We’ve already seen how ESG reporting and scoring is generating a growing wave of investments. Companies that report their ESG scores are attracting more attention from across the business spectrum and, clearly, investors are looking at companies with high scores. But how should we compile and disseminate this kind of data in the market? Is there a standard? Is there a specific norm that dictates the necessary parameters? This is what we are going to discuss today.
ESG reporting, also known as sustainability reporting, has become indispensable for publicly traded companies that want to be recognized as good ESG investments. However, methodologies for measuring and reporting are still far from standardized.
That is why organizations’ reports are increasingly employing a diversity of official structures, or frameworks, to meet investors’ needs by facilitating the comparison between the performance of investment options in the market.
What are ESG Frameworks?
Frameworks, in the world of ESG, are systems for standardizing reporting and disseminating ESG metrics. The use of these frameworks is voluntary, though they may be required in some circumstances, such as by a specific investor, client or investment bank.
These reporting frameworks are developed by non-profit organizations, NGOs, business groups and other associations. As a result, they vary widely in the areas of focus and the metrics they recommend.
Using a specific ESG framework helps to guide reporting processes by showing companies where to look, what to measure, and how to communicate results. In capital markets, reliable data is the most valuable asset. Therefore, as the investor community increasingly focuses on ESG metrics, the levels of scrutiny of this data also intensifies. As a result, employing a reporting framework is essential and helps both companies and investors when disseminating and comparing data.
How to determine ESG targets?
The question many people ask is:
“But do frameworks determine what ESG targets my company should have?”
The answer is:
“It depends.”
ESG frameworks typically define the metrics and qualitative elements that a company should disseminate, as well as defining the format and frequency of these reports. Most of the time, they don’t provide targets for these metrics. That’s up to the company. For example, the frameworks do not define what the water consumption reduction target of an organization should be. It’s up to the company to carry out an assessment and define this target according to their established objectives and policies.
However, there are some ESG frameworks that incorporate targets. One example is the UN’s Sustainable Development Goals (SDGs). There are even some business organizations that require reporting on progress toward achieving certain targets.
What are the ESG Frameworks?
As I mentioned earlier, the large number of ESG frameworks is a problem. A more engaged investor, with access to data, will likely have a good understanding of the various frameworks. However, this is not always the case, which can lead to doubts when interpreting reports.
A number of organizations have invested to develop a framework that incorporates the best elements of existing ESG frameworks, which gives us some hope for a more standardized system in the future.
According to the KPMG Survey of Sustainability Reporting 2020, GRI standards are used by almost three-quarters (73%) of the G250 – the world’s 250 largest companies – and by two-thirds (67%) of the N100 – the 100 largest companies in 52 countries, totaling 5,200 organizations. This means that, today, GRI is the most used ESG framework in the world. Below is a brief summary of the 5 most used frameworks in the world today:
- GRI (Global Reporting Initiative) – This was the first framework developed and is the most used in the world. Initially, the goal was to provide companies with indicators for responsible environmental practices. Later, metrics were expanded to include human rights, governance and social wellbeing.
- SASB (Sustainability Accounting Standards Board) – This Framework was elaborated for 77 different economic sectors, which makes it very different from the others. It uses a proprietary sustainable industry classification system to group similar companies and sectors based on their sustainability-related risks and opportunities.
- IIRC (International Integrated Reporting Council) – The council is responsible for disseminating the International Framework (IR), which adopts a principles-based approach to provide guidelines for companies to follow when preparing reports for end users addressing ESG content for tangible and intangible assets.
- CDP (Carbon Disclosure Project) – The CDP puts together data on each organization using a detailed questionnaire and then gives it a score based on proprietary criteria. The CDP focuses on topics related to the environment and does not directly address social and governance issues.
- TCFD (Task Force on Climate-Related Financial Disclosures) – In 2020, TCFD-based reporting became mandatory for all asset owners and managers who adhere to the United Nations Principles for Responsible Investment (PRI). The PRI is the world’s largest investor network for sustainable investments.
One effort to harmonize different frameworks and standards was carried out by the Value Reporting Foundation, a global non-profit organization that offers a wide range of resources designed to help businesses and investors develop a shared understanding of business value.
The Better Alignment Project is a collaborative project that was developed over two years and launched in the fourth quarter of 2019. The project, developed between the CDP, CDSB, GRI, International Integrated Reporting Council (IIRC) and SASB, helps synchronize the different reporting structures on the Corporate Reporting Dialogue platform.
The Sustainable Stock Exchange (SSE) initiative, a UN Partnership Program, provides a global platform to explore how stock exchanges maintain databases on ESG issues with all guidance documents provided by stock exchanges for listed companies, allowing them to learn from their peers. Most of the world’s major stock exchanges now have guidance on how to disseminate ESG data.
Greenwashing: have you heard this term?
If you’re involved in the world of ESG, you’ve probably heard the term greenwashing, but do you know what it means? Greenwashing is when an organization spends more time and money promoting itself as sustainable than it actually does to minimize its environmental impact. This is deceptive advertising to win over consumers who want to support companies concerned with improving the planet or to attract less informed investors.
Identifying greenwashing is becoming increasingly difficult as ESG concerns become commonplace for investors and companies with portfolios, leading to an explosion of investment products labeled as “sustainable.”
Unfortunately, for investors, there is no easy way to determine if the investment is truly ESG. However, there are some tools available that can help. Ideally, you would gather information on companies to verify if are truly making progress in this area and if their discourse is, in fact, coherent with their practices.
A tip for companies: don’t adopt strategies that could lead people to see your organization as greenwashing. This could tarnish your company’s image for many years.
Conclusion
ESG reporting, also known as sustainability reporting, gives companies the opportunity to be transparent with stakeholders about their approach to environmental, social and corporate governance guidelines. ESG reporting is increasingly an essential part of business operations.
With dozens of ESG Frameworks used in different sectors around the world, it’s hard for companies to know where to start with ESG reporting. But the important thing is to develop a clear strategy, analyze the existing frameworks and even look to other companies leading in this area today as benchmarks. The essential thing is to get started!
SoftExpert offers a complete ESG solution. SoftExpert ESG improves data transparency and accountability, saves time and resources and facilitates internal and external communication and involvement. The software helps organizations prepare their sustainability reports by efficiently compiling the necessary data for sustainability reporting and optimizes and automates processes and operations that directly contribute to ESG results.
Are you interested in learning more about ESG after reading this article? If so, please take a look at more content that we have already covered here in the blog!
