ESG reporting frameworks are used by companies for the disclosure of data covering business operations and opportunities and risks related to the environmental, social and governance (ESG) aspects of the business.
ESG reporting frameworks are created by various organizations, including NGOs, stock exchanges, business groups, nonprofit organizations, think tanks and governments. Although hundreds of ESG frameworks exist, only a dozen or so are considered major.
Each framework typically sets the metrics and qualitative elements that a company should disclose, as well as the format and reporting frequency. Some frameworks are voluntary, while others are government mandated.
Why ESG reporting matters
The pace at which ESG metrics are being reported is on an incredible trajectory. Largely in response to rising investor and community interest, growing numbers of organizations are targeting sustainability performance improvements, setting ESG goals and reporting on their performance.
As a result, ESG has moved from the margins to the mainstream, and now more than ever, organizations are expected to report their ESG performance. Failure to take ESG risks seriously could result in many negative impacts for firms, —from shareholder action at annual general meetings to divestment by asset managers.
The growing importance of ESG means that organizations are reporting their ESG impact using an ever-increasing range of different frameworks.
Selecting ESG reporting frameworks
The ESG reporting landscape is cluttered with a large number and variety of reporting frameworks. Applying different lenses to assess and categorize the various frameworks can help with understanding the options and selecting the appropriate ESG reporting frameworks for your organization.
Lens 1: Potential for impact
The decision on which framework to report to use should start by considering where an organization can make the most difference based on materiality assessments.
Materiality in the context of ESG
The concept of materiality guides organizations to focus on ESG issues that are relevant to them and will have a measurable impact on their business.
To determine materiality, an organization must first identify its risks and then assess the consequences of those vulnerabilities. Using a “risk matrix” approach, organizations can determine which ESG-related risks to prioritize based on their risk profile, and which of those consequences would have significant negative impacts on the organization.
For example, a large-cap e-commerce company may choose to focus on packaging materials and waste (environmental), supply chain labor standards (social) and business ethics (governance) in its materiality assessment because it determined these to have the largest risk profiles when it comes to environmental impact, overall shareholder and consumer confidence, and regulatory requirements. In this case, the company should look for ESG reporting frameworks that cover all three ESG categories.
– Assessing double materiality. Double materiality calls on organizations to consider materiality from two viewpoints: financial materiality and materiality to the market, the environment and people. Double materiality recognizes that an organization is responsible for managing its own financial risks by looking inward. It also looks at the outward impacts of its decisions and operations on people and the environment. By applying the concept of double materiality, organizations can identify both the financial and nonfinancial impacts of their operations to help shape a more holistic ESG strategy.
Impact and influence
The other side of the materiality coin is impact and influence. Organizations assessing their ESG reporting approach may also find it beneficial to consider the environmental and social factors that they can influence most directly and rapidly.
Using an action priority or impact effort prioritization matrix, organizations can quickly identify where to focus their initial efforts and then use these insights to determine which ESG framework can help with realizing goals that are within reach.
For example, organizations in the fast-moving consumer goods and retail sectors can exert influence within their supply chain. In these sectors, an organization’s procurement choices can have significant impact on the ESG performance of companies in the supply chain, thus magnifying their ESG impact.
Lens 2: Stakeholder expectations
When exploring frameworks, consider stakeholder expectations specific to preferred ESG reporting frameworks and how different stakeholders will use information from disclosures.
What are external stakeholders looking for?
Organizations may also consider what their stakeholders are looking for and which ESG frameworks these stakeholders expect to be used. For example, investors, boards, insurers and creditors may prefer the organization report to the Task Force on Climate-related Financial Disclosures (TCFD) or Sustainability Accounting Standards Board (SASB). Employees and consumers may expect disclosures based on the United Nations Sustainable Development Goals (UN SDGs) . While governments or regulators may prefer Streamlined Energy and Carbon Reporting (SECR) or National Greenhouse and Energy Reporting (NGER), depending on the locale.
How will internal stakeholders use the information?
Stakeholders will use ESG disclosures for various reasons, which organizations should take into account when developing their ESG reporting strategy. The risk, compliance and HR teams would be invested in the data to drive strategic decisions around equity and inclusion, while energy and utilities would be looking closely at consumption and expenditure across the organization. Procurement teams, on the other hand, would be using the data collected to assess their supply chain operations and the risk profile of suppliers.
Lens 3: Geography
Certain ESG reporting frameworks are only relevant in particular geographies. In some cases, this is because reporting is mandated by law. In others, it can be because the framework is specific to local conditions.
Examples include the European Union Corporate Sustainability Reporting Directive (EU CSRD) ENERGY STAR® (North America and select other countries), SECR (UK) and NGER (Australia).
Lens 4: Sector preference
Organizations belonging to a particular sector will find a natural alignment between their sector and some ESG reporting frameworks, such as Global Real Estate Sustainability Benchmark (GRESB). It is used to assess the sustainability performance of real estate and infrastructure portfolios.
Organizations interested in assessing which frameworks their peers use can find this information by reviewing the websites of reporting frameworks, which often include a sector filter and a list of reporters. Using this information, organizations can ascertain the relevance of the ESG framework to their sector. Similarly, organizations can review their sector peers’ websites for published sustainability reports along with annual reports to see how they have been reporting to relevant frameworks.
Lens 5: Framework coverage
Each of the major ESG reporting frameworks has different levels of focus on the key ESG performance metrics, including environment, social, governance, carbon, energy, waste and water.
Understanding which framework focuses on which indicator can help with framework selection and provide insights into where organizations may be able to report to multiple frameworks using existing data.
Adopting a dedicated ESG reporting system
As the investor community sharpens its focus on ESG metrics, the level of scrutiny applied to this data intensifies. After all, the most valuable commodity in capital markets is reliable and auditable data.
Unlike the typical financial data investors are familiar with, ESG data has generally not been held to the same standards of accuracy. It’s often hused in disparate systems, while some organizations attempt to run their annual greenhouse gas (GHG) accounting using risk-laden spreadsheets. These approaches are not an efficient means of managing ESG data in the face of stakeholder and regulatory pressure—especially for complex global organizations reporting to multiple frameworks.
Organizations have dedicated IT systems to support processes and security, accounting systems to securely store financial data and HR systems to capture and manage people data. ESG reporting should not be any different. Organizations can benefit from having a specialized software platform to capture their activity data and calculate their emissions data, sustainability initiatives and supply chain data to bolster ESG reporting.
Nowhere is this more important than for the “E” in ESG, which is the most difficult to report and track—and the most essential for organizations looking to reduce their carbon emissions. These metrics generally include environmental factors such as water, waste, pollutants and energy, in addition to the metrics required to support GHG emissions accounting across Scopes 1, 2 and 3.
No matter what framework is chosen, accuracy, automation and auditability lay at the center of sound ESG reporting practices. Organizations that adopt these practices through a specialized ESG reporting solution are best prepared for the swathe of changes facing the ESG landscape.
ESG reporting software can help you stay organized by automating data capture directly from the source and maintaining an emissions factor engine for nationally recognized carbon emissions factor data tables, such as the US EPA Climate Leaders Program, e-GRID USA, Intergovernmental Panel on Climate Change (IPCC), IEA National Electricity Factors, Australian National Greenhouse Accounts, DEFRA (UK), and NZ Ministry for the Environment.
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