The sustainability reporting landscape

The German Sustainability Code (German: Deutscher Nachhaltigkeitskodex, DNK) was developed in 2010 by various stakeholder groups and went into effect in 2012. Since then, the DNK has been managed by the German Council for Sustainable Development. To comply with the DNK, an organization has to declare conformity with all 20 criteria, such as stakeholder engagement, employee rights, and resource management, as well as conformity with non-financial performance indicators from the GRI (Global Reporting Initiative). The DNK can be used for non-financial reporting to comply with CSR reporting (CSR-RUG).

In November 2022, the EU adopted the Corporate Sustainability Reporting Directive (CSRD). It replaces the existing Non-Financial Reporting Directive (NFRD) and will support the EU Green Deal by mandating certain large companies to report on sustainability metrics in line with the European Sustainability Reporting Standards (ESRS). Primarily developed by the European Financial Reporting Advisory Group (EFRAG), the ESRS shall ensure the quality and relevance of reported information.The proposed structure of the ESRS covers social, environmental, and governance topics as well as cross-cutting standards. The ESRS also includes the principle of “double materiality,” which makes companies not only look at the impact of the environment on their business, but also on the impact of their business on the environment (including social and governance issues).

Launched in 1998, the Greenhouse Gas Protocol (GHGP) provides a globally standardized framework to measure, manage and compare GHG emissions from private, and public sector operations, value chains and emission reduction actions. Supplying the world's most widely used greenhouse gas accounting standards, the GHG Protocol classifies greenhouse gas emissions into three areas of origin: Scope 1 (direct emissions), Scope 2 (indirect emissions), and Scope 3 (indirect emissions from upstream and downstream supply chain).

Founded in 1997, the GRI Standards are the world's most widely applied sustainability reporting standards. They are applied by small, large, private, or public organizations to report on their impact on the economy, environment, and society, giving organizations credibility and comparability in the pursuit of their contribution to sustainable development. The GRI Standards are designed as a modular set and provide a comprehensive picture of an organization's material issues, their related impacts and how they are managed. This is why the standards are of great importance to companies but also to many other stakeholders, including investors, capital markets, policymakers, and the society.

The International Sustainability Standards Board (ISSB) published drafts of the first two IFRS Sustainability Disclosure Standards on March 31, 2022. The draft IFRS S1 contains general requirements for the disclosure of sustainability-related financial information along an entity's entire value chain. The draft IFRS S2 specifies the requirements for the presentation of information that enables an investor to assess the impact of climate-related risks and opportunities on the enterprise value.

The SASB Standards enable organizations to make industry-specific sustainability disclosures on risks and opportunities that impact business value by identifying the environmental, social, and governance issues that are most important to financial performance and enterprise value. After merging with the Value Reporting Foundation (VRF) and founding the International Sustainability Standards Board (ISSB), the IFRS Foundation took over management of the SASB Standards in August 2022. The ISSB advises companies to continue using the SASB Standards until they are replaced by IFRS S.

The Euopean Commission released a proposal for the Corporate Sustainability Due Diligence Directive (CSDDD) on February 23, 2022. By integrating human rights and environmental concerns into business operations and corporate governance, this directive aims to promote sustainable and responsible corporate practices along the value chain. Once the negotiations around the CSDDD are concluded and the proposal is accepted, firms will be required to address negative effects of their actions, including those along their value chains both inside and outside of Europe. In contrast to the German Supply Chain Act (LkSG), the CSDDD will affect the entire value chain, as well as apply to a wider range of companies. Furthermore, companies must align their corporate strategy to the Paris Agreement.

The Corporate Sustainability Reporting Directive (CSRD) establishes a uniform framework for the reporting of non-financial data for companies operating in the European Union. The goal of the directive is to take into account the non-financial performance of large companies. The CSRD replaces the Directive 2014/95/EU – also called the Non-Financial Reporting Directive (NFRD) – and requires more detailed information on sustainability goals and key figures. More specifically, it requires disclosure about a company's business performance, results of operations, position and the impact of its activities. One of the most important differences compared to the NFRD is the introduction of the concept of double materiality. It provides tighter criteria for the determination of whether a sustainability matter must be included in a company’s sustainability report.

The German CSR Directive Implementation Act (German: CSR-Richtlinie-Umsetzungsgesetz, CSR-RUG) transposes the EU directive 2014/95/EU into German law. It is therefore based on the NFRD which requires large companies to publish their non-financial information. The directive went into effect at the beginning of 2017. The CSR-RUG requires companies to report on non-financial topics including environmental and social issues, human rights and anti-corruption measures as well as their corporate governance.

As part of the European Green Deal, the EU Taxonomy Regulation sets criteria to determine if an economic activity can be considered sustainable. According to the EU Taxonomy, a sustainable economic activity has to be assigned to a defined taxonomy activity by the EU, contribute substantially to one of six defined environmental objectives, do not significantly harm any of the remaining environmental objectives, and comply with a series of minimum social safeguards. The goal of the regulation is to reorient capital flows to focus on sustainable investments and business activities including areas such as circular economy, renewable energy, and biodiversity.

Passed by the German Bundestag in June 2021, the German Supply Chain Due Diligence Act (German: Lieferkettensorgfaltspflichtengesetz, LkSG) came into force on January 1, 2023. The LkSG regulates corporate responsibility for compliance with human rights and environmental protection in global supply chains. Therefore, a company's due diligence obligations apply to both the company's own business operations and to the actions of its direct contractual partners and other suppliers along the entire supply chain. This includes, for example, protection against child labor, the right to fair wages, and environmental protection. The law outlines several criteria, which companies can use to identify their priorities when implementing their due diligences.

The Non-Financial Reporting Directive (NFRD) was adopted in 2014. Since its entry into force in 2018, it legally obliges companies to report on sustainability topics with regard to environmental, social and employee issues, anti-corruption measures, diversity, and measures to respect human rights. The CSRD is part of the European Commission's "Green Deal" and will gradually replace the NFRD starting in 2024. In Germany, the NFRD is implemented by the CSR-RUG (CSR Directive Implementation Act).

The EU Sustainable Finance Disclosure Regulation (SFDR) is a set of rules which requires financial market participants to provide information about how they deal with negative environmental and social impacts and risks of their investments. This mandated transparency aims to allow investors to better compare the sustainability performance of financial products and thereby reduce greenwashing within the industry. The SFDR has two levels: product-related disclosures and entity-related disclosures. Under the SFDR, companies must disclose so-called PAI indicators (principal adverse impacts on sustainability) that establish sustainability factors for investment decisions.The SFDR was introduced by the European Commission along with the EU Taxonomy Regulation as a result of the European Commission’s Sustainable Finance Action Plan (SFAP).

The OECD Guidelines for Multinational Enterprises (OECD Guidelines) are recommendations from governments to multinational enterprises on responsible business conduct. They set standards for responsible business conduct across a range of issues, such as human rights, labor rights, and the environment. The OECD Guidelines also provide international grievance procedure to resolve injustices involving businesses subject to the OECD Guidelines and those who feel adversely affected by negligent business practices.

Science based targets (SBTs) are a way for companies to define emissions reduction targets. Unlike traditional “potential-based targets”, SBTs follow a “top-down” approach: They focus on the quantity of emissions that needs to be reduced in order to meet the targets set out in the Paris Climate Agreement, limiting global warming to 1.5°C. In addition, the Net-Zero Standard, launched in October 2021, gives companies a science-based framework for defining ambitious and effective climate goals.

In 2012, the UN initiated a process to establish a new framework to guide sustainable development. In 2015, along with other major agreements, such as the Paris Agreement, the UN adopted the “2030 Agenda for Sustainable Development” commonly referred to as the SDGs (Sustainable Development Goals) or Agenda 2030. The SDGs outline 17 major objectives to ensure sustainable development on a worldwide level. The goals include, among others, gender equality, zero hunger, clean water, and responsible consumption.

Published in 2018, the EU's Sustainable Finance Action Plan (SFAP) outlines a set of measures and legislative projects to promote sustainable finance. The SFAP introduces new regulations, including the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). These regulations are aimed at redirecting capital flows towards sustainable investments, better managing environmental risks and achieving greater transparency. The SFAP aims to contribute to the achievement of the Paris Climate Agreement, the EU climate targets, and the UN Sustainable Development Goals.

Launched in 2000, the UN Global Compact (UN GC) is voluntary association between companies, organizations, and the United Nations. It promotes the adoption and implementation of sustainable practices, comprising ten principles concerning areas such as human rights, labor, and the environment. The UN initiated this program to “give a human face to the global market“. Today, with more than 15,000 companies and more than 3,800 non-business participants, it is one of the world’s largest corporate sustainability initiatives.

The Principles for Responsible Investment (UN PRI) are a UN financial initiative developed by investors for investors with the aim of fostering a sustainable financial system. By March 2021, more than 4,900 financial institutions were subscribed to the PRI. These organizations ought to adhere to the PRI's six guiding principles introduced in 2006 and submit reports with regards to their performance on a regular basis.

In order to serve the public interest, the European Commission encouraged the formation of the private organization known as the European Financial Reporting Advisory Group (EFRAG) in 2001. Following the new responsibilities outlined in the CSRD, EFRAG expanded the scope of its mission in 2022 by giving technical advice to the European Commission in the form of a fully completed draft of the EU Sustainability Reporting Standards (ESRS). The operations of EFRAG are divided into two pillars: a sustainability reporting pillar and a financial reporting pillar.

In August 2010, the International Integrated Reporting Council (IIRC) was created. Its goal was to establish a worldwide recognized framework for a procedure that generates disclosures about an organization's value creation over time. The IIRC and the Sustainability Accounting Standards Board (SASB) combined in June 2021 to establish the Value Reporting Foundation (VRF). With regard to the entire spectrum of business value drivers and standards, the goal was to offer investors and corporations a comprehensive corporate reporting framework.

The International Organization for Standardization (ISO), a non-governmental organization founded in 1947, comprises 167 national standards bodies as members. International standards are created by ISO by bringing together professionals from member countries all over the world. In 2010, ISO introduced ISO 26000, a standard that defines social responsibility. It assists enterprises and organizations in turning concepts into practical actions, and in sharing socially responsible best practices.

In 2021, the IFRS Foundation Trustees announced the creation of a new standard-setting board – the International Sustainability Standards Board (ISSB) – to help meet the demand for high quality, transparent, reliable and comparable reporting on climate and other environmental, social and governance (ESG) matters.The objective of the ISSB is to offer a detailed worldwide baseline of sustainability-related disclosure standards that informs investors and other capital market players about the sustainability-related risks and opportunities faced by companies and enables them to make responsible decisions.

In 2011, the nonprofit, independent Sustainability Accounting Standards Board (SASB) was established. It set standards for the voluntary reporting of relevant financial sustainability data of specific enterprises. The International Integrated Reporting Council (IIRC) and the SASB announced their union to become the Value Reporting Foundation (VRF) in June 2021. In August 2022, the International Sustainability Standards Board (ISSB) — which had earlier amalgamated with the VRF and the Climate Disclosure Standards Board—took over management of the SASB Standards.

EMAS (Eco-Management and Audit Scheme) is a voluntary environmental management tool for companies and other organizations to evaluate, report, and improve their environmental performance. It is aimed at companies and other organizations seeking to systematically improve energy and material efficiency, reduce harmful environmental impacts and environment-related risks, and improve compliance with legislation. EMAS helps organizations improve their environmental performance and increase transparency by providing publicly available information on an organization's environmental performance.