Global sustainability reporting: we’re still getting there

Global alignment of sustainability reporting standards will be critical to meet net-zero targets. EPRA’s Lourdes Calderon Ruiz assesses where we are at.

Since the start of the sustainability reporting movement more than half a century ago, countries and organisations have been working to address sustainability issues. With the adoption of the Paris Agreement in 2015, a process began to move from market-driven sustainability reporting to mandatory regulatory requirements aligned with global climate goals. Since then, more than 130 countries have now set or are considering a target of reducing emissions to net zero by 2050 through legislation.

As sustainable reporting regulations have grown, interoperability and global alignment between regions have become increasingly important. Indeed, there has been strong collaboration and a high degree of crossover between the Global Reporting Initiative (GRI) and the European Financial Reporting and Advisory Group (EFRAG) in defining the European Sustainability Reporting Standards (ESRS) to maximise their use across Europe.

International Standards: GRI and ISSB

From an international perspective, on the one hand we have the GRI standards,
first launched in 2000 and which are the sustainability reporting standards used most widely across the world. They enable organisations to understand and report on their impacts on the economy, environment, and people in a comparable way.

The GRI standards assess organisations according to their impact materiality – their real-world impact for a wide range of stakeholders. Without being legally binding, they are currently used by 78% of the world’s largest 250 companies, and this adoption level suggests there is now common ESG reporting practice globally.

On the other hand, we have the International Sustainability Standards Board (ISSB), established in 2021 by the IFRS Foundation to set a global baseline that different jurisdictions can incorporate into their own rules. The ISSB’s first two sets of sustainability reporting standards will be effective from January 2024 and are focused on financial materiality from an investor point of view.

This means that we have two international standards, each with different scopes, audiences and materiality approaches, making it challenging to navigate through the jungle of sustainability standards. In response, the two organisations signed a Memorandum of Understanding in March 2022 to cooperate in the development of their sustainability standards. However, after a year, it is clear that the two parties are more focused on respecting each other rather than cooperating for creating a common set of standards.

However, the GRI standards have evolved and now share a much closer resemblance to the ESRS, being wider in scope and more varied in the concepts and scopes they both incorporate.

European Regulations: CSRD and ESRS

From a European perspective, the Corporate Sustainability Reporting Directive (CSRD) is now the main priority for almost all businesses. The CSRD came into force in January 2023, covering issues on ESG affecting private and public companies both in Europe and outside it.

CSRD also introduces the concept of double materiality for the first time in a regulation. This means that companies should report the impacts of their activities and business relationships on the economy, environment and people (impact materiality) as well as the sustainability impacts that can influence the enterprise value of the companies (financial materiality).

The standards through which the CSRD will be implemented have been designated as the ESRS and are being developed gradually by EFRAG, but not independently. Indeed, industry organisations, including EPRA, are participating in working groups on the development of sector-specific standards. This is in part to ensure that businesses will have a say in their development, and have the best chance of a thorough understanding of their obligations. EPRA, for instance, will be updating its sustainability Best Practice Recommendations (sBPR) as soon as the first set of ESRS is finalised, which is expected in summer 2023.

Working together

In July 2021, both EFRAG and the GRI signed a cooperation agreement to work together and develop the ESRS, in an attempt to be as aligned as possible. As a result, and from what we’ve seen so far, these two standards are very much aligned in terms of key principles and scope.

In terms of the materiality scope, even though strictly speaking the GRI standards are focused on impact materiality, in practice, the impacts of an organisation’s activities and business relationships on the economy, environment and people can have negative and positive consequences for the organisation itself.

These consequences can be operational or reputational, and therefore, in most cases, financial. So understanding these impacts is a necessary first step in determining related financially material issues for the organisation. This is particularly relevant within listed real estate (LRE). As such, sustainability reporting is crucial for LRE companies’ financial and value creation reporting.

It is also important to consider how European businesses which are subject to ESRS, but also operate in other markets, will go about complying with the new standards. With the ISSB’s first set of standards coming into force in 2024, it is likely that these will act as a common baseline to which a majority of global companies will aim to adhere.

Provided that the ESRS do not diverge from these too far, we may end up with a simple situation where European businesses match global standards and also potentially higher benchmarks set in Europe.

Looking ahead

Over the past three years, some sustainability regulatory bodies have joined forces to work towards defining compatible and common standards. Despite progress, there is still a need for a single set of global standards that address both financial and impact materiality and meet the transparency needs of stakeholders across jurisdictions.

Existing frameworks, such as the GRI standards or EPRA’s sBPR, will continue to evolve, but a plurality of different reporting criteria will make the regulatory burden potentially heavier and more complex. Of course, these separate frameworks have their own strengths and advantages, but the priority has to be to work towards a common set of rules.

The scale of the missed opportunity for global collaboration is immense, as disjointed sustainability reporting standards also hinder the ability to address urgent global sustainability challenges effectively. It is crucial for regulatory bodies, industry leaders, and stakeholders to work together on a global scale, fostering communication and cooperation to establish a unified and effective sustainability reporting system that drives meaningful progress towards a more sustainable future.

Lourdes Calderón Ruiz is ESG manager at the European Public Real Estate Association