Sustainability reporting has become increasingly important to investors. There is growing recognition that ESG factors can significantly impact a company’s long-term financial performance.
According to the Harvard Business Review, investors increasingly use ESG data to make informed investment decisions. Some investors avoid companies with poor environmental, social, and governance (ESG) ratings. They believe these firms face a higher risk of financial trouble. Others prefer companies with strong ESG performance. They see a link between sustainability and better long-term returns. Many investors use ESG data in their fundamental analysis. Some rely on ESG scores to drive activism and push companies to improve their practices. As a result, sustainability reporting has been gaining momentum in the investment and finance landscape.
Companies are already using many frameworks or standards voluntarily for their sustainability reporting. This article will explore what ESG frameworks and standards mean for SMEs and why we recommend that SMEs adopt the UN’s Sustainable Development Performance Indicators (SDPIs) for authentic sustainability.
What are Sustainability Reporting Frameworks and Standards?
It is often noted that there is some ambiguity surrounding these two terminologies, particularly the use of ‘framework‘ and ‘standard‘ in the context of ESG and sustainability reporting. Although we may consider them synonymous in practice, usage may vary. ‘Frameworks’ and ‘standards’ may be employed with nuanced distinctions. While these terms are often used interchangeably, both essentially provide companies with principles, guidelines, and tools to facilitate the reporting of ESG metrics; it’s good to understand how they differ.
Sustainability reporting frameworks provide broader perspectives and principles, addressing fundamental questions of ESG and sustainability. These frameworks guide companies on what to consider regarding their actions and how to present their ESG performance. For example:
- The 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 to these global goals. All member countries of the UN have adopted the SDGs as targets for 2030.
- The Science-Based Targets Initiative (SBTi) is a partnership between the CDP, the 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 reducing greenhouse gas emissions and limiting global warming to 1.5°C, which aligns with the Paris Agreement goals.
Conversely, sustainability reporting standards focus on 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) are 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). As a result, the acronyms ESRS and CSRD are often used together or interchangeably, which can be confusing. The CSRD is the law, while the ESRS is the standard for complying.
- The Global Reporting Initiative (GRI) is one of the most widely used standards globally. An independent, international organisation developed it. It provides guidelines for reporting various sustainability indicators, covering economic, environmental, and social aspects.
- The Sustainable Development Performance Indicators (SDPIs) set a standard for measuring the sustainability performance of economic entities, whether for-profit, non-profit, or social enterprises. It is based on ESG-related KPIs crafted by the United Nations Research Institute for Social Development (UNRISD) to measure 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 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 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, it requires fewer data points to be reported than most other standards. Where other standards tend to require disclosure of data, the SDPI aims to help organisations set goals and act by showing them how well or poorly they are performing relative to what’s needed and appropriate to their specific context.
We will now explore the fundamentals of SDPIs and their underlying principles for authentic sustainability reporting. We’ll explain why SMEs might select this relatively new standard for ESG and sustainability reporting.
What do the SDPIs measure, and why do they represent an approach to 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 organisation’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 when reporting on ESG and sustainability.
The widely used GRI upholds the concept of Sustainability Context as one of its first four Principles, which it defines as “the performance of the organisation 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 applying it in practice. Consequently, sustainability reports overlook the critical Sustainability Context principle, persisting in this trend.
Given these challenges, the SDPIs have emerged due to an extensive collaborative research project from 2018 to 2022 in partnership with the Centre for Social Value Enhancement Studies (CSES), multistakeholder platform r3.0, and UNRISD. The project aimed to develop methodologies and indicators to meaningfully measure and evaluate the performance of a broad range of economic entities in achieving the vision and goals of the 2030 Agenda for Sustainable Development.
According to the SDPIs project, progress toward the SDGs and the Paris Climate Agreement has slowed, and time is running out to achieve our ambitious goals for 2030. Current conventional environmental, social, and governance reporting is insufficient to measure progress toward sustainability effectively. Their findings highlight the limitations of mainstream ESG reporting, mainly 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 sustainability perspective.
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 organisation’s authentic sustainability performance. Additionally, those may often result in misleading ESG and sustainability reports and promote greenwashing practices. Economic entities need 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 organisations:
- For-profit enterprises (FPE) of all sizes. Particular attention was paid to large corporations with 250 or more employees and 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 measuring performance against norms and thresholds based on historical precedent, international agreements and scientific evidence.
- It identifies issues, indicators and targets that should be a key focus in sustainability disclosure and reporting.
- It transcends ESG reporting by contextualising impacts and performance and pushing economic entities to pursue ambitious and aspirational targets.
- It reduces the burden of countless indicators. It develops a two-tiered framework comprised of just 61 indicators (including six indicators specific to SSEs) for measuring and assessing sustainability performance and progress at the organisational level.
Two-tier approach used in the SDPIs
- The SDPI’s two-tier approach identifies 61 context-based indicators, including 20 common ESG indicators in Tier 1 and 41 in Tier 2. A total of 17 indicators of Tier 2 are specified to measure current performance against sustainability norms.
- This two-tier approach aims to facilitate trend analysis, contextualise 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 ensured triple materiality in sustainability reporting, meaning that through SDPIs, companies and businesses can report double materiality, sustainability due diligence, and context-based sustainability practices.
- 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 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:
- Sustainability reporting is crucial to long-term success. It supports legal compliance, tracks and enhances financial performance, and influences investor decisions.
- While not legally obligated to do so, SMEs can reap substantial benefits from implementing ESG reporting practices.
- SDPIs are comprehensive, context-sensitive, and UN-backed standards that effectively address 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 is a transformative and authentic sustainability reporting tool that empowers organisations to commit to sustainability and play their part in achieving the ambitious but necessary global goals.
