“We believe that sustainability should be our new standard for investing.”
Investor interest in sustainability is mounting, making this a hot topic in board rooms around the world. It’s not news that you should pay attention to the emerging environmental, social, and governance (ESG) frameworks. But where do you start?
Sustainability for organisations can take on multiple shapes — from creating sustainable internal processes to achieving positive long-term outcomes through these processes for employees, stakeholders, and shareholders alike.
While this is about setting ESG goals, it is also about measuring your progress towards them. This is where ESG frameworks come in to provide the much-needed measuring stick.
There is no uniform standard but there are various frameworks any organisation can reference or use as a guide to establishing a complete environmental, social, and governance (ESG) reporting process. These are all different and, sometimes, industry-specific which may be confusing.
Question is, which ESG framework may be right for you and why?
That is what we will explore in this article. Hopefully, it will help you reach a definitive conclusion or, at the very least, provide useful insight.
Why is ESG reporting necessary?
Basic ESG reporting will soon be mandatory in the EU. But, where it’s not, keeping account of your environmental, social, and governance metrics is important for your organisation’s long-term health and for keeping your investors happy.
According to one Edelman survey, a full 88% of institutional investors believe that companies that prioritise ESG initiatives represent better opportunities for long-term returns than companies that do not.
This makes a lot of sense since long-term viability and profitability are two of the primary factors guiding any investor’s decision-making process, whether they are an individual or an institution.
Measuring and reporting ESG is also an internal opportunity to innovate, identify risks, and possibly even reduce costs in areas you evaluate as needing improvement.
By adopting an ESG reporting framework now, you stay ahead of the curve and show all stakeholders that you are serious about sustainability.
ESG Frameworks And Standards
Since ESG reporting is very loosely regulated at this point, it’s up to you to choose a framework or frameworks to adhere to.
Thankfully, there are multiple standards that can help your company establish ESG performance measurement. Here are a few of the most widely used and recognized.
This international, independent body helps businesses, governments and other organisations understand, develop and communicate sustainability metrics. The guidelines, also known as ‘GRI standards’, can be downloaded freely on their website. GRI relies on voluntary disclosure. You share with them a report covering the topics that are most relevant to your organisation.
This non-profit organization has developed a global standard for identifying, managing and communicating financially-material sustainability information to investors.
These standards are explained through a materiality map and contain a complete set of 77 industry-specific metrics. SASB is a great choice when you want to communicate the value you create in investor language. Besides, you can use it in conjunction with another framework. Many companies use SASB along with GRI, for example.
Originally established in 2010, the IIRC published its own framework for integrated reporting which they define as “a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation.”
IIRC is often used together with SASB standards. The organisation provides extensive information on their website regarding their International Integrated Reporting Framework and its six pillars.
This is an investor collective created to help companies better communicate labour practices to stakeholders in an efficient way. Its website sports a list of reporting companies that have opted into the framework and is accepting the applications of those who want to start disclosing their ESG metrics.
An initiative of The Financial Stability Board, the task force was created to improve and increase reporting of climate-related financial risks. This will be a very interesting standard to track over the long term, to see which companies report climate-related financial information and also how they fare. What’s even more interesting is that the UK is considering implementing the TCFD requirements in its own legislation.
The TCFD recommendations for reporting can be found in their knowledge base, along with in-depth tutorials on how to adhere to their standards.
This is an international consortium of NGOs that are set to help organisations integrate information related to climate change in their financial reporting. The CDSB has developed its own framework which is currently used by 374 companies across 32 countries.
Based on data that we’ve been gathering even before Boardclic was created, our ESG index is a benchmark that gives you a clear view of how you’re performing in comparison to other companies. It enables you to get a better idea of where you stand, how well you are doing and which areas you can improve. What’s unique about Boardclic’s ESG index is that it’s based on our own set of questions and historical data. We can’t reveal the exact algorithm but the topics we cover include sustainable value creation, stakeholder management, corporate health, diversity, culture, and climate impact.
This is one of many third-party organisations that don’t directly offer an ESG framework you can implement. Instead, they collect data from various sources such as NGOs, company disclosures, sustainability reports, proxy reports, and many more.
Based on this data, an ESG index is calculated that is used by investors to evaluate companies. While you can’t influence your MSCI rating (if you have one), it’s a good idea to browse their website and familiarise yourself with their reports. Perhaps this can help you fine-tune your internal ESG framework to cover more of the points that investors are interested in.
Tips on choosing your framework
The frameworks outlined in the previous section should give you plenty to consider. Still, if you’re wondering which one may be right for your organisation, here are some tips to help make your decision easier:
- Know your organisation. Keep your sector and industry top of mind when deciding which framework is most appropriate to implement. This is especially true for some of the frameworks listed above such as the SASB and their set of 77 industry-specific standards.
- Know whom you are reporting to. Think about what drives your reporting needs. Are you going for multiple disclosures across Economic, Environment and Social categories? Are sustainability goals more important? Or do you need a complete framework that covers all financial and non-financial issues? The answer to this may depend on what your shareholders, lenders, community partners, and other stakeholders would like to see.
- Geography matters. Disclosure requirements vary by country and region. From the EU’s Corporate Sustainability Reporting Directive (CSRD) to the UK’s constantly changing disclosure requirements, having a framework that fits the required reporting standards is essential.
Challenges When Adopting ESG Frameworks
Choosing an ESG framework is only half the problem. The other half is adopting and implementing that chosen framework to cover all your objectives.
Here are just a few things that may arise as you go about this mission.
Different Scoring Systems
“How do we determine our ESG score?”
This is one of the top questions that businesses ask. It’s also one that has no easy answer.
An ESG score can be defined as a numerical measure of how an organization is performing on a wide range of environmental, social and governance (ESG) topics.
It’s both an internal and external way to keep score of how well you stack up on the ESG front. Think of it as a sustainability profit and loss statement.
However, your score depends on who is calculating it. So, the right question to ask is,
“What is our ESG score against [X framework/standard]?
One example of an ESG rating the Boardclic ESG Index which gives you an idea of how other companies are currently performing in terms of Environment, Social and Governance factors. Another example is the Morgan Stanley Capital International (MSCI) ESG Ratings, which are designed to measure a company’s long-term resilience to industry material environmental, social and governance (ESG) risks. And a third example is the Institutional Shareholder Services (ISS) ESG Ratings & Rankings, which aim to help institutional investors incorporate sustainability into their decision-making.
If you look up the same company on both websites, you will see different scores. That’s because rating methodologies are different.
So, to conclude, the focus for companies should be on reporting, rather than achieving a great rating because the latter can be a very slippery term. As long as you try to keep your reports transparent and you set ESG goals, you are bound to receive a good rating in the end.
Lack of Harmonisation
Despite or perhaps because of there being literally hundreds of ESG reporting frameworks that now exist, there is a real lack of harmonisation between them. Indeed, this inconsistency is even causing some firms to pause ESG reporting, due to not being able to settle on a workable framework.
Since ESG ratings and scores are often based solely on voluntary company self-disclosure and partial data, the accuracy of such ratings has been questioned. Unfortunately, until reporting and disclosure become a standardised practice, much like financial reporting for publicly listed companies, this will continue to be the case.
The future of ESG reporting
While a global standard for measuring and reporting sustainability performance may still be years away, an increasing number of NGOs are working independently towards developing standards for sustainability reporting. At the same time, some countries, including the UK, France, Denmark and New Zealand have set net-zero emissions goals and adopted the corresponding legislation to push companies to achieve these goals.
There is also some headway being made by one familiar NGO. This NGO is the IFRS Foundation, the body that oversees the work of the International Accounting Standards Board (IASB). The former proposed the creation of a Sustainability Standards Board (SSB) in September 2020.
Erkki Liikanen, Chair of the IFRS Foundation Trustees, said:
“Calls for standardisation and comparability of reporting on sustainability and climate-change issues continue to grow as these matters become increasingly important to capital markets. We, therefore, seek to assess whether there is demand for global sustainability standards and whether the IFRS Foundation should play a role in developing such standards.”
Whether this proposal is adopted or not remains to be seen, but investors and other market participants may soon get a clearer view of a company’s sustainability performance. Just as they currently have data about company financial performance.
And, just like you can compare your profit and sales to those of your peers, it makes sense to compare your ESG score, too. This is where a benchmark like Boardclic’s ESG index can be very helpful.
How many ESG frameworks are there?
The exact number is fluid and always changing but there are now about a dozen popular frameworks, which are fairly widely used throughout the world. We previously mentioned some in the ESG Frameworks and Standards section above and here are a few more:
- Climate Disclosure Standards Board (CDSB)
- Global Reporting Initiative (GRI)
- Science Based Targets initiative (SBTi)
- Task Force on Climate-related Financial Disclosures (TCFD)
- UN Principles for Responsible Investment (PRI)
- World Economic Forum (WEF) Stakeholder Capitalism Metrics
- Carbon Disclosure Project (CDP)
What is a good ESG score?
While an arbitrary measure at this point in time, ESG’s rising importance shouldn’t be ignored. Even though the data is imperfect and the reporting frameworks are not standardised.
That being said, a good ESG Rating from one of several ESG rating agencies and research and analysis firms, based on data you provide to them, can be anything at or above 70, on a scale of 1 to 100. This, of course, depends on the methodology and scope that the ratings agency uses. If you want an easy-to-use measuring stick, feel free to refer to Boardclic’s ESG index.
Is ESG reporting mandatory?
It depends on your location. All of the above ESG frameworks are completely voluntary at present. But governments around the world are adopting new legislation which will regulate ESG reporting and, eventually, make it mandatory.
We hope that you’ve learned more about environmental, social, and governance (ESG) reporting frameworks and are well on your way to being able to implement one or more of them in your organisation.
Whether it’s choosing the right ESG framework and standard or averting challenges associated with adopting and implementing a framework, knowing your options is key. It’s also important to be aware of what is likely coming down the pipeline for ESG reporting over the next few years. Then, you’ll be ready to take the lead on your organisation’s sustainability reporting.