In the world of business and finance, ESG (Environmental, Social, Governance) is proving its worth. Much like the fabled tortoise in its race against the hare, the steady pace of ESG adoption has caught up to conventional measures of business success. In fact, the two are now tied together in a three-legged race to the finish line: surfacing accurate information that tells the full story of a firm’s financial performance, impact, risk and future returns..
Originally conceived in 2005 as a method of corporate valuation, ESG reporting has been so successful in helping investors understand a company’s true performance and prospects that governments, businesses and non-governmental organizations (NGOs) around the globe have adopted it as a standard by which for-profit organizations can be measured.
Let’s take a closer look at why ESG frameworks have become such a vital part of doing business, shaping the future of corporate finance and reporting.
What Are ESG Frameworks?
ESG frameworks are guidelines for documenting and reporting on corporate commitments to environmental, social, and governance goals. These frameworks are developed by international standards boards as well as governing bodies that mandate ESG reporting, such as government agencies, stock exchanges, and NGOs.
There are several different ESG frameworks to choose from. Which framework your company chooses to use depends largely on the location of your operations, type of industry, legal structure and corporate objectives.
- Read more about how to choose the right ESG framework for your organization
- Read more about understanding ESG raters and ESG rankers
Examples of ESG Frameworks and Standards
This list includes several examples of well known organizations focusing on sustainability and environmental reporting.
- International Sustainability Standards Board (ISSB): Created in 2021 by the International Financial Reporting Standards (IFRS) Foundation, the ISSB serves as a “sister board” to the existing International Accounting Standards Board (IASB), which has become the baseline for financial statements worldwide. The goal with ISSB is to establish truly global standards for sustainability disclosure
- Sustainability Accounting Standards Board (SASB): For more than a decade, this independent nonprofit organization has been providing accounting standards for use by publicly listed companies in the United States, with a focus on financially material factors. In August of 2022, the IFRS Foundation assumed responsibility for the SASB standards when it merged with Value Reporting Foundation, but ISSB encourages companies to keep using these standards. The International Integrated Reporting Council (IIRC) and its Integrated Reporting Framework also joined with IFRS as part of the same merger.
- Climate Disclosure Standards Board (CDSB): The CDSB was an international consortium of business and environmental NGOs dedicated to the cause of integrating climate-related information into standardized financial reports. The CDSB Framework was instrumental in early advances for incorporating environmental issues into mainstream reporting. The CDSB has since been consolidated into the IFRS Foundation.
- Global Sustainability Standards Board (GSSB): The GSSB oversees the GRI Standards, which were developed as a set of global best practices for sustainability reporting. Whereas the ISSB standards are more focused on investors and capital markets, the reporting requirements prescribed by GSSB are more holistic, addressing a range of stakeholders. In March of 2022, the IFRS and GRI signed a memorandum indicating the two boards will coordinate their work programs and standard-setting activities.
- Task Force on Climate-related Financial Disclosures (TCFD): Created by the Financial Sustainability Board, TCFD conducts surveys and provides recommendations that are designed to be applicable across sectors and regions.
- United Nations Global Compact (UNGC): This voluntary initiative invites CEOs to make commitments for implementing sustainability principles in accordance with the UN’s widely adopted Sustainable Development Goals.
- Workforce Disclosure Initiative (WDI): It’s important to remember that ESG isn’t only about sustainability and climate. The social component is a key focus of WDI, which “aims to improve corporate transparency and accountability on workforce issues, provide companies and investors with comprehensive and comparable data and help increase the provision of good jobs worldwide.”
- Climate Disclosure Project (CDP): The CDP is an international non-profit organization that runs a global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts.
How Are ESG Frameworks Used?
These reporting frameworks originated out of a call by stakeholders to not only know more about the financial stability of a company but also understand its commitment to long-term sustainability for the communities where it operates and sources raw materials, its employees, customers, investors and the environment.
In many cases, ESG frameworks are used voluntarily to achieve a certain level of certification. Such a certification can be a requirement of a large customer, a group of investors or in order to be included in stock indexes and porfolios. There are a growing number of governments at the country and provincial/state-level using ESG frameworks to develop disclosure requirements.
Why Is ESG Reporting Important?
The central purpose of ESG reporting is to demonstrate a cmopany’s long-term commitment to the highest standards of business and financial management around environmental, social, and governance performance.
Climate change has created a sense of urgency around the globe in terms of corporations taking responsibility for their environmental impact.
Common environmental goals:
- Reduce overall greenhouse gas emissions
- Manage hazardous material waste
- Mitigate harm to local water supplies
- Protect biodiversity and wildlife
From racial equity to public health policy to the war in Ukraine, the impact of social issues on the workplace is more apparent than ever. Workers, community members, and other key stakeholders are asking brands to take a more active role in social issues.
Common social goals:
- Enact fair labor standards
- Actively support diversity and inclusion
- Enable stronger communities through economic development
- Ensure health and safety of workers and community members
Poor organizational governance can have far-reaching consequences for shareholders and the public. The purpose of a board is to thoughtfully steer the direction of an organization to the benefit of all stakeholders.
Common governance goals:
- Robust data security
- Transparent business ethics
- Ethical supply chain management
- Reasonable incentives programs for C-Suite and shareholders
The degree of self-examination and transparency these frameworks offer is good not only for key stakeholders but also for the business itself. ESG reporting has been around long enough now that data backs up the positive impact of embracing ESG accountability.
According to a recent McKinsey report, ESG funds saw an astounding 1,300% increase in assets under management (AUM) between 2018 and 2021. Organizations earn a place in these investment funds by having strong ESG ratings.
These investments can also perform better over the long run, because the businesses behind the funds have taken a long-term view of building corporate wealth.
By taking a deeper look at the lasting impact of business activity, companies can enact changes that make them more resilient in the face of climate change and water insecurity, of greater value to local communities, while offering new revenue potential.
Csaba Csiszkó, head of sustainability at denkstatt Hungary, recently said in an interview: “Traditionally, a company’s prime objective has been to generate money. Undoubtedly, profits are indispensable for covering employees’ wages and supporting the growth of a business. But over the years, especially since sustainability has become an integral part of finance in the form of ESG [environmental, social and governance] reports, the corporate world has started entertaining an interest in how they make money, focusing on social and environmental impacts too.”
A whole host of new regulations around environmental impact reporting, diversity reporting, and financial disclosure are spurring more organizations to conduct ESG audits.
In an ESG roundtable, Klaas Nijs of Antea Group Belgium shared, “Regulation is broadening in scope: whereas in the past regulators tended to focus on large emitters first and foremost, they are now also shifting focus on smaller companies because in the end, effective climate change regulation needs to address all actors.”
Planning for an ESG-aligned Future
Every company’s ESG journey is unique, to its particular industry, the regions it impacts, and its products, business model, culture, and strategy..
As your organization prepares for an ESG-aligned future, it’s important to consider where you focus your goals and invest to make the greatest positive impact.
"The range of emerging, complex environmental and social issues facing business come with many names. The challenge is not what you call it but what you do about it—what do you do to create value over time, for owners, employees, customers, investors and society? As population grows and the global middle class expands, we will exert unprecedented pressures on earth's systems to meet human needs. Call it whatever you want. The fact is this: successful companies, communities and countries will be those that figure how to broaden their vision, take full responsibility for their impacts (intended or not), and to grow responsibly." – Erik Foley, Senior Consultant Antea Group USA.
Make a Real Commitment to ESG
ESG has proven to be a valuable tool for both sustainability efforts and corporate financial performance. For ESG to be successful, organizations need to commit to combating real problems.
“Measure your current ESG footprint—that’s crucial,” Simpson of McKinsey offered. “Then discover the magic: What is the essential strength that you bring, which is understood and felt by your employees and stakeholders and everybody can get excited about? Then make that a strategic differentiating factor.”
For support on incorporating ESG into your due diligence reporting, reach out to our team of experts today.
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