How Companies Will Have to Report on ESG Globally: Explained

The International Sustainability Standards Board was supposed to create a single global standard for ESG reporting, cutting through an alphabet soup of voluntary rules. Instead, different countries and regions—including the EU—are creating their own, separate, reporting rules on environmental, social and corporate governance reporting. Here’s a roadmap to help comply with the different regulatory paths that are emerging.

1. What are the compulsory ESG reporting regimes?

So far there are only two—the ISSB’s and the EU’s—both starting up next year. Others, however—including Australia, Japan and the US—are writing their own national standards. Just a handful, such as the UK, intend to rely solely on the ISSB’s new rules. Although ISSB standards become effective in fiscal 2024, countries must approve them individually, meaning some places might not require ISSB reporting until 2025. EU sustainability reporting is being introduced in stages. Listed companies with more than 500 employees must use the European rules starting in 2024, large non-listed companies from 2025, and listed smaller companies—using a simplified reporting structure—from 2026. Foreign companies with significant European revenues must comply with the new rules.

2. How do they differ?

ISSB rules are aimed narrowly at financial investors. Companies using them must report how ESG issues impact their value. The board in June published its first two reporting standards, covering climate and general sustainability reporting. It plans to eventually write reporting rules for all ESG topics, and it is currently seeking input about which areas to tackle next. The EU plans are far more ambitious, aimed from the outset at a broader audience of stakeholders—including employees, suppliers and the general public, as well as investors. It has issued detailed rules for reporting environmental, social, human rights, anti-corruption measures, and the diversity of corporate boards.

3. Why are there different approaches?

The ISSB was set up in 2021 in response to demands from investors frustrated by the very different ways that companies were reporting things like climate risks. It received heavyweight backing from bodies including the G-20 group of nations, which endorsed better corporate reporting as an important part of the struggle to control global warming. The ISSB calls its rules a “global baseline” for ESG reporting, ensuring that companies globally report the same things to investors in the same way—an approach that mirrors the role of its sister body, the International Accounting Standards Board, in financial reporting. The EU, in contrast, wants companies to acknowledge the damage they cause to the world, as well as to the risks they face from problems such as climate change. It’s a much broader approach which only applies to Europe, although the EU hopes other countries will follow its lead.

4. So there will be separate EU and global reports?

Companies that adhere to EU reporting should also be meeting ISSB rules, with the two groups saying their standards are broadly compatible. This is what the Europeans call “dual materiality,” as the rules aim at both financial investors and a wider audience. ISSB reports alone will not meet the much broader European requirements, however. Companies based in countries like the UK, using ISSB reporting rules but also doing business in the EU, might therefore have to prepare separate reports to satisfy European rules. The US and several other countries are meanwhile working on their own national reporting rules. This creates the risk that companies will find themselves forced to write separate reports for several jurisdictions at once.

5. What other challenges do companies face?

There is a concern that the old alphabet soup of voluntary reporting standards will be replaced with a stew of stand-alone national standards, creating confusion and unwelcome paperwork for international companies. In practice, however, most national standards will be based on two sets of voluntary rules: the Global Reporting Initiative, whose impact reporting framework underpins the EU’s rules; and those of the Sustainability Accounting Standards Board, a body that is being subsumed into the ISSB along with its financial reporting rules. Companies using these should in theory be able to tweak their existing reporting to meet national requirements. GRI is already used by around 10,000 companies worldwide, and it says its users should be well-prepared for EU reporting. The ISSB says that companies should use SASB standards until it extends coverage to new areas. What is still lacking is a template of how to combine ISSB and SASB reporting, making it tricky for companies to prepare for national reporting rules that are likely to combine the two.