ESG frameworks are structured frameworks or guidelines that provide a standardized approach for companies to assess, measure, and report their Environmental, Social, and Governance (ESG) performance.
These frameworks help companies organize and disclose relevant information on their sustainability practices, allowing stakeholders to compare and evaluate ESG performance across different organisations consistently.
There are several prominent ESG frameworks commonly used by companies:
1. Global Reporting Initiative (GRI): GRI provides a comprehensive framework for sustainability reporting, covering a wide range of ESG topics. It offers guidelines and indicators to assist companies in disclosing their economic, environmental, and social impacts.
2. Sustainability Accounting Standards Board (SASB): SASB provides industry-specific standards for reporting financially material ESG information. It focuses on identifying and reporting ESG factors most likely to impact the financial performance of companies within specific industries.
3. Task Force on Climate-related Financial Disclosures (TCFD): TCFD provides recommendations for companies to disclose climate-related financial risks and opportunities. It encourages companies to assess and report on climate-related risks in their governance, strategy, risk management, and metrics.
4. Carbon Disclosure Project (CDP): CDP focuses specifically on carbon emissions and climate change-related disclosures. It requests companies to report their environmental impact, carbon footprint, and climate change-related risks and opportunities.
5. United Nations Sustainable Development Goals (SDGs): The SDGs provide a set of 17 global goals to address major social and environmental challenges, such as poverty, inequality, climate change, and sustainable consumption. Companies can align their sustainability efforts with specific SDGs and report their contributions to the goals.
These frameworks provide guidance on relevant ESG indicators, reporting requirements, and disclosure methodologies. They help companies structure their ESG reporting, enhance transparency, and enable stakeholders to assess and compare ESG performance across organisations. Companies can choose to adopt one or multiple frameworks based on their specific needs, industry focus, and stakeholder expectations.
Benchmark ESG Frameworks
Benchmark frameworks, also known as benchmarking tools, are used to compare and evaluate the performance of companies or investments based on specific environmental, social, and governance (ESG) criteria. These frameworks provide benchmarks against which companies can measure their ESG performance relative to peers or industry standards. Here are some commonly used benchmark frameworks:
CDP Climate A List: CDP's Climate A List recognizes companies leading in climate action and disclosure. It assesses companies' efforts in addressing climate change risks and opportunities, focusing on greenhouse gas emissions reduction, energy efficiency, and climate governance.
Global Real Estate Sustainability Benchmark (GRESB): GRESB is a global tool used predominately by investors to assess the sustainability performance of real estate and infrastructure portfolios and assets worldwide. How GRESB works GRESB Assessments provide investors and asset managers with material insights into the sustainability performance of a company’s real assets. These performance insights are aligned with international reporting frameworks such as the GRI and Principles for Responsible Investment (PRI). Assessment participants receive comparative business intelligence on where they stand against their peers, a roadmap with actions they can take to improve their ESG performance and a communication platform to engage with investors. Investors use the ESG data and GRESB analytical tools to improve the sustainability performance of their investment portfolios, engage with managers and prepare for increasingly rigorous ESG obligations.
These benchmark frameworks help investors, stakeholders, and companies assess ESG performance, identify leaders in sustainability, and make informed decisions. Companies can utilize these frameworks to benchmark their ESG practices, identify areas for improvement, and strive for better performance compared to peers.
Voluntary ESG Frameworks
Voluntary ESG reporting frameworks provide flexibility for organisations to choose the relevant questions and topics to report on based on their industry and materiality. Here are some notable voluntary ESG frameworks:
Global Reporting Initiative (GRI): GRI offers globally applicable guidance through its standards, which cover materiality, management reporting, and disclosure for a comprehensive range of sustainability issues. Many organisations use GRI Standards to prepare their sustainability reports, selecting the relevant topic-specific standards to report on material topics.
Task Force on Climate-related Financial Disclosures (TCFD): TCFD focuses specifically on climate-related risks and opportunities. It helps organisations articulate the impact of ESG performance on future financial performance and value creation. TCFD's recommendations address governance, strategy, risk management, and metrics/targets related to climate-related issues.
Value Reporting Foundation (VRF) - Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC): VRF resulted from the merger of SASB and IIRC. It sets standards for disclosing financially material sustainability information to investors. SASB Standards cover ESG issues across 77 industry standards, enabling organisations to share outward ESG impacts with investors, debt holders, and internal stakeholders.
Each framework operates differently:
GRI Standards provide comprehensive guidance for material topics, with organisations selecting relevant standards to report on economic, environmental, and social aspects.
TCFD focuses on climate-related risks and opportunities, addressing governance, strategy, risk management, and metrics/targets related to climate impacts.
SASB Standards offer specific industry-based standards to disclose ESG metrics, enabling organisations to report transparently and relevantly to investors.
Companies such as asset management firms, manufacturing giants, and specialized industries utilize these frameworks to disclose ESG metrics and communicate their sustainability performance to stakeholders. Selecting the appropriate framework depends on the organisation's reporting objectives, material topics, and stakeholder requirements.
Mandatory ESG Frameworks
Regulatory ESG reporting frameworks differ from benchmark frameworks as they require all responses, without necessarily providing a scoring mechanism. These frameworks are mandated by government bodies.
Here are some key regulatory ESG reporting frameworks:
Sustainable Finance Disclosure Regulation (SFDR): SFDR aims to standardize ESG reporting for financial products and entities within the EU. It requires reporters to publish a Principal Adverse Impact (PAI) statement that discloses various quantitative indicators, including weighted averages of ESG metrics for investments and emissions from their own activities. SFDR aligns with the EU taxonomy and the proposed EU Corporate Sustainability Reporting Directive (CSRD) to advance sustainable finance in the EU.
Corporate Sustainability Reporting Directive (CSRD): CSRD sets rules for organisations to report sustainability disclosures across environmental and social issues within the European Union. It requires organisations to report according to European Sustainability Reporting Standards (ESRS). CSRD emphasizes the double materiality concept, considering financial and societal impacts. It includes reporting on business strategy to mitigate risks related to environmental and social issues, and it values social metrics such as employee health, human rights, and anti-corruption. CSRD applies to EU companies, EU subsidiaries of non-EU companies, and non-European companies with significant EU presence.
Streamlined Energy and Carbon Reporting (SECR): SECR is the UK government's guidance for organisations required to disclose their energy use, GHG emissions, and related information. It applies to quoted companies, large unquoted companies, and limited liability partnerships. Quoted companies must disclose energy use, Scope 1 and 2 GHG emissions, and at least one emissions intensity metric. Unquoted large companies and LLPs must report UK energy use, associated GHG emissions, and at least one intensity metric.
National Greenhouse and Energy Reporting (NGER): NGER is Australia's national framework for reporting company information on greenhouse gas (GHG) emissions, energy production, and consumption. Regulated by the Clean Energy Regulator, it collects data on GHGs such as CO2, CH4, N2O, SF6, and specified hydrofluorocarbons and perfluorocarbons. The data must enable external audits to verify its relevance, completeness, consistency, transparency, and accuracy.
These regulatory frameworks aim to enhance transparency and consistency in ESG reporting, enabling investors and stakeholders to make informed decisions. Compliance with these frameworks is essential for organisations operating within their respective jurisdictions.
Benchmark ESG Indices
1. Dow Jones Sustainability Indices (DJSI): DJSI evaluates the sustainability performance of companies based on economic, environmental, and social dimensions. It ranks companies within various industry sectors, providing an indication of their sustainability leadership.
2. MSCI ESG Research: MSCI ESG Research offers ESG ratings and indices that assess companies' exposure to ESG risks and opportunities. These ratings and indices serve as benchmarks for investors looking to incorporate ESG considerations into their investment decisions.
3. FTSE4Good Index Series: The FTSE4Good Index Series measures the ESG performance of companies based on globally recognized standards. It includes criteria related to environmental sustainability, social responsibility, and corporate governance.
4. Corporate Knights Global 100: The Corporate Knights Global 100 is an index that ranks the world's most sustainable companies. It evaluates companies based on a range of ESG indicators, including resource management, employee diversity, clean revenue, and more.
5. Sustainalytics: Sustainalytics provides ESG research, ratings, and indices that assess companies' ESG performance. These benchmarks enable investors to compare companies based on various ESG criteria and identify sustainability leaders.
Choosing the right ESG Framework
Selecting the appropriate ESG (Environmental, Social, and Governance) framework for your organisation involves considering various factors. Here are key considerations to help you choose the right ESG framework:
Relevance to Your Industry: Look for frameworks that are relevant to your industry and specific ESG focus areas. Different frameworks may have sector-specific indicators and guidelines that align with your organisation's operations and impact.
Reporting Requirements: Consider the reporting requirements of the framework. Assess whether the framework's reporting standards align with your organisation's capacity to collect and report data effectively. Evaluate the level of transparency and disclosure expected by the framework.
Materiality and Stakeholder Expectations: Identify the material ESG issues for your organisation based on stakeholder expectations and impact on business value. Choose a framework that includes indicators and metrics relevant to these material issues to effectively measure and report on them.
Recognition and Credibility: Consider the recognition and credibility of the framework within your industry and among investors, stakeholders, and peers. Widely recognized frameworks often provide more credibility and comparability in evaluating ESG performance.
Compatibility with Other Frameworks: Evaluate whether the framework aligns or complements other frameworks or reporting initiatives that your organisation may be using. Integration with other frameworks can enhance consistency and reduce duplication of efforts.
Reporting and Data CollectionEfforts: Assess the feasibility and resources required to implement the framework. Consider the availability and accessibility of the data required by the framework, as well as the tools and systems needed for data collection, analysis, and reporting.
Investor and Stakeholder Preferences: Consider the preferences of your investors, stakeholders, and customers. Some stakeholders may have specific expectations or preferences for certain ESG frameworks, and aligning with their preferences can enhance stakeholder engagement and trust.
Evolving Standards and Regulatory Landscape: Stay informed about emerging ESG reporting standards and regulatory requirements. Choose a framework that is adaptable to evolving standards and can help your organisation stay ahead of regulatory changes.
It is important to note that businesses are not limited to adopting a single framework. Many organisations use a combination of frameworks to address different aspects of their ESG performance and reporting needs. Ultimately, the chosen framework(s) should align with the organisation's ESG goals, provide meaningful insights, and facilitate transparent and credible reporting of the company's sustainability efforts.
