What are ESG standards, and why are they important? How can companies decide which ESG framework to adopt? We explain all things ESG reporting.
What is ESG?
Companies provide reports on ESG (environmental social, and good governance) performance in order to be transparent to their employees, investors and clients.
ESG has historically been a focus for sustainability-minded business leaders. However, in the current economic climate, ESG has become an important subject for any executive trying to improve their performance.
ESG reports are often used by investors — both personal and institutionalfor the purpose of helping examine and quantify the aspects they believe are important. ESG reports are also used by regulators in certain industries to monitor issues such as carbon emissions, the use of natural resources, and human rights.
What’s an ESG framework?
ESG frameworks are systems for standardizing the reporting and disclosure and disclosure ESG metrics. They are often not mandatory, but they could be required by a specific investor or in the context of laws in certain countries.
These frameworks are put together by nonprofit organisations, NGOs, business groups, and other groups. They differ in the areas of particular focus and in the metrics they suggest.
For instance, one of the most frequently used ESG structures is called The Global Reporting Initiative (GRI) framework, a set of guidelines to ensure responsible environmental economic, social and governance conduct covering a wide range of topics. 73% of the world’s largest 250 firms report on sustainability according to an approach based on the GRI framework.
Do ESG frameworks set sustainability targets?
ESG frameworks typically set the metrics and qualitative elements that companies must disclose in addition to the form and frequency of this reporting.
In the majority of cases, they don’t set targets for those indicators (e.g. goals for reducing carbon emissions or for enhancing diversity) It’s usually determined by the company.
However, some frameworks closely incorporate goals, like the UN’s Sustainable Development Goals (SDGs) in their reporting requirements, and some business organisations require reporting on progress toward certain targets.
Why are ESG frameworks crucial?
ESG frameworks allow companies to make a positive impact on the world. Furthermore, reporting on ESG has been proven to provide other benefits to the organization. For example:
Strong ESG policies can assist companies to reduce energy, water, and waste expenses and help drive more strategic resource allocation.
Consumers are placing more and increasing pressure on companies to be more environmentally and socially responsible.
Investors are increasingly considering ESG as a standard aspect of their investment strategy.
Employees are also involved with corporate responsibility, therefore ESG reporting can contribute to productivity and morale of employees, as well as help in attracting new talent.
The majority of enterprise businesses engage in some form of ESG reporting, and therefore those that don’t do so don’t run the risk of falling behind and losing business.
How many ESG frameworks are there?
There are over dozen frameworks that are extremely popular and a myriad of other frameworks which are utilized by smaller amounts of companies in certain industries and regions.
A few of the most well-known ESG Frameworks include:
Climate Disclosure Standards Board (CDSB)
Global Reporting Initiative (GRI)
Science Based Targets project (SBTi)
Sustainability Accounting Standards Board (SASB)
Task Force on Climate-related Financial Disclosures (TCFD)
UN Principles for Responsible Investment (PRI)
World Economic Forum (WEF) Stakeholder Capitalism Metrics
The sheer number of ESG frameworks poses a problem as standards don’t have the same impact if they’re not established. A professional investor who’s knowledgeable about ESG may have a solid understanding of various frameworks, but the average consumer or employee isn’t likely to, and thus won’t have any basis for understanding reports.
ESG guidelines and standards were developed separately by multiple parties with each framework focusing on various topics and metrics. The intent was good, however the end result is a complex landscape with a myriad of frameworks to choose from.
Numerous organizations have taken steps to create an “universal” framework using the best elements of earlier created frameworks. This is expected to make the ESG environment easier to navigate.
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What is An ESG rating?
As credit scores aim to assess a company’s creditworthiness by examining a variety of factors, ESG ratings aim to determine a company’s exposure environmental, social and governance risks and the effectiveness with which they handle those risks.
Unlike frameworks, which provide specific guidelines on what to report and the best way to report it, ESG ratings assign a specific score to a business based on the company’s ESG performance.
Unfortunately, ESG ratings aren’t always the same across different providers. The research conducted by the MIT Sloan School of Management found that prominent agencies’ ESG ratings only aligned in about six out of 10 instances. But, ESG ratings are still an emerging product, and they are poised to improve their accuracy and become extensively used in the near future.
ESG reporting provides companies with the chance to communicate with their stakeholders regarding their strategy for environmental, social and corporate governance issues. It’s fast becoming an essential component of operating an enterprise business.