Log Out

The new frontier of sustainability reporting

Standard-setting bodies around the world are proposing authoritative rules. 
November 11, 2022

By Louis P. Le Guyader, CPA 

As of now, no mandatory environmental, social and governmental (ESG) reporting rules exist for entities in the United States under either SEC regulations or in U.S. Generally Accepted Accounting Principles (GAAP). But changes are coming; in 2022, regulators across the globe acted to make sustainability reporting rules authoritative. 

The new 2022 actions include new disclosure rules from the SEC, a new European Union (EU) law mandating more rigorous ESG reporting methodologies and scope, and a new regulator, the International Sustainability Standards Board (ISSB) created under the umbrella of the International Financial Reporting Standards Foundation to formalize ESG reporting rules. The regulators were motivated to act for several reasons: 

  • In the United States, there were increasing numbers of ESG frauds and ESG investor losses, resulting in enforcement actions under general and well-established rules to protect markets. 
  • The EU felt the twin effects of economic slowdown from the COVID pandemic and the shock to food supplies due to the Russian “special military action” in Ukraine. EU parliament discovered that most of its climate change goals had not been met and decided to respond by expanding ESG reporting and making certain elements mandatory. 
  • The United Nations continued to emphasize its 17 sustainability goals and the international reporting community, acting through the IFRS Foundation, responded by forming the ISSB. 

ESG reporting rules are set to further evolve from a widely accepted set of voluntary guidelines to a more formal, authoritative, and presumably mandatory reporting regime, with explicit roles of the profession. This article summarizes these 2022 changes. 

What is ESG reporting? 

ESG topics relate to “risk” — the likelihood that an ESG event can lead to a loss, whether a corporate loss born by shareholders, an investment fund loss suffered by investors, or a societal loss shared by a broader constituency. The three pillars of reporting, as explained in U.S. Financial Accounting Standards Board (FASB) concepts statements, are measurement, recognition and disclosure. Since there are rarely debits and credits for “risk,” ESG reporting is mostly disclosure. 

Reporting companies around the world, the users of capital, most often use a combination of these ESG documents: the 17 UN sustainability goals, the 77 Sustainability Accounting Standards Board (SASB) standards, and format guidelines of the Global Reporting Initiative (GRI). This article focuses on reporting companies who use these items. 

Sustainability, or ESG, reporting addresses three major topics with varying degrees of topical specificity, uniformity, and depth: E for environment, S for Society and G for Governance. 

Where financial reporting is “value reporting,” ESG reporting is “impact reporting.” Financial statements are reports on performance measured through earnings and cash flows and authenticated using legally binding GAAP rules and auditing regulations. An ESG report discloses the ESG losses a company may be responsible for causing, reports positive impacts the company uses to manage those losses, and is 

sometimes authenticated by reference to ad hoc ESG reporting frameworks with those reports sometimes verified by professional assurance reports (see below). 

Technical issues 

Two technical reporting topics are attracting the spotlight in ESG reporting: metrics and taxonomy. Metrics have been used that often require specialized scientific or legal knowledge. They are the kind of variable that cannot be directly presented in financial statements in a “debit and credit” system. Often such variables, if disclosed in U.S. GAAP reports or SEC filings, would be non-GAAP (Regulation G) measures. 

Taxonomies and technical glossaries have been published or mandated to address the growing ESG reporting technical jargon. Just as in mainstream GAAP reporting, the specificity provided by jargon creates transparency challenges. 

Other background issues 

Sustainability reporting is relevant to capital users, or reporting corporations, and capital providers and their intermediaries, ranging from credit rating agencies to various equity and debt funds. The major rating agencies incorporate ESG tags into their debt ratings, ESG indices are used to describe funds and attract ESG-sensitive capital, and public companies issue stand-alone ESG reports that rival SEC 10Ks in length and complexity. The setting is ripe to involve regulators of varying kinds to formalize the reporting guidelines by making them authoritative and mandatory. 

Some topics have been brought into the ESG setting from long-established reporting rules ranging from labor regulations to corporate governance laws. Labor issues are centered on traditional topics such as “decent” pay, health, education and retirement. But the labor spotlight is often attracted by difficult topics such as slavery and human trafficking. Governance issues are as wide-ranging as board governance, bribery and insider trading. If anything, the number of topics presented as “ESG” continues to grow. 

ESG regulatory actions around the world 

Regulators took three major regulatory steps affecting ESG reporting in 2022 in the United States, the EU, and more globally from the setting of the IFRS Foundation in London. 

United States 

The SEC has proposed Release No. 33 – 11068, Enhanced Disclosures about [ESG] Investment Practices, “to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry.” The SEC borrowed metrics and taxonomy from the ESG space. The final rule should be issued by year-end 2022. 

The SEC is fighting moral hazards that accompany ESG reporting: greenwashing. This is a fraud based upon a lie about how an entity has achieved ESG impacts. SEC ESG enforcement actions date as far back as 2008. The SEC has created the Climate and ESG Task Force within the Division of Enforcement to “identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment.” 

European Union 

The EU parliamentarians believe the existing EU limited scope and quasi-voluntary Non-Financial Reporting Directive (NFSD) did not have the intended impact on helping the EU achieve its goals for a sustainable economy, so the NSRD will be upgraded to the Corporate Sustainability Reporting Directive (CSRD). The draft agenda was agreed upon by the EU council in summer 2022 and goes to a full EU parliament vote this fall. Under EU regulations, once a law is passed by the EU parliament, it must be adopted into law by each of the EU member countries. The principal provisions of the CSRD include: 

  • An expansion of scope from the largest 11,000 EU companies to nearly 50,000 by making the rules applicable to all large EU companies and all companies listed on regulated exchanges. · The issuance of new reporting standards by the European Financial Reporting Advisory Group. 
  • The certification of reports by an accredited independent auditor or certifier using certification standards issued by the EU.

It’s of great importance to U.S. companies that the rules will apply to non-European companies that have both EU revenue over €150 million and at least one subsidiary or branch in the EU. A U.S. company that is subject to the CSRD rule would need to prepare a report that is certified by an EU auditor or an established auditor of another country (see the section on verification below). 

Global community The IFRS Foundation created the ISSB in early 2022 to issue ESG reporting rules. The ISSB is a sister organization to the International Accounting Standards Board (IASB), which issues IFRS financial statement rules. The IASB’s IFRS model is an alternative reporting model to the FASB’s U.S. GAAP model. Currently, there is no U.S. alternative to the ISSB. Effective Aug. 1, 2022, the IFRS Foundation completed its consolidation of the Value Reporting Foundation. This means that the 77 standards of the SASB, the IFRF Integrated Financial Reporting Framework, and other related reporting initiatives will be overseen by some combination of the IFRS Foundation, the ISSB, and the IASB. For the moment, users of the SASB’s are encouraged to continue using them. 

The long-term setting is less certain. The IASB created a “subscription system” for the United States of IFRS. To use IFRS, a reporting entity would need to be a “citizen” of a country or political jurisdiction that enacted a law to adopt IFRS, and that jurisdiction would need to have executed an intellectual property agreement with the IFRS Foundation. Currently, use of the SASB or Global Reporting Initiative is voluntary and does not include any of these two “subscription” steps. The uncertainties around the use of these pre-existing voluntary ESG regimes and other ISSB products under the IFRS Foundation include: 

  • Will the voluntary protocol to issue ESG reports “in accordance with” these voluntary frameworks now require more formal “subscription”? 
  • Will the use of the ISSB suite of reporting standards carry with it the obligation to adopt IFRS? 

Reporting formalities 

These formalities represent significant differences between ESG and financial reporting. 


The ESG reporting community has relied upon voluntary “certifications” of ESG reports. For a U.S. audience, these certifications are not audit opinions. They are statements of assurance as understood under AICPA attestation rules. 

In the United States, GRI reports prepared “in accordance with” the GRI principles may meet suitable criteria identified in the AICPA attestation standards. GRI recommends that reporting entities engage experts, including CPAs who adhere to the AICPA’s standards, to issue an external assurance report on ESG reports. See more in the GRI Universal Standards 2021 FAQs. 

GRI’s recommendation is not an endorsement of the AICPA process, and it’s also not a requirement. Like so much else in ESG reporting currently, it is a voluntary step. 


Materiality is a major concern in the ESG reporting community. It is a conceptually and technically difficult topic. For ESG purposes, an organization asserting that a report is issued “in accordance with” the GRI principles is required to identify material topics along two dimensions: the significance of the organizations impacts and the organizations’ influence on the assessments and decisions of stakeholders. 

ESG and financial reporting settings use different notions of materiality. Materiality will challenge the ability of reporting entities to raise ESG reporting to the same standards as financial reporting. Attempts to incorporate ESG reporting into audited financial statements will be problematic for the same reason. 


ESG reports are disclosure reports on ESG risks. At present the most widely used sustainability reporting rules are the GRI and the 77 SASB rules — all voluntary. And this setting is changing rapidly. The EU is moving to make ESG reporting mandatory under its new Corporate Sustainability Reporting Directive. The European Financial Reporting Advisory Group will also issue new reporting standards. In the United States, the SEC is moving to make ESG disclosures mandatory for asset management activities, a source of capital. The IFRS Foundation has moved to coalesce the voluntary pre-existing frameworks into what may become a “subscription” basis framework like IFRS managed by both the IASB and ISSB. The relation between IFRS Foundation entities and EUFRAG is unclear. Whether the SEC and the FASB will initiate new U.S. GAAP disclosure rules is also unclear. 

Throughout these rapid changes, the principal opportunity for members of the U.S. accounting and auditing profession is to participate in and lead the creation of ESG disclosures and reports and to verify them through attestation engagements. The opportunity seems vast and rapidly evolving as ESG rules become authoritative and ESG reporting becomes mandatory. 

Louis P. Le Guyader, CPA, is an accounting professor at Southeastern Louisiana University. He began his academic career after earning his Ph.D. at Columbia University, and this followed two decades on Wall Street at PriceWaterhouseCoopers and BNP-Paribas. His first transaction as an investment banker after graduating from the Darden MBA program was an early form of sustainability financing — the tax-exempt financing of pollution control facilities at a fossil fuel power plant in Louisiana. Contact him on LinkedIn.