Author: Enrique Pastor Escobar - Partner Kreston FLS Taxes and BPS
ESG criteria are the environmental, social and governance factors that determine the degree of sustainability of a company1. Some companies do not mandatorily report their ESG impacts because they do not see the relevance of establishing governance structures to manage and monitor these initiatives2, or because they do not have a regulator or government to require it23. In addition, many companies that report their ESG impacts do so on a voluntary basis and without a third party to vouch for the veracity of what they report2.
However, ESG financial reporting is becoming increasingly important for investors and capital markets, as it allows them to assess the risks and opportunities that companies have related to sustainability and climate change3. As a result, a new global framework of globally accepted sustainability standards, called ISSB, is being developed to standardize ESG financial reporting and make it more relevant and comparable3.
WHAT IS ISSB
The ISSB is the International Sustainability Standards Board, an independent private sector body that develops and approves International Financial Reporting Standards for Sustainability (IFRS) 12. The ISSB is the second board of the IFRS Foundation, in addition to the International Accounting Standards Board (IASB), which issues the International Financial Reporting Standards (IFRS) currently used in more than 140 countries234 .
The ISSB's primary mandate is to develop a globally accepted high quality corporate sustainability disclosure standard base, addressing the needs of the capital markets and the request of the G20 leaders and the International Organization of Securities Commissions (IOSCO), in the face of the new global sustainable economic model2. The ISSB and the IASB can jointly look at the relevant information needs for investors in relation to sustainability and climate: the IASB would define what should directly impact the financial statements and the ISSB what is required to be disclosed as part of the financial sustainability disclosures, taking care that there is always a connection with the financial statements2.
The ISSB published its first two draft standards on sustainability disclosures in March 2022: general requirements for sustainability disclosures related to financial reporting (IFRS S1) and climate disclosures (IFRS S2)1. These standards aim to standardize ESG financial reporting and make it more relevant and comparable2.
COMPANIES REPORTING IN MEXICO ON THEIR ESG ISSUES
The 100 companies with the best ESG Responsibility in Mexico (expoknews.com)
According to the Merco Responsabilidad ESG Mexico 2021 study, the 100 most responsible companies in terms of environmental, social and governance criteria are the following1:
- Grupo Bimbo
- Modelo Group
- BBVA
- Nestlé
- Walmart
- Natura
- Pfizer
- Grupo Herdez
- Citibanamex
These companies prepare a specific corporate responsibility report based on certain frameworks such as GRI (Global Reporting Initiative), IIRC (International Integrated Reporting Council), TCFD (Task Force on Climate-Related Financial Disclosures), SASB, etc1. Some of the variables they report on are: the impact of their activities on the environment, society and governance; risks and opportunities related to climate change; carbon emission reduction targets; the link with the Sustainable Development Goals (SDGs); and the impact on biodiversity2.
According to the Merco Responsabilidad ESG Mexico 2021 study, the 10 most responsible companies in terms of environmental, social and governance criteria are the following: - Grupo Bimbo - Grupo Modelo - BBVA - Nestlé - Google - Walmart - Natura - Pfizer - Grupo Herdez - Citibanamex. These companies prepare a specific corporate responsibility report based on certain frameworks such as the GRI (Global Reporting Initiative), IIRC (International Integrated Reporting Council), TCFD (Task Force on Climate-Related Financial Disclosures), SASB, etc. Some of the variables they report on are: the impact of their activities on the environment, society and governance; risks and opportunities related to climate change; carbon emission reduction targets; linkage with the Sustainable Development Goals (SDGs); and impact on biodiversity.
WHAT ARE THE FINANCIAL REPORTS REGARDING ESG.
ESG financial reports are documents that companies prepare to communicate their environmental, social and governance (ESG) performance to their key stakeholders, especially investors and capital markets. These reports seek to show how companies manage the risks and opportunities they have related to sustainability and climate change, and how these impact their financial valuation and long-term strategy. ESG financial reporting is based on certain frameworks or standards that establish the criteria and metrics to be used to disclose information in a consistent and comparable manner.
There are several frameworks or standards that companies can use to prepare ESG financial reports, depending on their sector, size, location and objectives. Some of the most commonly used are:
GRI (Global Reporting Initiative): An international organization that develops standards for sustainability reporting based on the principle of materiality, i.e. the relevance of issues for stakeholders. GRI standards cover economic, environmental and social aspects, as well as sector-specific topics.
SASB (Sustainability Accounting Standards Board): A non-profit organization that develops sustainability reporting standards focused on aspects that are financially relevant to investors. SASB standards are based on a rigorous analysis of evidence and stakeholder consensus, and are tailored to each industry.
TCFD (Task Force on Climate-Related Financial Disclosures): An initiative of the Financial Stability Board that develops voluntary recommendations for climate-related financial reporting. TCFD recommendations focus on four areas: governance, strategy, risk management, and metrics and targets.
CDP (Carbon Disclosure Project): A non-profit organization that operates a global platform for companies and cities to disclose information on their environmental impact. CDP requests information on climate change, water use and deforestation from thousands of companies each year and makes it available to investors and other stakeholders.
IR (Integrated Reporting): A framework developed by the International Integrated Reporting Council (IIRC) that seeks to integrate financial and non-financial information into a single report that shows the value created by an organization in the short, medium and long term. IR is based on six capitals: financial, manufactured, intellectual, human, social and natural.
In addition to these frameworks or standards, there are others that can also be used by companies to prepare ESG financial reports, such as the UN Guiding Principles on Business and Human Rights, the UN Sustainable Development Goals (SDGs), the UN Principles for Responsible Investment (PRI), the UN Global Compact Principles, the ISO 26000 Standard on Social Responsibility, etc.
But, we have news, because there are already standards that will be mandatory as of 2025 in Mexico. Leave your comments on this article and soon I will talk about what the Standards include for Mexico.
