As the global capital market evolves, investors are expecting more sophisticated disclosure. Traditionally, reporting has been mainly focused on financial information. More recently, institutional investors are increasingly paying attention to material nonfinancial information to assess long-term value creation. According to a 2022 E&Y survey, 99% of investors utilize companies’ Environmental Social and Governance (ESG) disclosures to make investment decisions. It is important to note, however, that investors consider that the quality of corporate sustainability reporting still does not meet their requirements and expectations, particularly in regards to climate risk reporting. The same survey found that more than half of them are not conducting climate change scenario analysis and disclosing the results.[1]
As a consequence of the above, investors are increasingly interested (and are expecting) further standardization in companies’ sustainability disclosures. This has resulted in the emergence of new guidelines aimed at systematizing the reporting of non-financial information.[2]
Sustainability Reporting
Sustainability reporting contributes to better long-term strategic management, given that identifying risks and opportunities improves how they are managed.[3] From there stems the importance of communicating, in a transparent and accurate manner, not only the sustainability performance, but also how the organization manages sustainability issues.
Transparent sustainability reporting can result in a competitive advantage, enhancing the company’s reputation, increasing employee retention, and enabling stakeholders to evaluate the organization’s activities with existing sustainability regulations and standards.[4]
Pathway to Sustainability Reporting
As sustainability reporting has become more mainstream, various guidelines have emerged to standardize how companies present this information. The first attempt to systematize this was in 1997 with the creation of the Global Reporting Initiative (GRI), an independent organization that provides a common language for companies to report on their impacts. Since then, market players such as regulators, stock exchanges, authorities, NGO’s, working groups, and a variety of other entities have developed standards on sustainability disclosure. As an example, currently, around 71 stock exchanges worldwide have guidelines on sustainability disclosure, and there are mandatory rules in 27 markets, 16 of which are in the emerging markets.[5]
A recent trend in sustainability disclosure has been the harmonization and consolidation of a variety of standards and recommendations (see Figure 1).
Figure 1. Consolidation of Sustainability Disclosure
Source: IFC 2023
The Integrated Reporting Framework[6] has consolidated SASB (Sustainability Accounting Standards Board Standards)[7] and TCFD (the Task Force on Climate-related Financial Disclosures Recommendations)[8] into the International Sustainability Standards Board (ISSB), an independent standard-setting body which operates under the oversight of the IFRS Foundation. The objective of this consolidation is to develop a comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. For a better understanding of the efforts made in the consolidation work,
Regulations and Frameworks on Climate Disclosure
One of the main topics in sustainability reporting that has been in the forefront of discussion are requirements related to climate disclosure. In the US and the EU, for example, regulations have been established for companies to report on climate risk:
- In March 2024, the Securities and Exchange Commission (SEC) adopted rules to standardize climate-related disclosures by public companies in the United States.[9]
- The European Sustainability Reporting Standards (ESRS) were launched on July 31, 2023 and are effective as of January 2024 as well. They are a set of 12 standards under which companies subject to the Corporate Sustainability Reporting Directive (CSRD) have to report.[10]
The push for climate disclosure has also been seen in the voluntary frameworks, for example:
- IFRS S1 provides a set of disclosure requirements about the sustainability-related risks and opportunities and IFRS S2, sets out climate-related disclosures.[11]
The following table provides a comparison of these Frameworks:[12]
Table 1. Comparison of Climate Disclosure Frameworks
Challenges in Sustainability Reporting
Given the diversity of standards that have emerged, there are various challenges that market players face.
- Interoperability: differences between reporting standards makes the alignment between standards difficult. Although there has been a move towards harmonization, given the importance of contextualizing standards to regions/jurisdictions, some of these differences are unavoidable.
- Comparability of sustainability reporting information: the spectrum of sustainability issues is very broad, so various complications regarding the selection of information and the manner in which it is to be reported can emerge. Additionally, an information gap due to national regulations applicable to specific jurisdictions may arise. The difficulty in making information comparable increases even more if the institutions or entities operate on a cross-border scale.
- Identification and measurement of sustainability indicators: these challenges go from the identification of relevant information for reporting, to the measurement of non-financial impacts using appropriate methodologies to the manner of presenting information. It is important to establish indicators and evaluation mechanisms that facilitate the analysis of progress over time.
- Integration of sustainability in entities’ strategy: it is necessary for sustainability to be an integral part of the reporting company’s strategy and culture, so capacity building sessions and awareness-raising may be necessary to achieve more favorable results.
Despite these challenges, the purpose of all sustainability disclosure frameworks is to provide information to investors for more informed decision-making, so identifying areas of convergence is of vital importance, especially for companies that wish to apply multiple standards concurrently.
Case Study: Sustainability Reporting in Mexico
Mexico is an example of a jurisdiction that has issued their own sustainability standards based on international references. During the first quarter of 2023, the Mexican Council for Financial Information Standards (CINIF in spanish) published a plan for the development of Sustainability Information Standards (NIS in spanish), that will constitute the first Mexican regulatory set for reporting on sustainability issues.
The regulation, which is still in the development phase,[13] is initially voluntary, with the aim of eventually becoming mandatory. Publicly listed companies on Mexican stock exchanges will adopt the IFRS S1 and IFRS S2 standards, while those unlisted companies (private enterprises) will adopt the NIS, which are expected to come into effect in 2025. NIS 1 is developing around the General Standards for Sustainability Information Disclosure and NIS 2 about Disclosure of Basic Sustainability Indicators.[14]
In addition, several reforms to Mexican regulations regarding sustainability have been initiated. In December 2023, an amendment to the Securities Market Law (Ley del Mercado de Valores) granted the Ministry of Finance and Public Credit (SHCP) the authority to establish provisions regarding sustainable development, as well as to strengthen gender equity[15].
The need not only to have sustainability information reporting standards but also for that information to be systematized and easily comparable across different jurisdictions is clear and evident. Sustainability has moved beyond its secondary role to become a fundamental component of business operations.
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Brenda Aguilar is an analyst at HPL, graduated with honors from the Law School of the Universidad Nacional Autónoma de Mexico (UNAM) and graduated with a Bachelor’s Degree in Financial Management at the Instituto Tecnológico Autónomo de Mexico (ITAM). She has experience working in the legal public sector in Mexico and has developed expertise in accounting, tax and financial issues applicable to domestic and foreign suppliers. To date, Brenda has supported some consultancy projects with clients in Eastern Europe, Latin America and the Caribbean.
Abbreviations
| CINIF | Mexican Council for Financial Information StandardsConsejo de Normas de Información Financiera |
| CSRD | Corporate Sustainability Reporting Directive |
| EFRAG | European Financial Reporting Advisory Group |
| ESG | Environmental, Social, and Governance |
| ESRS | European Sustainability Reporting Standards |
| EU | European Union |
| GRI | Global Reporting Initiative |
| IFC | International Finance Corporation |
| IFRS | International Financial Reporting Standards Foundation |
| ISSB | International Sustainability Standards Board |
| NIS | Sustainability Information StandardsNormas de Información de Sostenibilidad |
| SASB | Sustainability Accounting Standards Board |
| SEC | Securities and Exchange Commission |
| SHCP | Ministry of Finance and Public CreditSecretaría de Hacienda y Crédito Público |
| TCFD | Task Force on Climate-related Financial Disclosures |
References
[1] EY (2022). How can corporate reporting bridge the ESG trust gap? Available here.
[2] BID Invest (2020). Los factores ASG: ¿Para qué sirven en los mercados emergentes?. Available here.
[3] Deloitte (2020). Sustainability Reporting Strategy Creating impact through transparency. Available here.
[4] Ecovadis (s.f.). What is Sustainability Reporting?. Available here.
[5] IFC (2023). Understanding the Global Reporting Frameworks. Available here.
[6] Integrated Reporting (2021). Integrated Reporting Framework. Available here.
[7] SASB (2022). SASB Standards. Available here.
[8] TCFD (2023). TCFD Recommendations. Available here.
[9] SEC (2024). The Enhancement and Standardization of Climate-Related Disclosures: Final Rules. Available here.
[10] CSRD (2022). Directiva (UE) 2022/2464. Available here.
[11] IFRS (2024). IFRS Sustainability Standards Navigator. Available here.
[12] Based on IFC (2023). Understanding the Global Reporting Frameworks. Available here and Carlin (2024). LinkedIn post available here.
[13] CINIF (2023). Auscultación de las NIS 1 y NIS 2. Available here.
[14] El Financiero (2023). ESG en México: también se desarrollarán normas de sostenibilidad en el país. Available here.
[15] DOF (2023). Decreto por el que se reforman, adicionan y derogan diversas disposiciones de la Ley del Mercado de Valores y de la Ley de Fondos de Inversión. Available here.