ESG reporting has surged in prominence amid consumer, shareholder and employee pressure, combined with a growing realization among investors and financial institutions that sustainability risk is investment risk, as BlackRock CEO Larry Fink highlighted in his letter to CEOs. With ESG performance soaring to the top of the agenda, the ESG reporting sector is destined for change, having long been plagued by a collection of competing guidance and reporting frameworks.
Existing ESG frameworks – coverage of ESG topics
Current ESG frameworks have different levels of focus on the core topics of Environmental, Social and Governance with some frameworks covering each topic in detail, others covering only two, and yet others covering some topics in detail and some at a high level.
The list of existing ESG frameworks is long, and the variations significate, so we’ve captured their key characteristics in this ESG Frameworks matrix, including examples of coverage.
Overlaps and gaps in frameworks
Given the plethora of reporting and guidance frameworks, inevitably there is a considerable amount of overlap. For instance, TCFD has a singular focus on how material climate-related issues could impact a company’s financial performance. Meanwhile, SASB has a broad focus on sustainability, assessing how material sustainability issues impact a company’s financial performance, which of course includes climate-related risks, causing it to overlap with TCFD.
To harmonize SASB’s standards with TCFD’s recommendations, SASB is undertaking a review of its 79 industry standards, evaluating them with the objective of bringing them into closer alignment with TCFD recommendations. With this alignment, a company that reports in line with SASB standards would also then satisfy TCFD recommendations.
With an eye towards reducing the reporting burden on companies, frameworks are taking action to create alignment and CDP, SASB, and GRI have all aligned their frameworks. Similarly, GRI is updating its disclosure standards to help companies align their sustainability disclosures with the UN’s 17 Sustainable Development Goals (SDGs), thereby aligning itself with the PRI.
Meanwhile for real asset investments, GRESB has gone to great lengths to structure its assessments in line with the GRI, PRI, TCFD and SASB. Noticeably, about half of its disclosure requirements are shared with SASB.
A timeline of progress towards a global standard for ESG reporting
The future of ESG reporting can be seen from at least three separate perspectives. These include regulatory changes, industry coalescence around particular frameworks, and inter-framework consolidation.
In terms of regulatory changes, there has been a variety of progress across national and supranational jurisdictions. The US SEC’s proposal announced in March 2022 will align a variety of companies with a disclosure modelled off of TCFD, with the UK government pursuing similar requirements. Similarly, the EU’s sustainable finance package, which includes both CSRD, the EU Taxonomy, and SFDR, will further require ESG-related disclosures from companies.
As the practice of ESG Reporting matures, industry sectors are coalescing around their preferred frameworks. The early movers in this regard were the property sector, who favor reporting against the Dow Jones Sustainability Index (via the S&P Global Corporate Sustainability Assessment (CSA), and this trend can be seen more recently amongst the investment community with some asset managers (such as Blackrock) encouraging their investees to report against SASB.
Framework consolidation is also occurring, resulting in a reporting landscape where frameworks further focus on their own niches. Beyond the ones mentioned above, there are several other examples of such agreements, with the IFRS and GRI agreeing to coordinate on their standard-setting being the latest. While this may not see formal consolidation into a single ESG framework, this may represent a move to allowing frameworks to focus on different areas of ESG impact.
How to set yourself up for success
As BlackRock’s Larry Fink put it, “Climate change has become a defining factor in companies’ long-term prospects.” Now more than ever before, companies are expected to report their ESG performance, and failure to take ESG risks seriously could result in a range of negative impacts for firms, stretching from shareholder action at Annual General Meetings to exclusion or divestment from asset managers. The devastation caused by Covid-19 has only served to heighten the importance for investors of managing risk.
Unsurprisingly, ESG reporting has seen a meteoric rise and all indications point to its importance increasing as pressure mounts to accelerate the low carbon transition. But ESG reporting must not fall victim to becoming a tick-box activity; the ultimate goal, after all, is improvement in ESG performance.
To set yourself up for success, there are best practices you can follow, not only for ESG reporting, but also for ongoing performance improvement. For instance, it is important to ensure that you have a good data foundation in a flexible format to meet reporting requirements now and in the future. Central to this, is that the data collection and storage process is auditable with traceability through to the source of the data.
Equally important is that it allows for flexible boundary-setting globally. Specifically, that it is easy to configure and change reporting groups, and the locations, accounts and meters that underlie them. Baseline emissions need to be recalculated when structural changes occur in the organization that changes the inventory boundary (such as acquisitions or divestments).
Structuring data into a flexible organizational hierarchy can simplify the process for recalculating baselines to enable more agility in ESG reporting. You can read more about these practices for ESG data management in our Carbon Accounting & ESG Data Management eBook.
It is also important to acknowledge that the data required for implementing decarbonization strategies is often scattered across various internal systems throughout an organization, many of which may be incompatible. It is also possible that the data may be held by suppliers that do not have systems and processes set-up to share it.
To address data capture challenges, companies should consider outsourcing the data capture process to a specialist service provider. Another best practice is to aim for automated data transfer whenever possible since files handled by people prior to data collection are more prone to failure to load, precision loss, and metric confusion. Best practice is to utilize a cloud-based enterprise software platform to store and manage the data on an ongoing basis as this method is superior to spreadsheets.
Despite consolidation across frameworks and increasing clarity around preferred frameworks by industry, ESG reporting remains a complex space, and it can be a burden for a company to report to multiple frameworks. But with a strong data foundation in place, a company can set itself up well to meet reporting requirements regardless of whether a global framework comes to fruition.