Environmental, Social, and Governance (ESG) issues have become more important in business over the past few years, as more people understand how non-financial factors can affect a company’s long-term success. As we move into 2024, the ESG reporting landscape is changing quickly. This is because sustainability and ethical business practices are becoming more important. The ESG reporting frameworks shape a big part of how companies talk about their sustainability efforts. These frameworks give structured instructions on how to make clear and useful reports that show how well a company is doing in areas like government, social issues, and the environment. Frameworks explain “how” to report on ESG factors, while standards explain “what” to report. Together, they make sure that businesses meet the world standards for sustainability.
This blog post will delve into the key shifts in ESG reporting frameworks for 2024 and discuss their implications for businesses.
What is an ESG reporting framework?
An ESG reporting framework is a list of rules and guidelines that are used to make sustainable reports that are clear, structured, and useful. You should not mix up ESG guidelines and ESG standards. When it comes to ESG reporting, frameworks tell you how to do it, while standards tell you what to record.
The word “ESG” framework comes from the fact that it lets companies give a clear and consistent picture of how their business is doing in terms of sustainability, which includes how it treats people, the environment, and its governance.
The ESG reporting framework organizes businesses to share important details about how they’re doing in these areas. Investors can make better choices when they look at not only a company’s financial metrics but also how it affects society and the world.
Why do we need reporting frameworks?
Frameworks help businesses report on their sustainability, which in turn helps them in several important ways, such as:
- Be more open with your clients
- Learn about ways to make things better.
- Stay in line with the standards for mandatory reporting
To get the most out of these benefits, sustainability studies need to be easy to find, useful, and able to be put into action. Organizations with varying levels of sustainability knowledge can use ESG reporting frameworks to put together and share their sustainability efforts in a way that is thorough and easy for both internal and external stakeholders to understand.
How do reporting frameworks work?
There are three main ways an ESG framework tends to work, these are:
- Questionnaires – Disclosing companies are typically provided with a set of questions that are tailored to their industry. These questions often require numerical inputs, such as current and historic emission figures, or may ask for feedback on sustainability-related issues within the company’s value chain. Even though companies are not required to create a detailed report, the questions are designed to encourage high levels of transparency and disclosure.
- Leveraged information reports – Commonly referred to as a “reverse report”, in this method, a third party researches a company and prepares a report, which is then presented to the company for review and potential changes before it’s publicly released. While this approach is less demanding on companies, the accuracy and level of detail in the report may not be as extensive as it would be if the company conducted the research themselves.
- Reporting frameworks – Reporting frameworks are the preferred option among the three types of ESG standards. These frameworks offer detailed guidelines designed for specific industries, enabling companies to create their reports. One of the advantages of using a reporting framework is the flexibility it provides in terms of the level of detail required for each topic. This allows for a broad range of disclosure results that can be customized to meet the needs of the company.
A Walkthrough of Reporting Framework Operations
CDP is a nonprofit organization that gets information from businesses and towns about the environment. The Online Response System (ORS) from CDP lets companies describe how their actions affect the environment. After that, the data is rated by outside experts, which is then used to make CDP ratings.
The three main types of business surveys are about forests, climate change, and water security. For each company, only questionnaires that are related to their work are used to give them a score. One company that will only be scored on the climate change questionnaire works in the oil and gas field. There are both general questionnaires and sector-specific questionnaires for companies in industries with a lot of effect. These forms ask more specific questions about how business affects the world. The CDP score is a letter grade that shows how well a company takes care of the environment. Companies with a higher score are considered to be more environmentally responsible.
The integration of frameworks and standards
In terms of ESG reporting, frameworks and guidelines are like two sides of the same coin. Standards give you the specifics, while frameworks give you the big picture. Companies can make ESG reports that are both useful and helpful if they use both.
Framework providers, such as CDP, are making their frameworks more in line with international norms. This is good news for businesses because it means they can meet the needs of more than one standard with just one platform. This can help make sure that businesses report their ESG data in a way that is consistent and easy to compare. It can also save time and money.
Representations of ESG Frameworks
Many environmental, social, and governance frameworks are available to businesses. There are over 600 reporting requirements currently in place worldwide; nevertheless, it is essential to be aware that relying on just one of these laws might not be sufficient to reveal all of the necessary information. When it comes to covering the entirety of their sustainability projects, larger organizations may employ multiple frameworks from which to choose. For example, in their latest sustainability report, cloud computing giant VMware mentioned considerations from six different reporting frameworks.
The list below shows some of the most common models that businesses can use. However, companies should research to determine which one may be best suited to them.
International Sustainability Standards Board (ISSB) – An independent, private-sector body founded by the International Financial Reporting Standards Foundation (IFRS) that is looking to develop “high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.”
The objective of the ISSB is to provide investors and other market participants with consistent information about companies’ sustainability-related risks and opportunities to help them make informed decisions across a range of industries.
To date, the ISSB has not released any standards, however, has confirmed that it will issue its first two finalized frameworks by the end of June, with an expectation that the first corporate reports aligned with these frameworks will be issued in 2025. Once these standards are established, it is expected that investors and other stakeholders will demand comparable and transparent ESG data that will require companies to provide information in line with these standards.
Global Reporting Initiative (GRI) – An independent organization – headquartered in Amsterdam with regional offices around the world – that helps businesses, governments, and other organizations understand and communicate their sustainability impacts.
The GRI Standards are used by thousands of companies, governments, and groups around the world and are generally seen as the gold standard for sustainability reporting. The guidelines give a complete plan for writing about an organization’s ESG performance. They cover many areas, like greenhouse gas emissions, water use, labour practices, human rights, fighting corruption, and getting involved in the community.
The standards also provide specific guidance on how to disclose information about each topic, including what information to include, how to measure and report on performance, and how to ensure transparency and accuracy. Data reported under the GRI feeds into Sustainalytics, which provides research, ratings, and data to institutional investors and companies.
Focus: Takes a comprehensive approach to ESG matters with equal weight on environmental, social, and governance factors. Heavy on stakeholder engagement to determine materiality.
Sustainability Accounting Standards Board (SASB)– Another non-profit, the SASB standards are designed to help companies identify and report on financial material sustainability issues that are relevant to their industry. By using the SASB, companies can provide investors with more useful and comparable information about their sustainability performance, which can help them make better-informed investment decisions. It effectively connects businesses and investors on the financial impacts of sustainability.
Together with the Global Reporting Initiative (GRI), the SASB is one of the most widely used frameworks for sustainability reporting. In January 2021, BlackRock CEO Larry Fink recommended that companies follow SASB for industry-specific ESG disclosures.
At the end of 2020, SASB and GRI announced a collaboration, aiming to create better transparency and trust among reporting companies. As of August 2022, the International Sustainability Standards Board (ISSB) of the IFRS Foundation assumed responsibility for the SASB Standards. The ISSB has committed to build on the industry-based SASB Standards and leverage SASB’s industry-based approach to standards development.
Focus: Aim to align organizations and investors on the financial impacts of ESG. Strong on key Environmental topics relevant to each industry sector; selected social topics; limited on Governance.
Carbon Disclosure Project (CDP) – A non-profit group that was started in 2000. It runs the world’s biggest system for companies and cities to share information. Their job is to gather and examine information about how well the environment is doing and give advice on how to make practices more sustainable. Companies give data to CDP by filling out the CDP Questionnaire, which can be about climate, water, the supply chain, or trees, among other things. EcoVadis, a company that gives sustainability scores, can use the Climate Score that CDP makes to put companies into different levels, such as bronze, silver, gold, or platinum.
In 2021, CDP and the SME Climate Hub worked together to release a new strategy for climate disclosure. The framework helps companies keep track of and report on their progress toward their climate goals. It also helps them show that they are leaders in their fields when it comes to climate change.
Focus: The method is mostly about the “E” in ESG, with a focus on dealing with the “G” part when it comes to environmental issues like climate change, water, and forests.
Science-Based Targets Initiative- The SBTi’s reporting framework provides guidelines for how organizations should report their progress, including what data they should collect and how they should measure their emissions. The framework also includes specific requirements for reporting on different types of emissions, such as Scope 1 (direct) and Scope 2 (indirect) emissions, as well as Scope 3 (indirect) emissions related to the organization’s value chain.
The SBTi reporting framework also requires organizations to report on their progress toward achieving their science-based targets, including any challenges or barriers they have encountered along the way. This information is used by the SBTi to assess the effectiveness of its program and to identify areas where additional support or guidance may be needed.
UN Sustainable Development Goals- While not a reporting framework in the traditional sense, the United Nations Sustainable Development Goals (SDGs) are a set of 17 global objectives that aim to address the world’s most pressing environmental, social, and economic challenges.
The SDGs provide a common language and framework for organizations to align their strategies and activities with global sustainability goals, and to report on their contributions to achieving the goals. Several reporting frameworks, such as the CDP, GRI, and SASB, collaborate with these goals, and organizations can disclose their progress toward them using these frameworks. Governments can leverage this data to track national progress and develop related policies.
Choosing the Right Frameworks: A Guide to Decision-Making
There are a lot of different ESG reporting systems out there now. It’s hard to say which one (or which mix of them) will work best for your business because they each have their own set of metrics and reporting needs.
The situation with ESG reporting is getting even more complicated as new rules like the Corporate Sustainability Reporting Directive (CSRD) and IFRS standards come into effect. Because of all of this, it can be hard to figure out the best reporting strategy for your business.
There is more than a dozen different ESG reporting frameworks, and each one has its own set of measures and rules for how to report. It can be hard to figure out which one or combination of them will work best for your business, especially since the field of ESG reporting is changing so quickly thanks to new rules and the growth of IFRS standards. You need to think about what kind of ESG data your company wants to share, and which models will help them do that best.
Here are the following things to think about when picking an ESG framework:
- Industry Alignment: Explore frameworks commonly used by companies in the same industry.
- Competitor Analysis: Evaluate the frameworks adopted by direct competitors for benchmarking purposes.
- Audience Perspective: Tailor your choice of framework to the specific information needs of investors, customers, employees, and other stakeholders.
- Regulatory Adherence: Stay abreast of emerging regulations, especially those related to climate disclosures and other ESG reporting requirements.
While following the rules and laws is important for your business, there are other things to think about as well. It’s important to remember that the different reporting systems were created for slightly different reasons. Because of this, many businesses, especially large ones, use more than one.
The groups that run some of the platforms are working to make this easy. Two groups, the IFRS Foundation and GRI, are working together to improve how they set standards and make their systems more compatible with one another. CDP also wants to add the new IFRS standard on climate change statements to the platform it uses for reporting.
Conclusion
In summary, ESG frameworks guide businesses through the complexities of sustainability reporting, providing a roadmap for transparent and comprehensive disclosure. Despite challenges such as fragmentation, collaborative efforts among organizations, investors, consumers, and governments aim to create a more consistent and trustworthy ESG reporting landscape. Embracing these frameworks allows companies to contribute to a sustainable future, aligning practices with global expectations and fostering meaningful stakeholder engagement.
ESG frameworks, such as CDP, GRI, and SASB, offer businesses a roadmap to achieve sustainability objectives and provide stakeholders with the necessary information for informed decision-making. Despite concerns about fragmentation in ESG reporting, efforts are underway to address this challenge and promote collaboration between companies, investors, consumers, and governments to drive progress towards a more sustainable future for all.
ESG reporting is made easier by using tools like IRIS CARBON® that work with many reporting systems, like CDP, GRI, and SASB. This not only improves accuracy and speed, but it also helps make the reporting scene more consistent and trustworthy. Companies that use these kinds of tools show that they are committed to being open and responsibly doing business. This moves us closer to a sustainable future.
