Navigating ESG Frameworks with High Quality Data

Navigating Environmental, Social, and Corporate Governance (ESG) reporting can at times become a frustrating labyrinth of acronyms, surveys, standards, disclosures mixed in with hundreds of constantly changing ESG criteria. It’s especially challenging to know where to start with reporting frameworks and competing ESG disclosure standards. Although ESG reporting is still voluntary, the industry continues to evolve at an accelerated rate and global standards are quickly converging. To help simplify your ESG journey, we’ve summarized key takeaways, trends and best practices for you to quickly get up to speed with ESG reporting frameworks.

Understanding ESG reporting frameworks

ESG reporting frameworks, or ESG disclosure frameworks, provide principles-based guidance to ESG topics and how the qualitative or quantitative information gets structured, prepared, and ultimately disclosed to investors, lenders, and other stakeholders. In other words, frameworks help prevent ESG investors from comparing apples to oranges. Aligning your ESG data with an ESG reporting framework provides investors with a sustainability snapshot of your company in a comparable, consistent, trusted format to screen your company’s financial risk for environmental, social, and governance performance. Aligning your data to ESG reporting frameworks also demonstrates you’ve done your ESG homework and can benchmark yourself with industry peers.

These uniform reporting structures for ESG data are put forth by independent framework-setting organizations, who also set their own ESG standards to complement their frameworks. Note, ESG reporting standards shouldn’t be confused with ESG standardization. Currently there are no uniform, regulatory, or mandatory requirements for reporting ESG information in the United States. However, as ESG investments continue to flourish in response to the pressing climate crisis and President Biden’s new climate agenda, lack of ESG standardization has become a mounting issue driving the reporting frameworks to further coalesce under the guidance of the SEC.

Which ESG reporting framework is right for your company?

ESG was coined as a term back in 2004, starting off as a niche concept. Fifteen years later, it has evolved into a thriving, international marketplace and ecosystem, with dozens of different rating companies, index actors, and reporting frameworks that are all similar, yet competitive. And they continue to grow. 

The primary group of sustainability accounting standard-setters, who create the reporting frameworks, include the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB). CDP, CDSB, GRI, IIRC and SASB address themselves as the “big five.” Other prominent standard setters and reporting frameworks are more industry-specific, like GRESB and The United Nations adopted the Principles for Responsible Investment (UNPRI). The Task Force on Climate-related Financial Disclosures (TCFD) is widely adopted by investors and the other frameworks. Launched in 2015 supported by G20 members, TCFD’s focus is on the effects of climate change on companies and resulting financial risk, while the other frameworks help understand the effects that companies have on climate change.

Leading ESG reporting frameworks and standard setters are called on to collaborate and merge

The high demand for a globally accepted standardized system calls for collaboration amongst reporting frameworks. ESG standardization will eventually be built from the existing frameworks and adapted to market needs. Therefore in 2020, during the pandemic, the big five reporting frameworks released a shared vision “statement of intent” to work together toward comprehensive corporate reporting to eliminate confusion over conflicting sets of standards, which threatens to impede progress in the ESG marketplace. A formal collaboration means that companies won’t have to align with multiple frameworks or backtrack to collect data multiple times. Following this collaboration, IIRC and SASB announced a merger which has since become the International Sustainability Standards Board (ISSB), part of the IFRS Foundation with the specific mandate to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions. They are expected to release their global sustainability reporting standards in early 2023.

Reporting frameworks are designed to be building blocks for your ESG reporting. It’s common practice for companies to mix and match components of different frameworks into sustainability reports. Ultimately, your C-level management must evaluate and decide which tools and frameworks best serve your communications objectives and meet the needs of your key stakeholders.

Tips for aligning to ESG reporting frameworks:

1. Choose frameworks that work best for your stakeholder investors and industry peers.

Pay attention to which reporting frameworks are preferred by your investors, asset managers, and your industry peers. For instance, BlackRock used to endorse GRI. Now they are a proponent for a single global disclosure standard. At present, BlackRock asks their companies to report in alignment with the recommendations of TCFD and SASB, claiming it covers a broader set of material sustainability factors. Once you know your investors choice, then assess which industry peers have the best ESG profiles that outperform the rest. Analyse which combinations of reporting frameworks they use. If it varies from your investor’s choice, then it is worth consulting and communicating with your stakeholders. Reported information is most useful when it is consistent across time periods and comparable across industries and geographies.

2. Investment flows with reliable, high quality ESG data using strong internal controls.

ESG reporting frameworks and audits can’t always ensure that a company is using high quality data. For instance, audits can improve the quality of reported information, but they still require reliable internal data to establish a reliable audit trail. The lack of quality internal information contributes to the high frequency of “limited assurance” audits in publicly available ESG reports. Likewise, any ESG reporting framework and standard-setting body must ultimately rely on companies to measure and report their data accurately. Since many companies lack strong internal control systems, they aren’t able to generate high-quality ESG data. (Internal controls refers to the processes providing reasonable assurance that the reported metrics and numbers are correct.) When the ESG process is done right, it drives better, trustworthy ESG data, which then equates to better investment outcomes, helps manage risk exposure, and affects a company’s bottom line and reputation directly.

3. Prepare for unified reporting standards set forth by regulatory bodies.

Even though the exact form of a unified ESG disclosure standard is still unknown, be prepared to respond to regulation or market pressure, whether or not you voluntarily disclose your social or environmental metrics and goals. Otherwise, you may miss an important opportunity to attract the right investors who expect high-quality ESG data.

How to get started on ESG

Gone are the days of collecting data only to produce a glossy annual report. Reclaim your time by automating your ESG reporting processes to focus instead on actionable insights from your own company’s data. Our ESG team works alongside yours to develop sustainability strategy and quantitative targets that are informed by a robust understanding of your current performance. Activate your ESG potential. Contact us today to start on ESG program.