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What is ESG?

What are ESG standards, and why are they important? How do companies choose the best ESG framework to adopt? We will explain everything about ESG reporting.

What is ESG?

Companies report on ESG (environmental social, and corporate governance) performance to be transparent to their employees, investors and clients.

ESG has historically been a focus for sustainability-minded business leaders. However, with the current business climate, ESG has become an important subject for any executive who are looking to increase their performance.

ESG reports are often used by investors — both personal and institutionalin order to examine and quantify the aspects they consider to be important. ESG Reports are also used by regulators in some industries to keep tabs on issues such as carbon emissions, the use of natural resources, and human rights.

What’s the definition of an ESG framework?

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

These frameworks are created by non-profit groups, NGOs businesses, and others. In the end, they vary widely in areas of concentration and the types of measures they recommend.

For example, one of the most popular ESG guidelines is one called the Global Reporting Initiative (GRI) framework, a set of standards that promote responsible environmental, social, economic, and governance that covers a wide range of topics. 73 percent of the world’s 250 largest firms report on sustainability according to this GRI framework.

Do ESG frameworks define sustainability targets?

ESG frameworks generally define the criteria for the qualitative and quantitative elements which a company must reveal and the format and frequency of that reporting.

In the majority of cases they don’t establish targets for these indicators (e.g. goals for reducing carbon emissions or for enhancing diversity) The setting of targets is generally left to the discretion of the company.

Some frameworks incorporate goals such as the United Nations’ Sustainable Development Goals (SDGs) into their reporting requirements and some business organisations require periodic reports on progress towards certain targets.

What is the reason ESG frameworks so important?

ESG frameworks can help businesses make positive changes in the world. Additionally the reporting of ESG has been shown to bring other benefits to the business. For instance:

The most robust ESG policies can help companies reduce energy, water, as well as waste, and encourage more efficient resource allocation.
Consumers are putting more pressure on businesses to be environmentally and socially responsible.
Investors are increasingly looking at ESG as a standard aspect of their investment strategy.
Employees are also invested in corporate responsibility, so ESG reporting can contribute to employee morale/productivity and help attract talent.

The majority of companies are involved in some type of ESG advisory reporting, and therefore those that don’t risk falling behind and losing business.

How many ESG frameworks are there?

There are more than dozen frameworks that are extremely popular, and many more that are used by smaller numbers of organisations within certain sectors and regions.

Some popular ESG Frameworks include:

CDP
Climate Disclosure Standards Board (CDSB)
Global Reporting Initiative (GRI)
Science Based Targets Initiative (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 can be a challenge and standards don’t have the same authority if they’ren’t recognized as standard. A person who is knowledgeable about ESG might have a good grasp of the various frameworks, however, the average consumer or employee probably won’t and thus won’t have any base of reference to understand reports.

ESG guidelines and standards were created independently by multiple parties with each framework placing emphasis on different topics and metrics. The intention was good however the end result is a complex landscape with a myriad of frameworks to pick from.

Numerous organizations have been working to create an “universal” framework that incorporates the best elements of previously created frameworks. This will hopefully make the ESG framework simpler to navigate.

What’s An ESG rating?

Like credit ratings are designed to measure a company’s creditworthiness using a range of criteria, ESG ratings aim to measure a company’s exposure to environmental, social and governance risk and how efficiently they deal with those risks.

In contrast to frameworks that provide suggestions for what information to report on and how to report on it, ESG ratings assign a particular score to an organization based on their ESG performance.

However, ESG ratings aren’t always consistent across providers. The research conducted by the MIT Sloan School of Management discovered that the most prominent companies’ ESG scores were at most 6 out of 10 cases. The reality is that ESG evaluations are still an infancy product, but they’re poised to become more accurate and extensively used in the near future.

Conclusion

ESG reporting gives companies the opportunity to share their information to stakeholders regarding their policies on environmental, social, and corporate governance matters. It’s quickly becoming a necessary element of running an enterprise business.