the Most Renowned ESG Guidance Frameworks: Carbon Disclosure Standard Board (CDSB)

The Climate Disclosure Standards Board (CDSB) was an international consortium of business, environmental and social NGOs, committed to advancing and aligning the global mainstream corporate reporting model to equate natural social capital with financial capital. CDSB, created in 2007, did this by offering companies a framework for reporting environment and social information with the same rigor as financial information. CDSB has now consolidated into the IFRS Foundation. On November 3rd 2021 the IFRS Foundation announced that it would form a new International Sustainability Standards Board (ISSB), as well as the consolidation of the Climate Disclosure Standards Board and the Value Reporting Foundation (VRF—which houses the Integrated Reporting Framework and the SASB Standards) by June 2022. The first CDSB Framework, the Climate Change Reporting Framework, released in 2010, focused on the risks and opportunities that climate change presents to an organization’s strategy, financial performance and condition. In 2015, following two public consultations, the CDSB Framework for reporting environmental and climate change information was released. The CDSB Framework was updated in April 2018 to align with the recommendations of the Task Force on Climate-related Financial Disclosures and other key mainstream reporting requirements, helping to streamline the reporting cycle for many organizations. In light of changing market and user demands, the scope of the CDSB Framework was expanded to include social as well environmental, including climate change, information. Following public consultation, the CDSB Framework for reporting environmental and social information was released in 2022. CDSB technical guidance will form part of the evidence base as the ISSB develops its IFRS Sustainability Disclosure Standards. CDSB’s Framework and technical guidance on Water, Biodiversity and Social disclosures will remain useful for companies until such time as the ISSB declare any change on such topics. CDSB technical work has not been subject to the IFRS Foundation’s due process, which the International Sustainability Standards Board will follow in its work and does not form part of IFRS Standards. Through the provision of robust environmental and social information, CDSB hopes to encourage analysis and decision-making by investors that recognize the dependence and impacts of economic and financial stability on natural, human and social capital (CDSB, 1., 2022).

The objective of CDSB Framework

The CDSB Framework formed a foundation for the Task Force for Climate-Related Financial Disclosures (TCFD) recommendations and sets out an approach for reporting environmental and social information in mainstream reports, such as annual reports, 10-K filing, or integrated reports.  The objectives of the CDSB Framework are to:

• Help companies translate their sustainability information into long-term value;
• Provide clear, concise and consistent information to investors, connecting the organization’s sustainability performance to its overall strategy, performance and prospects;
• Enable and encourage informed investor-decision making on the allocation of financial capital;
• Add value to an organization’s existing mainstream report, while minimizing the reporting burden and simplifying the reporting process.

The Framework also indirectly supports organizations by:

• Supports compliance with regulatory reporting requirements with current & emerging requirements for sustainability reporting, (e.g. the EU Non-Financial Reporting Directive or Thailand 56-1 Form);
• Forms part of the evidence base as the ISSB develops its IFRS Sustainability Disclosure Standards.;
• Aligns and complements the objectives of financial reporting by providing environmental and social information that is connected with financial information;
• Aligns with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD);
• Creates resilient reporting due to CDSB was built on the most widely used reporting approaches, such as CDP, GRI, SASB, IFRS;
• Encourages standardization of environmental and social information reporting;
• Supports the rigor that is appropriate for information provided to investors;
• Helps prepare confident reports.

The development of the CDSB Framework has been overseen by the CDSB Technical Working Group, consisting of representatives from the largest accounting firms, reporting organizations, companies and academia. Currently, voluntary and mandatory reporting schemes on sustainability have multiplied, but there is no single standard about how companies should identify relevant information on natural, social and human capital and how users of such information can interpret it. As such, the information available is inconsistent and financial institutions are not taking account of environmental and social factors in their decision-making (CDSB, 2., 2022). Therefore, an organization should select reporting schemes that suit for its activities.

CDSB Framework Application Guidance

The first one is Climate Guidance which is produced for assisting companies in the disclosure of material climate-related information in the mainstream report. The Climate Guidance is designed to complement the CDSB Framework and other frameworks, codes and recommendations that are aligned with some or all of the requirements of the CDSB Framework. This guidance offers companies a means of developing their reporting practices and ensuring that investors are receiving the material climate-related information needed for efficient and effective capital allocation to drive the transition to a just, low-carbon economy. The current standard of mainstream reporting on climate risks and opportunities means that there is an information deficit for investors and other decision-makers. This shortfall in high quality, decision-useful material climate information means that investors are unable to make the capital allocations that can drive change across economies and societies. The focus of the guidance is on the first six reporting requirements of the CDSB Framework. These reporting requirements set out the key content elements for reporting material environmental information in the mainstream report as following:

• REQ-01 Governance
• REQ-02 Management’s environmental policies, strategies and targets
• REQ-03 Risks and opportunities
• REQ-04 Sources of environmental impact
• REQ-05 Performance and comparative analysis
• REQ-06 Outlook

For each of these reporting requirements, the Climate Guidance provides:

• A checklist for making effective climate disclosures;
• Detailed reporting suggestions and guidance to complement the CDSB reporting requirement in relation to climate issues;
• A selection of further useful resources to assist companies in developing their mainstream climate reporting;
• Explained examples of good practice in mainstream climate reporting.

The Climate Guidance also offers some further important considerations for companies in making mainstream climate disclosures, covering aspects of the reporting principles and remaining requirements of the CDSB Framework. In addition, the Climate Guidance provides an overview of the significance of climate change to business, explaining the importance of physical and transition risks, and highlighting the key and unique characteristics of the climate system and their importance to corporate reporting. Finally, the Appendices to the Climate Guidance provides a mapping of the CDSB Framework to the TCFD Recommendations and a list of additional CDSB resources for preparing effective climate disclosures (CDSB, 3., 2022).

Water Guidance is the second guidance for water-related disclosure, which has been developed for assisting companies in the disclosure of water-related financial information in mainstream report. It is designed to supplement the CDSB Framework for reporting environmental and climate change information to investors. The Water Guidance offers companies a means of developing their reporting practices and ensuring that investors are receiving the material water-related information needed for effective capital allocation to drive the transition to a sustainable, resilient, and water secure economy. The intended users of this Guidance are organizations, both single companies and corporate groups, and in particular those responsible for financial, governance and sustainability reporting (CDSB, 4., 2022).

The third part of a series of CDSB Framework Application Guidance is Biodiversity Guidance, which aims to extend the TCFD recommendation and its core elements to nature. It is designed to support the intended users in applying the CDSB Framework to the natural capital elements of climate change, water, and biodiversity. Following the guidance on climate-related and water-related disclosures, the Biodiversity Application Guidance is designed to enhance the quality of disclosures for such significant matters. Working in conjunction with the reporting principles and requirements of the CDSB Framework, each application guidance assists companies to develop clear, concise, consistent, and comparable (inter-period comparability of the same entity and inter-entity comparability) disclosures, enhancing the decision-usefulness of their mainstream reporting on sustainability-related financial matters to investors. Given the interconnected nature of environmental topics, the application guidance documents are complementary with some overlapping subtopics. The objective of the Biodiversity Application Guidance is to support organizations in preparing high-quality disclosures that enable users of mainstream reports to assess material biodiversity-related financial information. In addition, the Biodiversity Application Guidance also provides an overview of the significance of biodiversity to business, explaining the importance of biodiversity-related business risks and opportunities, and highlighting the key characteristics of biodiversity and their importance to corporate reporting (CDSB, 5.,2022).

In July 2021, CDSB published a position paper on social reporting and determined the benefit of expanding the scope of the CDSB Framework to include social as well as environmental information. This decision was made for three key reasons. First, the importance of social information to companies, investors and regulators in their decision-making continues to grow and increasingly poses material risks and opportunities to organizations. Second, the significance of the connections between environmental and social issues and the resultant businesses effects are being better understood, demonstrating the need to comprehend and report on these matters in an interlinked manner. Finally, there is presently no reporting framework for social information that is definitively committed to the principles, approaches, and structure of the mainstream report. The updated version of the CDSB Framework is hoped to assist in the development of higher-quality and more decision-useful environmental and social disclosures, benefitting both report preparers and users. The “Corporate reporting on social matters” integrates social information into the market-tested and well-aligned reporting principles and requirements of the CDSB Framework, offers specific guidance for reporting on social issues in the mainstream report, and more generally seeks to add detail and clarity to several areas of the framework. Challenges exist with the present practices of reporting consistent, comparable, decision-useful information on social issues, particularly for material social issues in the mainstream report. The challenge hence is not necessarily one of volume of data, but more one of quality, rigor, and context of that information (CDSB, 6., 2022).

CDSB is setting out to expand the scope of its reporting framework and technical work to suitably accommodate financially material social issues. This will see CDSB provide the market with the framework for TCFD-style reporting across all financially material social and environmental issues and offer companies the means of reporting decision-useful information that meets ever-developing needs and expectations of users.

References:

1. CDSB, 1. (2022) Consolidation of CDSB. [online] London: Climate Disclosure Standard Board. Available from: https://www.cdsb.net/ [Access 14 June 2023].
2. CDSB, 2. (2022) Framework for Reporting Environment and Social Information. [online] London: Climate Disclosure Standard Board. Available from: https://www.cdsb.net/what-we-do/reporting-frameworks/environmental-information-natural-capital [Access 14 June 2023].
3. CDSB, 3. (2022) Climate Guidance. [online] London: Climate Disclosure Standard Board. Available from: https://www.cdsb.net/climateguidance [Access 14 June 2023].
4. CDSB, 4. (2022) Water Guidance. [online] London: Climate Disclosure Standard Board. Available from: https://www.cdsb.net/water [Access 14 June 2023].
5. CDSB, 5. (2022) Biodiversity Guidance. [online] London: Climate Disclosure Standard Board. Available from: https://www.cdsb.net/biodiversity [Access 14 June 2023].
6. CDSB, 6. (2022) Social Guidance. [online] London: Climate Disclosure Standard Board. Available from: https://www.cdsb.net/what-we-do/corporate-reporting-social-issues [Access 14 June 2023].