ESG (Environmental, Social, and Governance) is a framework for assessing a company’s business practices and performance on different ethical and environmental issues. It is used for screening investments based on corporate policies, encouraging organisations to abide by them.
ESG compliance is not just about meeting regulatory requirements. It's a powerful tool that can help businesses avoid risky and unethical practices, foster transparency, drive long-term value creation, and ensure accountability.
ESG reporting is a crucial tool that allows organisations to integrate sustainability into every aspect of their operations. Understanding what is ECG, its frameworks, and why it’s important, is key to making informed and sustainable investment decisions.
What is ESG?
It is a set of standards for assessing a company’s behaviour and actions to screen potential investments. ESG reporting is used by organisations as a part of the analysis process to recognise material risks and growth opportunities.
ESG reporting goes beyond the financial metrics - providing an idea of the company’s impact on society and the environment. Apart from investors, other stakeholders - like customers, employees, and suppliers - use ESG standards to measure the impact of the organisational operations.
To assess an organisation based on ESG criteria, a wide range of policies and behaviours are looked into. These factors are:
- Environmental: The environmental factors refer to a company’s overall impact on the environment. Some of these factors are greenhouse gas emissions, management's behaviour toward natural resources, and the company’s resiliency against climate risks. It also incorporates the energy resources the company takes in and the waste it discharges.
- Social: The social aspect evaluates the organisation's relationship with its internal and external stakeholders. Factors like employee wages and engagement are measured. It also evaluates the reputation and impact of the company on the communities where it operates. In this digital age, it is also important to consider how well the organisation safeguards the privacy and data of its customers.
- Governance: These factors refer to how the organisation is led and managed. It assesses the practises and controls a company adopts to govern itself and make effective decisions. Aspects like how stakeholders' expectations are managed and how their rights are honoured are assessed. ESG analysts also try to understand what kind of internal controls are there to promote accountability and transparency in leaders.
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What are ESG frameworks?
There are several ESG frameworks. They can be grouped into three categories. Here is a list of some of the most popular ones:
Voluntary disclosure frameworks
Companies under this ESG framework voluntarily disclose their sustainability-related practices, policies, and performance data. Here are some of the most popular voluntary disclosure frameworks:
- Carbon Disclosure Projects (CDP): Companies must disclose their non-financial data including greenhouse emissions and environmental performance. The CDP framework focuses on the carbon footprint of the organisation. Industry competitors are used as benchmarks and companies are scored and ranked publicly.
- Dow Jones Sustainability Indices (DJSI): A building-specific ESG framework. It offers a subscription-based survey of building-related ESG data and assets. Results are available publicly.
- Global Real Estate Industry Benchmark (GRESB): It is another framework used for buildings. It asks for active disclosure of building-related ESG data. These results are also publicly available.
Guidance frameworks
These frameworks provide recommended guidelines to help organisations identify, manage, and report their ESG performance. Here is a list of some of the most popular guidance frameworks:
- Global Reporting Initiative (GRI): The aim of GRI disclosures is broad. These disclosures cover a wide range of ESG topics. It is related to management’s approach. Reporting principles include stakeholders' inclusivity, integrity, and sustainability.
- Sustainability Accounting Standards Board (SASB): It offers voluntary frameworks focusing on financial substantive data relevant to investors. The information can then be used by investors to compare business performance in critical ESG areas.
- Carbon Disclosure Standards Board (CDSB): This initiative aims to create a holistic view of an organisation’s performance - based on its financial performance and impact on the natural capital. This ESG framework aims at standardising environmental information reporting.
Third-party aggregators
These frameworks assess a company’s performance according to aggregated and publicly available data. This information is gathered from publications, brand websites, or annual reports. Here is a list of the third-party aggregators:
- Bloomberg Terminal ESG Analysis: Information from CSR reports, annual sustainability reports, and websites are assessed. Only those with a subscription can access the data.
- Sustainalytics: It aggregates and assesses organisational data based on media reports and company-sourced findings.
- MSCI: It aggregates data from numerous specialised datasets from NGOs, models, media reports, and governments. MSCI’s goal is to identify the company’s ESG risks and how it compares to the competitors.
Summing up
To achieve ESG progress, it is important to choose the most aligned ESG framework according to your business goals. Understanding what is ESG reporting and how it applies to your organisation can help create sustainable investments and avoid risks.
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Frequently Asked Questions
What is the difference between ESG and sustainability?
ESG is a set of specific criteria within environmental, social, and governance concerns. It is used for evaluating the behaviour and performance of a company. Sustainability on the other hand is a broader concept.
How do companies select an ESG framework?
Organisations choose a framework based on how it aligns with the firm’s goals. Apart from that, they also consider stakeholders' expectations, industry preferences, and their potential for impact.
What does an ESG specialist do?
ESG specialists play a crucial role in sustainable investing. They are equipped with strong analytical skills and a deep understanding of ESG factors. Their responsibilities include evaluating a company's ESG performance, identifying potential risks and opportunities, and providing recommendations for sustainable investment strategies.
How can ESG reporting help gain customer loyalty?
Committing to ethical business practices can help elevate the organisation’s reputation. Studies have shown, 77% of customers are motivated to purchase from companies that aim to make the world a better place.
