key Features:
- Integration of ESG information with financial data.
- A concise representation of a company's strategy, governance, performance, and prospects.
- Focus on long-term value creation and sustainable business practices.
💡 The IIRC's Integrated Reporting Framework is used by leading global companies to communicate how they create value in the short, medium, and long term.
Sustainability Accounting Standards Board (SASB)
The US-based Sustainability Accounting Standards Board (SASB) provides a unique perspective with its standards, emphasizing an introspective look at how sustainability concerns impact a company's financial performance. One of SASB's defining features is the creation of over 70 industry-specific standards.
Key Features:
- Industry-specific standards tailored to identify material sustainability issues.
- Focus on the financial impacts of sustainability concerns.
- Useful for benchmarking and providing a standardized reporting framework.
💡 SASB standards are increasingly adopted by US companies to provide clear, comparable, and consistent sustainability information that meets investor needs.
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TCFD (now incorporated into IFRS S1 and S2)
The Task Force on Climate-related Financial Disclosures (TCFD) provides recommendations for disclosing clear, comparable, and consistent information about the risks and opportunities presented by climate change. The TCFD framework has been widely endorsed by organizations and regulators globally.
Key Features:
- Focus on the financial implications of climate-related risks and opportunities.
- Encourages companies to disclose governance, strategy, risk management, and metrics and targets related to climate change.
- Aligns with investor and regulatory demands for climate-related financial information.
💡 💡 As of 2023, the TCFD framework has been incorporated into the new IFRS S2 Climate-related Disclosures standard.
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CDP: Carbon Disclosure Project
The Carbon Disclosure Project (CDP) is a global disclosure system that enables companies, cities, states, and regions to measure and manage their environmental impacts. CDP focuses primarily on climate change, water security, and deforestation.
Key Features:
- Encourages the disclosure of greenhouse gas emissions and climate-related risks.
- Provides a scoring system to evaluate companies' progress in environmental stewardship.
- Aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
💡 CDP is backed by over 590 investors with assets of over $110 trillion, highlighting the significant investor demand for environmental transparency.
Global Compact Self-Assessment Tool
The United Nations Global Compact provides a self-assessment tool for companies to evaluate their sustainability performance against the Ten Principles of the UN Global Compact in areas of human rights, labor, environment, and anti-corruption.
Key Features:
- Aligns with the Sustainable Development Goals (SDGs).
- Provides a structured approach to assess and improve sustainability practices.
- Enhances transparency and accountability.
💡 The UN Global Compact is the world's largest corporate sustainability initiative, with over 12,000 participants in 170 countries.
Carbon Trust Standard
The Carbon Trust Standard certifies organizations that measure, manage, and reduce their carbon emissions and improve their resource management.
Key Features:
- Focuses on carbon, water, and waste management.
- Provides independent verification of sustainability achievements.
- Encourages continuous improvement in environmental performance.
💡 The Carbon Trust is a globally recognized organization that works with businesses, governments, and organizations to accelerate the transition to a sustainable, low-carbon economy.
ISO 26000
ISO 26000 is an international standard providing guidelines for social responsibility. While not a certification, it offers guidance on how businesses and organizations can operate in a socially responsible way.
Key Features:
- Provides guidance on concepts, terms, and definitions related to social responsibility.
- Helps organizations integrate social responsibility into their values and practices.
- Covers a wide range of social responsibility topics including human rights, labor practices, the environment, and fair operating practices.
💡 ISO 26000 is developed by the International Organization for Standardization (ISO), a globally recognized body. The standard is used by companies in over 88 countries around the world.
EU Corporate Sustainability Reporting Directive (CSRD)
The EU's Corporate Sustainability Reporting Directive (CSRD) aims to standardize and enhance the quality of sustainability information disclosed by companies within the EU. This directive replaces the Non-Financial Reporting Directive (NFRD) and significantly expands the scope of reporting requirements.
Key Features:
- Mandatory sustainability reporting for large companies and listed SMEs.
- Requirements to report on environmental, social, and governance issues.
- Alignment with European Green Deal objectives and the Sustainable Finance Disclosure Regulation.
- Ensures audited and comparable sustainability information across the EU.
💡 The CSRD is a critical component of the EU's efforts to direct financial flows towards sustainable investments and achieve the goals of the European Green Deal. Nearly 50,000 companies are required to report under the directive.
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SEC Climate Disclosure Rule
The US Securities and Exchange Commission (SEC) Climate Disclosure Rule is designed to enhance transparency for investors by requiring publicly listed companies in the US to disclose material climate-related risks and greenhouse gas (GHG) emissions. This rule aims to provide consistent and comparable climate-related financial information to support informed decision-making.
Key Features:
- Focus on financial materiality and the impacts of climate risks on a company's operations.
- Mandatory disclosure of Scope 1, Scope 2, and, in certain cases, Scope 3 GHG emissions.
- Requirements to disclose governance, risk management, and the financial impacts of climate-related risks and opportunities.
💡 While still under review due to legal challenges, the SEC Climate Disclosure Rule represents a significant step towards standardizing climate-related financial reporting in the US.
| Framework | Focus Area | Key Features | Adoption Highlights |
|---|---|---|---|
| GRI Standards | Economic, environmental, and social issues | Comprehensive coverage of sustainability topics; emphasis on stakeholder engagement and transparency. | Over 90% of the largest 250 corporations globally report using GRI standards. |
| IIRC Integrated Reporting (IR) | Integrated ESG and financial data | Concise reports integrating ESG and financial data; focus on long-term value creation. | Widely used by global companies to show value creation over short, medium, and long-term timeframes. |
| SASB Standards | Financial materiality of ESG issues | Industry-specific standards; focuses on the financial impacts of sustainability. | Popular among US companies; covers over 70 industry-specific standards. |
| TCFD / IFRS S1 and S2 | Climate-related risks and opportunities |
|
Over 5,000 organizations globally support TCFD; IFRS S1 and S2 adopted by multiple jurisdictions. |
| CDP (Carbon Disclosure Project) | Environmental impacts (climate, water, etc.) | Greenhouse gas emissions and climate risk disclosures; scoring system for progress. | Backed by over 590 investors managing $110 trillion in assets. |
| UN Global Compact | Alignment with UN SDGs | Self-assessment tool for sustainability aligned with Ten Principles of the UN Global Compact. | World’s largest corporate sustainability initiative with 12,000 participants in 170 countries. |
| Carbon Trust Standard | Carbon, water, and waste management | Independent verification of carbon and resource management achievements. | Recognized globally for accelerating the transition to a low-carbon economy. |
| ISO 26000 | Social responsibility | Guidance on integrating social responsibility into values and practices. | Used by companies in 88 countries globally as a social responsibility guideline. |
| EU CSRD | Mandatory ESG disclosures | Covers environmental, social, and governance issues; ensures audited and comparable information. | Mandated for nearly 50,000 EU companies as part of the European Green Deal. |
| SEC Climate Disclosure Rule | Climate-related financial risks in the U.S. | Focus on Scope 1, Scope 2, and some Scope 3 GHG emissions; governance and financial risk disclosures. | Under review, but aims to standardize climate reporting for U.S. publicly listed companies. |
Is it possible to use multiple sustainability standards?
You might be asking: Can I create reports using multiple standards?
Indeed, you can. Ideally, one might produce a comprehensive sustainability report using the GRI Standards for a broad audience, an integrated report following the IIRC guidelines for investors, and a detailed, industry-specific report using the SASB Standards. Additionally, aligning with TCFD recommendations can address climate-related financial disclosures, and using CDP can enhance environmental transparency. For companies operating in the EU, compliance with the CSRD is essential.
Remember, even starting with one of these frameworks and shifting your company towards a sustainability-oriented approach is already a significant stride forward.
Sustainability reporting in the United States
In the United States, sustainability reporting is becoming increasingly important, driven by a combination of regulatory requirements, investor expectations, and market trends. Here’s a look at what companies operating in the US need to know about sustainability reporting:
Regulatory landscape
While the US does not yet have a comprehensive federal mandate for sustainability reporting akin to the European Union's Corporate Sustainability Reporting Directive (CSRD), several regulations and guidelines encourage or require disclosure of certain sustainability-related information:
- Securities and Exchange Commission (SEC): The SEC has proposed new rules to enhance and standardize climate-related disclosures for investors. These proposed rules would require publicly traded companies to disclose information about their greenhouse gas emissions, climate-related risks, and governance of climate-related risks.
- Environmental Protection Agency (EPA): The EPA provides guidelines for reporting on various environmental factors, including greenhouse gas emissions and pollution levels, which many companies include in their sustainability reports.
- State-Level Initiatives: Some states, like California, have enacted more stringent environmental regulations that indirectly affect corporate sustainability reporting. Companies operating in these states must adhere to state-specific requirements that often exceed federal regulations.
Investor expectations
US investors are increasingly factoring sustainability into their decision-making processes. Asset managers and institutional investors are pushing for greater transparency and standardized reporting on ESG factors. Key initiatives include:
- Principles for Responsible Investment (PRI): Many US-based investors are signatories to the PRI, which encourages the incorporation of ESG issues into investment practice.
- Sustainable Accounting Standards Board (SASB): SASB provides industry-specific standards that guide companies on what sustainability information is most material to investors. Adopting SASB standards can help companies meet investor expectations and improve their attractiveness to sustainability-focused investors.
Market trends
The US market is witnessing a growing demand for sustainable business practices. Consumers, particularly younger demographics, are more likely to support companies with strong sustainability credentials. This trend is pushing companies to adopt and report on sustainable practices to maintain market competitiveness.
Voluntary frameworks and standards
Many US companies voluntarily adopt international sustainability reporting frameworks to align with global best practices and meet stakeholder demands. The most commonly adopted frameworks in the US include:
- Global Reporting Initiative (GRI): GRI standards are widely used by US companies to report on a broad range of ESG issues.
- Task Force on Climate-related Financial Disclosures (TCFD): The TCFD framework is gaining traction in the US for its focus on climate-related financial risks and opportunities.
- Carbon Disclosure Project (CDP): Many US companies report to CDP to disclose their environmental impacts and management strategies.
Steps to implement sustainability reporting
Sustainability reporting can seem daunting, but breaking it down into clear, actionable steps ensures a smooth and effective process. Here’s a practical guide to get started:
Step 1: Identify material topics
Start by determining which sustainability topics are most relevant to your organization. This can be done through stakeholder surveys, industry benchmarking, or internal assessments. Prioritise areas like climate change, resource management, or employee well-being based on their impact on your business and stakeholders.
Step 2: Select a framework
Choose a reporting framework that aligns with your goals. For comprehensive ESG reporting, frameworks like GRI are ideal. If your focus is on climate-related risks, consider IFRS S2. The framework you select will shape your reporting process and ensure consistency with global standards.
Step 3: Collect data
Gather quantitative and qualitative data to inform your report. Use tools like emissions tracking software, energy monitoring systems, or supply chain analytics to streamline the data collection process. Make sure to validate your data to maintain accuracy and credibility.
Step 4: Draft the report
Structure your report around the chosen framework, focusing on transparency and comparability. Highlight your governance practices, risk management strategies, and key sustainability metrics. Include case studies or real-world examples to demonstrate progress and impact.
Step 5: Engage stakeholders
Publish your report on your company website, share it with investors, and distribute it to key stakeholders. Actively seek feedback to refine future reports and foster trust among your audience.
Leveraging technology for reporting
Technology plays a critical role in modern sustainability reporting. Data analytics tools, AI platforms, and cloud-based software can simplify complex processes like tracking emissions, analyzing resource usage, and generating insights. By integrating these tools, companies can enhance accuracy, save time, and improve the overall quality of their reports. Read on to learn how Greenly's carbon management solutions can help your company successfully implement sustainability reporting.
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What about Greenly?
Greenly is a carbon management platform designed to help businesses take control of their sustainability efforts. From tracking emissions to creating tailored strategies for reduction, Greenly offers an array of services to support companies on their sustainability journey.
Services offered by Greenly:
- Carbon footprint assessments: Measure your company’s Scope 1, 2, and 3 emissions with precision.
- Life Cycle Assessments (LCA): Evaluate the environmental impact of your products and services.
- Sustainable procurement strategies: Identify and collaborate with eco-conscious suppliers.
- Emission tracking software: Monitor and analyze emissions across all operations in real time.
- Custom decarbonization pathways: Develop actionable strategies to meet science-based targets.
Greenly’s user-friendly platform helps you navigate the complexities of carbon management, enabling businesses of all sizes to meet their sustainability goals. Interested in learning how Greenly can support your business? Click here to find out more.
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