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.
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.
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.
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.
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) (link resides outside ibm.com). 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.
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.
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.
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 (PDF) can help with framework selection and provide insights into where organizations may be able to report to multiple frameworks using existing data.
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.
Benchmark ESG reporting frameworks require responses to all questions in the framework and typically have a scoring element.
CDP is a framework for companies to provide environmental information to their stakeholders—investors, employees and customers—covering environmental governance and policy, risks and opportunity management, environmental targets and strategy and scenario analysis.
How CDP works
CDP offers three questionnaires on the topics of climate change, water and forests—each of which is scored using different methodologies. Each questionnaire includes general questions alongside sector-specific questions aimed at high-impact sectors. The scoring of CDP’s questionnaires is conducted by accredited scoring partners trained by CDP.
GRESB is a global tool used predominately by investors to assess the sustainability performance of real estate and infrastructure portfolios and assets worldwide.
How GRESB works
GRESB Assessments provide investors and asset managers with material insights into the sustainability performance of a company’s real assets. These performance insights are aligned with international reporting frameworks such as the GRI and Principles for Responsible Investment (PRI). Assessment participants receive comparative business intelligence on where they stand against their peers, a roadmap with actions they can take to improve their ESG performance and a communication platform to engage with investors. Investors use the ESG data and GRESB analytical tools to improve the sustainability performance of their investment portfolios, engage with managers and prepare for increasingly rigorous ESG obligations.
Voluntary ESG reporting frameworks allow reporters to select the questions they want to report against, depending on factors such as their industry of operation and their materiality. Scoring is typically not included in these frameworks.
GRI is a globally applicable guidance framework that provides standards detailing approaches to materiality, management reporting and disclosure for a comprehensive range of sustainability issues. GRI Standards guide many organizations in the production of their own sustainability reports.
How GRI works
The modular, interrelated GRI Standards are designed primarily to be used as a set to prepare a sustainability report focused on material topics. The three universal standards are used by every organization that reports under the GRI framework. An organization also chooses from the topic-specific standards to report on its material topics—economic, environmental or social.
The TCFD was explicitly designed to address climate risks to the business, falling squarely within the “E” of ESG reporting. The TCFD helps organizations across the globe articulate how ESG performance is most likely to materially impact future financial performance and value creation.
The TCFD was created in December 2015 after the G20 Finance Ministers asked the Financial Stability Board (FSB) to evaluate the connection between climate-related issues and the financial sector. The FSB is an international body that makes recommendations to the global financial system, so the push toward climate-related finance was significant.
How the TCFD works
Broken into four pillars, the TCFD addresses disclosure requirements related to:
1. Governance: How does the organization’s governance structure address climate-related risks and opportunities?
2. Strategy: What are the tangible material impacts of climate-related risks and opportunities on the whole business, including strategy and financial planning?
3. Risk management: How does the organization define, assess and manage climate-related risks?
4. Metrics and targets: What are the measurements used to assess material climate-related risks and opportunities?
In June 2021, SASB and IIRC announced their merger to form the VRF (link resides outside ibm.com), an ESG guidance framework that sets standards for the disclosure of financially material sustainability information by companies to their investors.1 The resources they provide include the Integrated Thinking Principles, the Integrated Reporting Framework and SASB Standards.
In total, the SASB Standards track ESG issues and performance across 77 industry standards. VRF’s framework is built to support companies in sharing their outward ESG impacts through the language of investors, debt holders and internal financial stakeholders.
How the SASB Standards work
Of the other ESG reporting frameworks, the GRI is most like SASB but supplies more broadly material information for reporting to stakeholders who are not just from financial portfolios.
Asset management companies such as BlackRock, Goldman Sachs and Morgan Stanley; manufacturing giants such as GM and Nike; and even specialized industries with companies such as Merck and JetBlue use SASB Standards to disclose ESG metrics. SASB also supplies resources to explain how investors across multiple asset classes use the standards. These tools allow organizations to be specific and report with a system that allows for transparency and relevancy with their investors.
Regulatory ESG reporting frameworks are like benchmark frameworks in that all responses are required, but not always scored. These frameworks and reporting requirements are also required by a government body.
SFDR (link resides outside ibm.com) aims to standardize the reporting of ESG metrics for financial products and entities within the EU. It does this by mandating that reporters publish a Principal Adverse Impact (PAI) statement detailing their disclosures. SFDR will act in concert with the EU taxonomy and the proposed EU Corporate Sustainability Reporting Directive (CSRD) to form the basis for the EU sustainable finance agenda.
How SFDR works
SFDR’s PAI statement requires financial bodies to report different types of quantitative indicators, including weighted averages across various ESG metrics for their investments as well as emissions from their own activities. In practice, this means that organizations must report the proportion of their investees’ activities that they finance. For example, if an investee generates 100 metric tons of hazardous waste and the financial body has 20% of the equity in that company, the financial body reports 20 metric tons of hazardous waste in its SFDR PAI.
The NGER Scheme (link resides outside ibm.com) is the Australian national framework for reporting and disseminating company information about GHG emissions, energy production and energy consumption. Established by the NGER Act in 2007, it is monitored by the Clean Energy Regulator.
How NGER works
The NGER Scheme collects emissions-related data about GHGs such as carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6) and specified kinds of hydrofluorocarbons and perfluorocarbons. Records of activities must be adequate to enable the Clean Energy Regulator to ascertain whether the corporation or person has complied with its obligations under the NGER Act.
This includes information that can be used to verify the relevance, completeness, consistency, transparency and accuracy of reported data during an external audit.
The SECR taxonomy is the UK government’s guidance for organizations required to disclose their energy use, GHG emissions and related information. The SECR was introduced to take effect from April 1, 2019, as the previous Carbon Reduction Commitment (CRC) Energy Efficiency Scheme came to an end. It builds on and extends the previous reporting requirements faced by quoted companies while adding new mandates for large unquoted and limited liability partnerships (LLPs).
It can also help all organizations with voluntary reporting on a range of environmental subjects, including GHG reporting and the use of KPIs. The SECR is central to the UK’s strategy for improving energy efficiency and reducing CO2 emissions, as set out in the Climate Change Act 2008.
It is expected that an estimated 11,900 companies incorporated in the UK will need to report on their energy and carbon emissions under the new framework.2
How the SECR works
Quoted companies that report to the SECR are required to disclose their energy use, global Scope 1 and 2 GHG emissions in metric tons of CO2 equivalent and at least one emissions intensity metric of their choosing for current and previous financial years. Scope 3 emissions remain voluntary but are recommended for emissions sources considered material.
Unquoted large companies and LLPs will also need to report, at minimum, their UK energy use and associated GHG emissions from electricity, gas and transport fuels, as well at least one intensity metric. Reporting each of these sustainability dimensions and tracking their progress over time requires access to consolidated, auditable data, which can be more easily achieved with sustainability reporting software.
The European Union’s CSRD prescribes rules for organizations to report sustainability disclosures across several topics pertaining to environmental and social issues. Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). Informed by the concept of double materiality of financial and societal impacts, the CSRD requires organizations to detail how their business strategy will mitigate the risks associated with these environmental and social issues and publish these disclosures publicly.
It values social metrics alongside environmental performance, by looking at matters such as employee health, human rights, bribery, anti-corruption and diversity across management.
CSRD applies to organizations with over €20 million in total assets, a net turnover of €40 million and/or 250+ employees – these include both EU companies and EU subsidiaries of non-EU companies. This would impact 50,000+ companies, nearly 10,000 of which are outside of the EU.
Sustainability reporting will also be required of non-European companies that generate an annual net turnover of €150 million in the EU and that have at least one subsidiary or branch in the EU. Non-EU companies will have to comply from 2028.
Ratings agencies require responses to all questions in the framework and typically have a scoring element.
ENERGY STAR® (link resides outside ibm.com) is a nationally recognized energy rating and benchmarking mechanism in North America that covers commercial buildings across a diverse group of building use types.
How ENERGY STAR® works
ENERGY STAR® is a U.S. Environmental Protection Agency (EPA) voluntary program that helps businesses and individuals save money and protect the climate through superior energy efficiency. Rankings compare the performance of a building against other similar buildings, called a peer group. Building owners can benchmark their performance internally across their portfolio and externally among similar sectors.
ENERGY STAR® scores are based on data from national building energy consumption surveys, which allows the ENERGY STAR® Portfolio Manager tool to control for key variables affecting a building’s energy performance, including climate, hours of operation and building size. This means that buildings from around the country—with different operating parameters and subject to different weather patterns—can be compared side by side to see how they stack up in terms of energy performance. The specific factors that are included in this normalization (hours, workers, climate and more) will depend on the property type. The 1–100 scale is set so that 1 represents the worst-performing buildings and 100 represents the best-performing buildings, with 50 representing the average
The DJSI tracks the performance (link resides outside ibm.com) of the world’s leading companies in terms of economic, environmental and social criteria, and is used by investors who wish to jointly assess financial and ESG aspects of company performance.
How DJSI works
The DJSI applies a transparent, rules-based component selection process based on the company’s Total Sustainability Scores resulting from the annual CSA. The CSA compares companies across 61 industries with questionnaires assessing a mix of 80–100 cross-industry and industry-specific questions. Companies receive scores ranging from 0 to 100 and percentile rankings for approximately 20 financially relevant sustainability criteria across economic, environmental and social dimensions. Only the top-ranked companies within each industry are selected for inclusion in the DJSI family. Investors in these indices gain exposure to the performance potential of well-known common factors—low volatility, dividend yield, value or momentum—while avoiding ESG-related risks in their portfolios by directing their investment toward more sustainable companies.
Using a six-star scale, NABERS helps Australian building owners understand how their asset impacts the environment and helps prospective tenants understand how energy-efficient their leased space is.
How NABERS works
NABERS compares the performance of a building or tenancy to benchmarks that represent the performance of other similar buildings in the same location. NABERS scores are calculated by an independent assessor using 12 months of real, measurable information about a building or tenancy, such as energy and water bills or waste consumption data as the basis of their rating. NABERS ratings are available for commercial office buildings, tenancies, hotels, shopping centers and data centers. NABERS announced in 2019 a plan to expand to all major building types. Under Australia’s Building Energy Efficiency Disclosure Act, all buildings for sale or under lease over 10,000 sq ft must receive a NABERS rating. Governments are required to lease space in buildings with ratings of 4.5 or higher.
Increasingly, AI and bots are used to evaluate an organization’s ESG performance through publicly available data. This practice, known as data scraping, presents a new challenge for organizations because it means that the data being used to assess access to capital is largely outside their control.
Various firms synthesize ESG data from different sources including ranked and “best of” lists, product review websites, social media posts and comments, company databases and news articles to build an organization’s profile.
Although these scoring systems and the piecemeal data gathered through data scraping don’t provide the context, methodology used or granular detail required from most investors, the practices are nonetheless becoming more widespread.
How to prepare for an AI-driven ESG valuation
With the practice of data scraping on an upward trend, investment and sustainability teams should consider the following approach to regain control of their data and protect the organization’s ESG valuation from the inevitable downsides of AI-driven ESG data scraping.
– Step 1: Identify which rating agencies you need to target. Approach your key institutional investors and ask them which ratings agencies they use.
– Step 2: Understand what data the target rating agencies use and how they go about uncovering it. Ask the rating agencies directly if possible, or research online to uncover what you can.
– Step 3: Ensure that the data you’re providing and the places where you’re sharing it meet the needs of the rating agencies. To accomplish this, follow these tips:
Determine the best keywords
Check your organization’s publicly available information to ensure that the data captured by the AI data scraping and bots is accurate. Undertake an analysis of the terminology used and adjust for clarity. This analysis should be applied to your organization’s website, comparison websites and company search databases such as Bloomberg.
Employ social listening
Track conversations online to determine what has been published about your organization and attempt to rectify any inaccurate statements. Examples include customer reviews, Google business listings, and customer social media comments and mentions of the organization.
Increase publicly available ESG information
Provide more data in sustainability action plans and reports. Publish supporting documents that go into further detail about the organization’s ESG performance and efforts. This data can then be published on your organization’s website, social media or other platforms.
The future of ESG reporting can be seen from at least three perspectives: regulatory changes, industry coalescence around frameworks and inter-framework consolidation. All these perspectives indicate one major directional move: the harmonization of ESG reporting frameworks.
– Regulatory changes: Various progress has been made across national and supranational jurisdictions. The U.S. Securities and Exchange Commission (SEC) announced a proposal in March 2022 to mandate ESG disclosure modeled off the TCFD. Similarly, the EU’s sustainable finance package—the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR), which includes CSRD—will further require ESG-related disclosures from companies.
– Industry sectors coalescing: As the practice of ESG reporting matures, industry sectors are coalescing around their preferred frameworks. The early movers in this regard were in the property sector, which favors reporting against the GRESB framework. This trend occurs more recently among the investment community, with asset managers such as BlackRock encouraging their investees to report against SASB.
– Framework consolidation: These changes are resulting in a reporting landscape in which frameworks are becoming more specialized, as seen with the International Financial Reporting Standards (IFRS) Foundation and GRI, or are consolidating, as seen with the International Integrated Reporting Council (IIRC) and SASB.
How to prepare for ESG reporting changes
With progressive steps toward a common language around ESG reporting and new announcements being made every few months, how can organizations better prepare for the inevitable changes facing ESG frameworks?
Get the data right
Having an accurate and auditable data foundation today means avoiding historical errors and changing processes when ESG reporting changes come into effect. Your ESG reporting software solution should help achieve this with an auditable data record and accurate emissions calculations.
The solution should be regularly updated in line with new framework requirements to ensure ESG reporting remains current with market obligations.
Build ties with the right stakeholders
Sustainability leaders should look beyond their current stakeholder group and consider others who can provide the granular data required from different frameworks and regulatory changes.
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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.
1 “IIRC and SASB form the Value Reporting Foundation, providing comprehensive suite of tools to assess, manage and communicate value,” (link resides outside ibm.com) Value Reporting Foundation, June 2021.
2 “New digital tool enables easier energy and carbon reporting,” (link resides outside ibm.com) GOV.UK, March 2020.