Why are ESG frameworks important?

What are ESG standards and why do they matter? What are the best ways for companies to choose which ESG framework to adopt? We explain all things ESG reporting.

What exactly is ESG?

Companies provide reports on ESG (environmental, social, and good governance) performance in order to provide transparency to their employees, investors, and customers.

ESG has historically been a focus for sustainability-minded business leaders. In the present business environment, ESG has become an important topic for all executives looking to improve performance.

ESG reports are often used by investors, both private and institutional- as a way to analyse and measure factors they consider to be important. ESG Reports are also utilized by the regulators of certain industries to monitor issues such as carbon emissions, the utilization of natural resources and human rights.

What’s an ESG framework?

ESG frameworks are systems of making it easier to report and disclose for ESG metrics. They’re usually non-binding, however they may be required by a specific investor or by laws in certain countries.

These frameworks are put together by nonprofit organisations, NGOs, business groups, and other groups. This is why they differ greatly in the areas they their focus as well as the metrics they recommend.

For instance, one the most popular ESG models is The Global Reporting Initiative (GRI) framework, a set of guidelines for ethical environmental, social, economic, and governance that covers many different topics. 73% of the world’s 250 largest 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, as well as the structure and frequency of the reporting.

The majority of the time they don’t set goals for these metrics (e.g. targets to cut carbon emissions or increasing diversity) The setting of targets is generally at the discretion of the company.

However, some frameworks closely incorporate goals, like the UN’s Sustainable Development Goals (SDGs) in their reporting requirements, and certain businesses have to report to report on their progress towards specific goals.

Why is it that ESG frameworks crucial?

ESG frameworks assist companies in making positive changes in the world. In addition reporting on ESG has been proven to provide other benefits to the organization. For example:

The most robust ESG policies can help companies reduce water, energy, and waste expenses and help drive more strategic resource allocation.
Consumers are placing more and increasing pressure on companies to be socially and environmentally responsible.
Investors are increasingly looking at ESG as a standard aspect of the investment process.
Employees are also invested in corporate accountability, which is why ESG reporting can boost morale and productivity of employees and also help to attract top talent.

The majority of enterprise businesses are involved in some type of ESG reporting, and therefore those that don’t do so don’t run the risk of getting behind and risk losing business.

Which ESG frameworks are there?

There are over a dozen very popular frameworks, and many more that are used by smaller groups of organizations in certain industries and regions.

Some popular ESG Frameworks include:

CDP
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 abundance of ESG frameworks is a problem; standards don’t have the same power if they’re not standardised. An investor who’s well-versed in ESG could have a great understanding of various frameworks but the average customer or employee probably won’t and therefore won’t have any framework to interpret reports.

ESG standard and the frameworks that were formulated independently by multiple parties with each framework placing emphasis on different aspects and metrics. The intent was good, but the result is a confusing landscape with too many frameworks available to select from.

A variety of organizations have taken steps to create a “universal” framework that incorporates the best components of previously designed frameworks. These will hopefully simplify the ESG framework simpler to navigate.

What is the definition of an ESG rating?

Similar to credit ratings, which aim to determine a company’s creditworthiness by examining a variety of factors, ESG ratings aim to evaluate a company’s risk exposure to environmental, social and governance risks , and the effectiveness with which they deal with those risk.

Contrary to frameworks, which give guidelines for what to be reported on and how to report it, ESG ratings assign a specific score to a business based on its ESG performance.

However, ESG ratings aren’t always uniform across providers. Research conducted at the MIT Sloan School of Management found that major agencies’ ESG rating were at most 6 of 10 cases. But, ESG scores aren’t yet an unproven product, and they’re poised to improve accuracy and be extensively used in the near future.

Conclusion

ESG advisory reporting provides companies with the opportunity to share their information with their stakeholders regarding their strategy for environmental, social, and corporate governance topics. It’s rapidly becoming a vital component of operating an enterprise business.