Here’s an overview of eight ESG reporting frameworks and standards that companies can use to file reports on their practices and ESG-related risks and opportunities.
As part of environmental, social and governance programs, companies can use ESG reporting frameworks to disclose information on the sustainability and ethical performance of their business operations. These frameworks offer a structured approach to evaluating a company’s practices and ESG-related business risks and opportunities, including its impact on the environment and society.
The overall goal of the reporting frameworks is to give internal and external stakeholders — investors, employees, customers, government officials and more — a comprehensive view of the state of ESG initiatives, while creating transparency and accountability for companies. The frameworks also set standards and guidelines for businesses on how to operate sustainably and responsibly.They cover a wide range of ESG factors, such as climate change, human rights, labor standards, data privacy, board diversity and executive compensation. Various frameworks are available, each with its own set of performance indicators and reporting requirements. As ESG frameworks continue to evolve and gain wider use, they’ve become a crucial tool for companies looking to demonstrate their commitment to sustainable growth and responsible business practices.
1. What is ESG reporting?
ESG reporting is the process of publicly disclosing an organization’s progress toward meeting its goals and commitments on environmental sustainability, social issues and corporate governance. The reports, generally done on an annual basis, include details on different ESG metrics used to measure performance in those three areas in both quantitative and qualitative ways. They often also list the long-term objectives of ESG strategies and provide updates on key milestones.Voluntary ESG reporting has been the primary means of documenting corporate initiatives and activities to date. The practice is already widespread among large companies: A November 2022 research report by business sustainability and ESG consulting firm Governance & Accountability Institute Inc. said 96% of companies in the S&P 500 and 81% of businesses in the broader Russell 1000 Index published sustainability reports in 2021.Government mandates on disclosures of sustainability and ESG information are also now starting to appear. For example, the European Union’s Corporate Sustainability Reporting Directive went into force in January 2023. It will require some 50,000 companies to report on business risks and opportunities related to social and environmental issues and the impact of their operations on people and the environment, with the initial reporting requirements taking effect in 2025. In 2022, the U.S. Securities and Exchange Commission proposed a similar climate risk disclosure rule for publicly traded companies.
2. Different types of ESG frameworks and standards
It’s useful to understand the distinction between ESG frameworks and standards. At a high level, their purpose and utility are different. According to the SASB Standards website, sustainability frameworks “provide principles-based guidance on how information is structured, how it is prepared and what broad topics are covered. Meanwhile, standards provide specific, detailed and repeatable requirements for what should be reported for each topic, including metrics.”In short, standards are designed to ensure that the ESG disclosures made in a particular framework are consistent and can be compared to one another. Frameworks and standards complement each other from that standpoint. In practice, though, the two are often conflated as different types of frameworks.For example, Nareit, an organization formally known as the National Association of Real Estate Investment Trusts, grouped ESG frameworks into these two primary categories in a 2019 report:
– Voluntary disclosure frameworks. These provide a platform and mechanisms for ESG disclosures that are applicable to organizations across different industry sectors and regions. Reporting is commonly done through online surveys or questionnaires that are then scored.
– Guidance frameworks. Akin to standards, they provide specific topics, methodologies and metrics for companies to use in reporting on their ESG performance.
Nareit also identified the scoring services offered by third-party aggregators as a third ESG framework category. More commonly known as ESG rating agencies and data providers, these are vendors that assess the ESG performance of companies based on publicly available data, including reports submitted through the other types of frameworks. They then issue ESG scores to companies, either in the form of a numerical score or a letter rating.
3. Popular ESG reporting frameworks and standards
ESG reporting frameworks and standards are in something of a state of flux. There’s no single standard for ESG reporting — nor is there likely to be, as much as that would simplify the reporting landscape. But several standards bodies have merged and are consolidating their frameworks, making the list of relevant ones a moving target. The following is a list of some of the most prominent ESG frameworks and where they now stand:
i. IFRS Sustainability Disclosure Standards.These are new standards developed by the International Sustainability Standards Board (ISSB), which was set up in 2021 by the International Financial Reporting Standards (IFRS) Foundation. The IFRS standards build on the existing SASB Standards and also supersede the CDSB Framework following the consolidation of the organizations responsible for those two frameworks into the IFRS Foundation in 2022. The goal is to create a unified set of disclosure standards that can be used globally to report ESG data to investors. The ISSB is working on two sets of requirements: one for general disclosures of sustainability-related financial information and the other for disclosing specific information about climate-related risks and opportunities. The organization issued the first version of both standards in June 2023.
ii. SASB Standards.Originally developed by the Sustainability Accounting Standards Board and released in 2018, the SASB Standards contain specifications on disclosing financially material sustainability information across 77 industries. The framework lists subsets of relevant ESG issues for each industry, including markets for different IT products and services. It was the most popular choice for evaluating the ESG programs of IT suppliers among 400 IT professionals surveyed in 2022 by TechTarget’s Enterprise Strategy Group division — cited by 66% of the respondents as a relevant framework for their organization. In 2021, SASB was consolidated into the Value Reporting Foundation, which then was absorbed by the IFRS Foundation in 2022. The SASB Standards currently remain available for use, although the IFRS Foundation says they’ll eventually be replaced by its new standards.
iii. CDSB Framework. This was developed by the Climate Disclosure Standards Board (CDSB) to support the inclusion of ESG reporting in mainstream corporate reports, such as annual reports and 10-K filings. The first version of the framework, released in 2010, focused on climate change issues; an update that incorporated broader environmental reporting became available in 2015, and another that added information on ESG’s social factors followed in 2022. At its height, the CDSB Framework was being used by 374 companies in 32 countries, according to the CDSB’s website. It’s still available to use for now, but no further work is being done on the framework after the CDSB’s consolidation into the IFRS Foundation in 2022.
iv. GRI Standards.According to its website, the standards developed by the Global Reporting Initiative (GRI) “enable any organization — large or small, private or public — to understand and report on their impacts on the economy, environment and people in a comparable and credible way, thereby increasing transparency on their contribution to sustainable development.” The GRI Standards are a modular framework that includes sets of universal, sector-specific and topic-based sustainability reporting standards. The first version was published in 2000 as the GRI Guidelines; after several updates, GRI released its formal standards in 2016, then began adding the topic standards in 2019 and the sector ones in 2021. In addition to the reporting companies themselves, GRI says the standards are relevant to investors, government policymakers and other stakeholders.
v. CDP.The Carbon Disclosure Project was founded in 2000 and is now known simply as CDP. It operates a namesake environmental disclosure system that companies can use to report on their business risks and opportunities related to climate change, water security and deforestation through separate questionnaires on those topics. CDP then gives reporting companies letter-grade scores in each area that can be viewed by various stakeholders. The not-for-profit charitable organization says its framework is being used by 18,700 companies worldwide, including more than 3,700 in North America. City governments can also use the CDP disclosure system to report on their climate action efforts and other environmental data.
vi. Task Force on Climate-related Financial Disclosures.Commonly known as the TCFD, the 31-member task force was created in 2015 by the Financial Stability Board, which monitors the global financial system and recommends actions to strengthen it. The TCFD was set up to develop recommendations on the information that companies should publicly disclose about their financial risks related to climate change for use by investors, lenders and insurance underwriters. Released in 2017, the 11 recommendations focus on four core elements: governance, strategy, risk managementand climate-related metrics and targets. The TCFD says that more than 4,000 companies have declared support for the recommendations. Several countries have mandated reporting that’s aligned with the TCFD recommendations, and the SEC’s proposed rule on climate-related risk disclosures by U.S. companies also aligns with them.
vii. United Nations Global Compact. Formed in 2000, the UN Global Compact bills itself as the “world’s largest corporate sustainability initiative,” with an emphasis on aligning business strategies and operations with a set of 10 principles on human rights, labor practices, the environment and anti-corruption measures. Participating companies file an annual Communication on Progress (CoP) report that details their adherence to the principles. More than 47,000 CoP reports have been submitted in total, according to the Global Compact, which in 2023 launched a new digital platform for CoP submissions that replaces the original narrative format with a standardized questionnaire. In addition, businesses can report on their contribution to and impact on the U.N.’s broader Sustainable Development Goals through a separate platform that blends the Global Compact’s principles and the GRI Standards.
viii. Workforce Disclosure Initiative. Created in 2016 by ShareAction, a charity that supports responsible investment practices with an ESG focus, the WDI offers a platform for reporting data on workforce practices and management. The WDI framework is modeled on the CDP’s disclosure system: Participating companies fill out an online survey and get a “disclosure scorecard” that they can use for benchmarking against business peers. In 2022, 167 companies worldwide completed the survey, which asks about topics that include workplace health and safety, policies and practices to support employee well-being, and treatment of both internal employees and supply chain workers.
4. How to decide which frameworks to use
There are more than a dozen ESG reporting frameworks overall, each with its own metrics and reporting requirements. It can be confusing to try to sort out which one — or combination of them — will best suit your organization, especially with the field of ESG reporting undergoing rapid change due to the development of the IFRS standards and new regulatory requirements.
One obvious factor to consider is the type of ESG information your organization is looking to report on and which framework or frameworks will best support that. Also, in a November 2022 blog post, John Niemoller, CEO of environmental, health and safety management software vendor Perillon, listed the following considerations for choosing among ESG frameworks:
Look at your industry. Consider the frameworks that are most often used by companies that are in the same business as yours.
Look at what your competitors are using. This narrows it down even further to direct competitors. Using the same framework they do can help in benchmarking against them.
Consider your audience. Investors, customers, employees and other stakeholders often want to see different information about ESG initiatives. Your choice of framework can be guided by your primary audience and its information needs.
Look at emerging regulations. Regulatory mandates on climate-related disclosures and other types of ESG reporting can also influence framework choices.
Beyond the specific regulatory requirements, there are other factors to consider about the regions in which your company operates. For example, a report on sustainability reporting standards published jointly by consulting firms EY and Oxford Analytica in 2021 said different countries and jurisdictions “have varying legal constructs governing corporate disclosure, as well as different legal liability profiles.” Those differences can also influence “the nature and acceptance of both voluntary and mandatory disclosures” on sustainability and ESG issues, the report added.
Keep in mind that because the various reporting frameworks were created for slightly different purposes, it’s common for companies — especially large businesses — to use more than one. Helpfully, the organizations in charge of some of the frameworks are working to make it easier to do so. For example, the IFRS Foundation and GRI are collaborating to coordinate their standard-setting activities and increase compatibility between their frameworks. In addition, CDP plans to incorporate the new IFRS standard on climate-related disclosures into its reporting platform.
source: www.techtarget.com
