ESG frameworks and standards provide guidance on how companies report on the interactions between their material business activities and the environment and society. Frameworks provide an overview of the structure and topics to be addressed. Standards provide detailed structures, including specific metrics and detailed criteria. Frameworks are sometimes put into practice in the absence of well-defined standards and allow flexibility in setting direction without prescribing a specific methodology. New ESG reporting regulations put pressure on companies to improve the quality of reporting.
What is an ESG framework?
Frameworks are often used when standards are ambiguous. ESG frameworks articulate thoughts on a topic without offering a defined reporting requirement. They provide guidance on how information should be prepared and structured, and what topics are covered based on general ESG principles and factors. Users can use the frameworks to categorize the data and key topics relevant to them within the defined boundaries.
Frameworks are often used on a voluntary basis to help companies develop meaningful and effective reporting while providing flexibility in application. Frameworks improve the credibility and readability of sometimes complex topics by providing readers with logical and relevant structures with which to contextualize ESG data.
The Task Force on Climate-related Financial Disclosures (TCFD) provides such a framework for understanding how the company is managing climate risk.
What is an ESG standard?
Standards provide detailed reporting structures with comprehensive ESG criteria. If you use ESG standards, you must disclose the predefined metrics and describe their methods for collecting ESG data.
The rigorous and thorough specifications of an ESG standard provide report writers with a kind of “spreadsheet” that enables reproducibility and consistency of high-quality ESG reporting. They improve the comparability of ESG reports within and across sectors. This is particularly important for listed companies where investors want to compare ESG reporting across multiple companies and sectors.
ESG standards have detailed requirements for defining the materiality or relevance of reported ESG data. They share common features, such as a focus on the public interest, due diligence, and standards for data sourcing. Currently, there are only two globally recognized ESG standards – the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) standards.
Why and how to use ESG frameworks and/or standards?
Momentum in ESG investing continues to build, and the quality of corporate reporting will come under increasing scrutiny by investors seeking to assess the risk of their investments. Frameworks and standards can be used by organizations of different sizes and maturity levels to support their efforts to improve environmental and social performance and to communicate their progress.
ESG reporting must be accurate, balanced, comparable, and relevant to the reporting companies. Selecting the best framework or standard that meets the company’s ESG reporting needs is a key component of high-quality reporting.
Small to mid-sized companies with simpler value chains are often subject to less stringent reporting requirements. In these cases, the level of detail and methodological rigor required by an ESG standard may not be necessary or practical to implement. Frameworks provide small business owners with a flexible structure that can be used within the company’s reporting boundaries.
Standards provide large companies with a repeatable and comparable formula that, once applied, can streamline ESG reporting processes and help standardize the collection of detailed performance data. A company embarking on ESG reporting should select a framework or standard that best fits its business and size, and work toward reports that are prepared in accordance with global standards to provide value to multiple stakeholder groups.
The importance of environmental and social governance and accountability has increased globally. In the European Union, the European Sustainability Reporting Standards (ESRS) are being developed by the EU with the support of GRI. This new standard will apply to all EU-based companies and will enable the development of reports aimed at multi-stakeholder audiences.
The new IFRS Foundation standards provide guidance on financial materiality for investor-focused reports and can be used as a complement to ESRS. The changing regulations are putting pressure on companies to operationalize their ESG reporting in the near term.
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