As businesses face increasing pressure to incorporate sustainability into their operations, Environmental, Social, and Governance (ESG) Reporting has become a critical aspect of demonstrating their commitment to sustainability. ESG reporting enables companies to communicate their sustainability efforts to stakeholders and demonstrate their compliance with ESG standards and frameworks. While Developing an ESG Strategy, one must choose the ESG frameworks and standards most suited to the organization. However, with so many ESG standards and frameworks available, it can be challenging to navigate the ESG reporting landscape and choose the right one for your company.
ESG reports target one of three different audiences:
- Investors: In order to make an informed investment decision, ESG frameworks assist in gathering information about an investment’s sustainability performance.
- Government: The frameworks for reporting ESG factors serve as guidelines for providing sustainability services and support to governments
- Management: Organizations can use ESG frameworks to transform sustainability-related concepts into actionable results.
Each ESG reporting framework caters to a specific audience, so there is no singular framework for all the groups.
Difference Between ESG Frameworks & ESG Standards
An ESG framework provides a set of principles to guide and shape the understanding of ESG practices. It provides a broad scope and direction for ESG reporting but does not provide a methodology for the collection of information or data, or the reporting itself. ESG frameworks are useful when a well-defined standard does not exist, or they can be used alongside ESG standards.
On the other hand, ESG standards are specific in their focus and contain detailed criteria explaining what needs to be reported. They dictate how information and data are collected, and how a report needs to be produced, including which topics and business areas to include. Standards make frameworks more actionable by ensuring comparable, consistent, and reliable disclosure.
It is essential to use both ESG frameworks and standards to ensure that the reporting is comprehensive, consistent, and reliable. By understanding the difference between the two, companies can make informed decisions about which frameworks and standards to use in their ESG reporting.
ESG Frameworks
ESG frameworks can be grouped into three categories, which are:
- Voluntary disclosure frameworks,
- Guidance frameworks,
- Third-party aggregators.
Voluntary Disclosure Frameworks
Companies that comply with these frameworks actively disclose their sustainability policy, practice, and performance data. These frameworks are often in the form of questionnaires. The following are the most popular voluntary disclosure frameworks, explained in detail:
- CDP: The Carbon Disclosure Project (CDP) assists organizations in disclosing their environmental, social, and governance (ESG) performance. The ESG framework of CDP involves a survey that encompasses climate change, deforestation, and water usage. Afterward, it generates a sustainability score and offers input regarding potential ESG hazards and possibilities.
- GRESB: The Global Real Estate Sustainability Benchmark (GRESB) is a globally acknowledged ESG framework that evaluates the sustainability performance of real estate assets and portfolios around the world. It offers ESG performance data and peer comparisons to assist in investment decision-making, promoting sustainability enhancements, and stimulating engagement in the real estate sector.
- DJSI: The Dow Jones Sustainability Indices (DJSI) were established in 1999 as the world’s first international sustainability benchmark. It serves as a prominent reporting framework for environmental, social, and governance (ESG) factors to evaluate the ESG performance of leading companies.
Guidance Frameworks
Frameworks provide methods and recommendations for identifying, managing, and reporting environmental, social, and governance performance. We’ve outlined the most popular guidance frameworks below, explaining each:
- SASB: The Sustainability Accounting Standards Board (SASB) is an ESG framework that encompasses five crucial areas of sustainability, including human capital, social capital, environment, business model and innovation, and leadership and governance. The framework follows a research-based approach and encourages open participation from companies, investors, and subject-matter experts to provide a comprehensive view of sustainability factors.
- GRI: The Global Reporting Initiative (GRI) is an autonomous entity that offers an ESG framework for sustainability reporting. It is recognized as the primary sustainability reporting standard and concentrates on significant concerns relevant to stakeholders, such as sector-specific and topic-specific standards.
- TCFD: The Task Force on Climate-Related Financial Disclosures (TCFD) provides guidelines aimed at promoting well-informed investment, credit, and insurance underwriting decisions.
- CDSB: The Climate Disclosure Standards Board (CDSB) is a non-profit entity that provides reporting on environmental, social, and governance (ESG) factors related to climate change. It focuses on four primary aspects, including emissions of greenhouse gases, opportunities, and risks associated with climate change, carbon pricing, and financial reporting related to climate change.
Third-Party Aggregators
A third-party aggregator is a framework for assessing an organization’s performance based on aggregated and publicly available data. Several sources are used to collect data, including company filings, publications, websites, annual reports, sustainability reports, and/or corporate social responsibility reports. Below are the main players in the third-party aggregator market.
- Bloomberg Terminal ESG Analysis: Bloomberg ESG is a data platform that provides financial analysts with insights on sustainable investing through either free or premium subscription options. The platform offers an extensive collection of global, regional, and industry-specific ESG resources, as well as news and commentary about ESG developments.
- MSCI ESG Ratings: MSCI ESG Ratings aim to measure a company’s management of financially relevant ESG risks and opportunities. They use a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to their competitors.
- Sustainalytics: Sustainalytics is a worldwide provider of ESG research and ratings, offering a range of services such as company research, risk assessments, and portfolio analytics solutions. These services are mainly designed to assist investors in gaining insight into the ESG risks and opportunities associated with their investments.
ESG Standards to direct your ESG Report
ISO: The International Organization for Standardization (ISO) is a self-governing and non-governmental entity that offers a broad range of ESG standards covering hundreds of topics. These standards are reached through a consensus-based process involving industry experts, NGOs, governments, and other relevant stakeholders from around the world.
ISSB: The International Sustainability Standards Board (ISSB) was introduced by the IFRS Foundation Trustees in 2021. This board is responsible for establishing global sustainability standards, which will offer high-quality disclosure on climate and sustainability matters to investors and other stakeholders in the capital markets, creating a uniform standard globally.
UN SDGs: The United Nations Sustainable Development Goals (UN SDGs), launched in 2015, comprise 17 goals designed to create a more sustainable and fair future. This ESG framework is geared towards eradicating poverty, preserving the environment, and fostering peace and prosperity through initiatives such as education, healthcare, gender equality, and clean energy.
WEF: The ESG standard developed by the World Economic Forum (WEF) assists institutions in reporting their ESG performance by utilizing 21 core and 34 expanded metrics across four pillars: governance, planet, people, and prosperity.
How to choose the right ESG reporting framework
Selecting an ESG reporting framework for your organization can be overwhelming given the variety of options available. Here are some key factors to consider when making your decision:
- Clarify the purpose of your ESG reporting framework in order to choose a solution that aligns well with your needs.
- Assess which ESG frameworks are most appropriate for specific industries and types of companies.
- Take into account the credibility of the ESG reporting framework based on its recognition and acceptance by industry stakeholders.
- Evaluate the scope and coverage of ESG factors included in the framework.
- Consider the current regulatory landscape in your jurisdiction and industry.
- Determine if using multiple ESG frameworks concurrently will lead to a more accurate ESG report.
Basic areas that should be covered in an ESG Report
Take Control of Your Sustainability
Selecting the right ESG reporting framework for your organization can be a daunting task. However, understanding the purpose of your reporting, assessing which frameworks are well-suited to your industry, considering the credibility and recognition of the framework, evaluating its scope and coverage, and taking into account the regulatory environment in your jurisdiction can help make this process more manageable. Additionally, using multiple frameworks simultaneously can provide a more accurate and comprehensive ESG report. It’s crucial to remember that selecting the right ESG framework can help your organization not only improve its sustainability performance but also enhance its reputation and build trust with stakeholders.
So, if you’re looking to select an ESG framework for your organization, start by considering these factors and making an informed decision that aligns with your goals and values. Remember, sustainability reporting is an ongoing process that requires continual monitoring and adaptation to remain relevant and effective.
Take the Next Step
Frequently Asked Questions (FAQ)
Why is ESG important for companies?
ESG is important for a variety of reasons, from responding to investor pressure and managing financial risks to reducing costs and waste and improving public relations. Every company contends with ESG issues and neglecting them can significantly increase the risk of experiencing negative incidents or controversies. We’ll look at some of these issues in more detail below.
Are there legal ESG requirements?
There may be legal and regulatory requirements in your jurisdiction related to ESG issues – for example, concerning workers, human rights, products, corporate governance, data privacy, and security, emissions, and much more. However, usually, when we speak of ESG legal requirements and regulations, we are talking about measuring impacts and reporting. This area is changing rapidly. There are currently several voluntary standards for reporting to guide companies, and some countries are expected to adopt them as laws over the coming years.
What’s the role of ESG risk scores and ratings?
For companies, the main purpose of an ESG score or risk rating is to understand their ESG performance baseline. ESG ratings may be used in several ways, such as:
- ESG ratings provide transparency to investors regarding how exposed companies are too specific risks, and how well companies are managing them.
- Organizations increasingly rely on ESG scores or risk ratings to obtain specialized financing for sustainability programs and projects.
- Businesses use their ESG scores for benchmarking their ESG performance and demonstrating their commitments to stakeholders.
- Fund managers may rely on ratings to include companies in sustainable investment funds.
What are the benefits of an ESG strategy?
By putting in place an ESG strategy, companies, and their stakeholders can enjoy a range of valuable benefits, including improving investor and public relations, managing risk, reducing costs, and enhancing financial performance. The following questions will look at just a few of the broad benefits of incorporating ESG practice into your business.
How can ESG improve investor relations?
Implementing an effective ESG program can improve investor relations in various ways. On a basic level, an ESG program requires good communication with investors to understand their needs and to share your progress. Moreover, investors, especially asset owners and asset management institutions, now expect to see corporate ESG policies and practices across the spectrum of environmental, social, and governance issues.
How does ESG affect risk management?
ESG affects risk management because ESG practices are risk management practices. For example, companies that implement effective ESG programs may experience less exposure to supply chain disruptions and other ESG controversies. They may also find they are better able to respond when ESG incidents do occur.
In addition, stakeholders are increasingly relying on information about a company’s ESG efforts, including ESG ratings, to assess a firm’s risk exposures as well as its possible future financial performance. This applies to medium and smaller companies as well.
How can an ESG program reduce costs?
Effective ESG programs can reduce business expenses in several ways. For example, sustainable practices could significantly reduce energy and water usage and limit the cost of packaging and the amount of waste your company produces. In the human resources department, companies with good ESG practices can reduce costs by limiting turnover-related expenses and attracting talent from a wider pool of potential employees.
