ESG Reporting and the Essence of SDPI for Authentic Sustainability

Table of Contents

This article is a continuation of the text posted last week.  

We published a couple of articles by my colleague Yannick Poullie last year on the CSRD and what it means for SMEs. I recommend that you read or revisit these now to understand better how this new law introduces requirements for ESG reporting within the EU that affect SMEs in the value chain regardless of whether they are subject to mandatory compliance. Additionally, ESG reporting has become increasingly important to investors and there is a growing recognition that ESG factors can have a significant impact on a company’s long-term financial performance.  

According to the Harvard Business Review investors are also increasingly using ESG data nowadays to make informed decisions about their investments. Some avoid companies with poor environmental, social, and governance (ESG) ratings, believing that these companies are more likely to experience financial difficulties. Others favour companies with strong ESG performance, believing that their commitment to sustainability and ethical practices is associated with better long-term financial returns. Some investors even integrate ESG data into their fundamental analysis of companies, while others use it as a basis for activism aimed at encouraging companies to improve their ESG practices. As a result, ESG reporting has been gaining momentum in the investment and finance landscape. 

Many frameworks or standards are already being used voluntarily by companies for their ESG reporting. This blog will explore what ESG frameworks and standards simply mean for SMEs. We will also explore some of the reasons why we recommend that SMEs adopt the UN’s Sustainable Development Performance Indicators (SDPIs) for authentic sustainability.  

What are ESG Reporting Frameworks and Standards?

It is often noted that there is some ambiguity surrounding terminology, particularly the use of the terms ‘framework’ and ‘standard’, in the context of ESG and sustainability reporting. Although we may consider them synonymous in practice, and note that usage may vary, ‘frameworks’ and ‘standards’ may be employed with nuanced distinctions. While these terms are often used interchangeably, both essentially providing companies with sets of principles, guidelines, and tools to facilitate the reporting of ESG metrics, it’s good to understand how they differ. 

ESG reporting frameworks provide broader perspectives and principles, addressing fundamental questions of ESG and sustainability. These frameworks guide companies on what to consider in terms of the actions they take and how to present their ESG performance. For example: 

  • Sustainable Development Goals (SDGs) developed by the United Nations, provide a comprehensive framework for sustainable development. Many companies align their sustainability efforts with specific SDGs and report on their contributions towards these global goals. The SDGs have been adopted bay all member countries of the UN as targets for 2030.
  • Science Based Targets Initiative (SBTi) is a partnership between the Carbon Disclosure Project (CDP), World Resources Institute (WRI), the World Wide Fund for Nature (WWF), and the United Nations Global Compact (UN Global Compact) affiliated with the We Mean Business Coalition. It provides frameworks for companies to define their path to reduce greenhouse gas emissions in line with limiting global warming to 1.5°C, in line with the Paris Agreement goals.  

ESG reporting standards, on the other hand, focus on the specific requirements and precise metrics for reporting on certain topics. By establishing detailed parameters, these standards streamline the reporting process, ensuring clarity and consistency in the assessment of ESG performance. Below are a few examples. 

  • The European Sustainability Reporting Standards (ESRS) is a set of standards designed to enhance the quality and comparability of sustainability reporting by the double materiality approach. These standards were developed by the European Financial Reporting Advisory Group (EFRAG) and adopted by the European Commission in July 2023. The ESRS provides the reporting methodology required to ensure a reporting company follows the EU’s Corporate Sustainability Reporting Directive (CSRD) legislation. As a result, the acronyms ESRS and CSRD are often used together or interchangeably, which can be confusing. Quite simply, the CSRD is the law, while the ESRS is the standard for complying with it. 
  • Global Reporting Initiative (GRI) is one of the most widely used frameworks globally and is developed by an independent, international organization. It provides guidelines for reporting on a range of sustainability indicators, covering economic, environmental, and social aspects. 
  • The Sustainable Development Performance Indicators (SDPIs) sets a standard to measure the sustainability performance of economic entities, whether for-profit, non-profit, or social enterprises. It is based on a set of ESG-related KPIs crafted by the United Nations Research Institute for Social Development (UNRISD) for the measurement of actions and impacts related to the Sustainable Development Goals (SDGs). These indicators, developed through extensive research and collaboration, provide the tools missing from other standards needed to assess sustainability performance in the context of regional resource availability and planetary boundaries. The indicators help organisations assess genuine impacts in socioeconomic, governance, and environmental areas framed against the concept of Triple Bottom Line (TBL) accounting: people, planet, and profit. It assesses performance against authentic sustainable development principles and highlights areas neglected by other standards. While it adopts a holistic approach, it also focuses on the essentials, thus requiring fewer data points to be reported than most other standards. Where other standards tend to simply require disclosure of data, the SDPI aims to help organisations set goals and take action by showing them how well or poorly they are performing relative to what’s needed and appropriate to their own specific context. 

We will now explore the fundamentals of SDPIs and their underlying principles for authentic sustainability reportingWe’ll shed more light on why SMEs might select this relatively new standard for their ESG and sustainability reporting.

What are the SDPIs, and why is it referred to as an approach for authentic sustainability reporting?

Despite significant advancements in sustainability measurement and disclosure over the past few decades, the effectiveness of sustainability reporting remains a subject of debate. Current frameworks and standards, methods and reporting approaches often fall short of providing a comprehensive and reliable assessment of an organization’s impact on socio-economic, environmental, and governance dimensions. Moreover, reporting overload and an excessive number of indicators are also problematic for businesses and companies to report on ESG and sustainability. 

 

The widely used GRI upholds as one of its four first-order Principles the concept of Sustainability Context, which it defines as “the performance of the organization in the context of the limits and demands placed on environmental or social resources at the sectoral, local, regional, or global level.” However, the UNRISD synthesis report highlights that the GRI reporting standard fails to provide specific guidance on how to apply it in practice. Consequently, sustainability reports tend to overlook the critical Sustainability Context principle entirely, persisting in this trend to date. 

 

In light of these challenges, the SDPIs have emerged as a result of extensive collaborative research project spanning from 2018 -2022 in partnership with the Center for Social Value Enhancement Studies (CSES), multistakeholder platform r3.0, and UNRISD. The project’s aim was to develop methodologies and indicators to meaningfully measure and evaluate the performance of a broad range of economic entities in relation to the vision and goals of the 2030 Agenda for Sustainable Development. 

According to the SDPIs project, progress towards the SDGs and The Paris Climate Agreement has slowed down, and time is running out to achieve our ambitious goals set for 2030. In particular, current conventional environmental, social and governance reporting is insufficient to effectively measure progress toward sustainability. Their findings highlight the limitations of mainstream ESG reporting, particularly its focus on disclosure and adherence to standards rather than on genuine impact assessment and improvement. 

SDPIs also identify four blind spots in current ESG reporting practices: 

  • key issue areas are ignored; 
  • annual or bi-annual data snapshots mask performance trends over a longer time horizon; 
  • average company-wide metrics hide wide variations in performance by, for example, region or occupation; and  
  • there is no way of knowing whether improvements in ESG performance are significant from the perspective of sustainability. 

In addition, reporting metrics typically show gradual yearly improvements but don’t assess performance against a specific threshold for human well-being and planetary health aligned with sustainable development. These blind spots hinder the progress toward sustainability assessment, with the predominant approach failing to provide a comprehensive picture of an organization’s authentic sustainability performance. Additionally, those may often result in misleading ESG and sustainability reports and promote greenwashing practices. It is essential for economic entities to shift towards authentic sustainability reporting like SDPIs if humanity’s overarching goals of mitigating climate change, securing equitable access to clean water, protecting biodiversity, and alleviating poverty are ever to be achieved. 

The fundamentals of the SDPIs are;

  • It developed a comprehensive framework to evaluate sustainability performance for two types of organizations:  
    • For-profit enterprises (FPE) of all sizes. Particular attention was paid to large corporations with 250 or more employees as well as their affiliates and smaller enterprises in their value chains. 
    • Social and solidarity economy (SSE) focusing on cooperatives, associations, and social enterprises. 
  • Its new methodologies and indicators incorporate concerns such as the need to measure performance against norms and thresholds based on historical precedent, international agreements and scientific evidence. 
  • It identifies a set of issues, indicators and targets that should be a key focus in sustainability disclosure and reporting.  
  • It transcends ESG reporting by contextualizing impacts and performance and pushing economic entities to pursue ambitious and aspirational targets. 
  • It reduces the burden of countless indicators and developed a two-tiered framework comprised of just 61 indicators (including 6 indicators specific to SSEs) for measuring and assessing sustainability performance and progress at the organizational level. 

What is this two-tier approach of SDPIs?

  • The SDPI’s two-tier approach identifies 61 context-based indicators, which include 20 common ESG indicators in Tier 1 and 41 indicators in Tier 2. A total of 17 indicators of Tier2 are specified to measure current performance against sustainability norms.  
  • This two-tier approach aims to facilitate trend analysis, contextualize impacts or performance with thresholds and norms, and activate the transformative change necessary to address key structural challenges by shedding light on ignored or neglected issue areas by other frameworks.   
  • This two-tier framework led to ensure triple materiality on sustainability reporting meaning through SDPIs companies and businesses can report double materiality, sustainability due diligence and context-based practices of sustainability.  
  • In addition, in the process of SDPI reporting, ESG becomes synonymous with sustainability as they have common ESG indicators to report.  
  • This two-tier approach clearly specifies four key features for FPEs and SSEs in their reporting practices. These are: 
    • Trend Analysis: indicators cover a minimum 5-year period, moving beyond conventional annual snapshots for a comprehensive view. 
    • Granularity and Transparency: performance information is expected at country, region, affiliate, or supplier levels, when applicable. 
    • Sustainability Standards: entities must adhere to predefined sustainability thresholds or norms for considered sustainable performance. 
    • Transformative Disclosure: indicators adopt a transformative approach, catalysing significant change to address key structural issues hindering sustainable development. 

Final Notes: 

  • ESG reporting is a crucial aspect of long-term success, contributing to legal compliance, tracking and enhancing financial performance, and influencing investor decisions. 
  • While not legally obligated to do so, SMEs can reap substantial benefits from implementing ESG reporting practices. 
  • The SDPIs is a comprehensive, context-sensitive, UN-backed standard that effectively addresses the limitations of conventional ESG reporting methodologies and standards by providing simplified reporting criteria and tools. This ensures transparency, adherence to established ESG guidelines, and transformative disclosure. 
  • Adopting SDPIs transcends mere compliance; it serves as a transformative and authentic sustainability reporting tool that empowers organizations to make a genuine commitment to sustainability and play their part in achieving the ambitious but necessary global goals.

If your business has not yet fully embraced ESG principles, we invite you to join us on this transformative journey. Together, we can create a world where businesses thrive, communities prosper, and our planet flourishes. 

Interested to learn more about sustainability-related topics? Follow MorrowX on our social media pages.