ESG Reporting Frameworks and Guidelines for Corporates
In today's business landscape, companies of all sizes and across all sectors face growing pressure to operate sustainably and with social responsibility. The issues related to climate change, social inequality, and environmental degradation require companies to address their impact and take proactive measures to create a more sustainable future.
ESG (Environmental, Social, and Governance) reporting is a crucial tool for corporates to demonstrate their commitment to sustainability and social responsibility. By disclosing information on their environmental, social, and governance performance, companies can provide stakeholders with valuable insights into their practices and impact.
ESG reporting offers numerous benefits to corporates. First and foremost, it helps build trust and credibility with stakeholders, including investors, customers, employees, regulators, and the wider community. Stakeholders increasingly expect companies to be transparent about their sustainability efforts and to be accountable for their impact on the environment and society. ESG reporting allows companies to meet these expectations by providing clear and measurable data on their sustainability performance.
Furthermore, companies that prioritise ESG reporting and demonstrate strong ESG performance often enjoy several advantages. They are more likely to attract and retain investors who are increasingly integrating ESG factors into their investment decisions. Investors recognize that companies with strong ESG practices are better positioned for long-term financial success and are less exposed to risks associated with environmental and social issues. Additionally, companies that embrace sustainability and social responsibility can enhance their reputation, improve customer loyalty, attract top talent, and mitigate regulatory and legal risks.
Getting Started with ESG Reporting
If your company is considering embarking on an ESG reporting journey, here are some key steps to guide you:
Understand the Regulatory Landscape: Start by familiarising yourself with any regulatory requirements related to ESG reporting in your industry and geographic region. Compliance with these regulations is essential to avoid financial penalties, legal liabilities, and reputation damage. Engage with regulators to gain insights into their expectations for ESG reporting and provide feedback on the effectiveness of reporting frameworks.
Identify Key Stakeholders: Determine who your company's key stakeholders are, such as investors, customers, employees, regulators, and NGOs. Understanding their expectations and needs is crucial in choosing the right ESG framework and reporting approach. Engage in dialogue with stakeholders to gather their input and align your reporting strategy accordingly.
Define ESG Priorities: Identify your company's most significant ESG risks and opportunities and prioritise them based on their materiality and relevance to your stakeholders. This process will help you narrow down the focus areas and ensure that your reporting efforts address the most pressing issues.
Research ESG Frameworks: Explore the various ESG frameworks available and compare them to your company's ESG priorities and stakeholder needs. Consider factors such as the framework's scope, data requirements, reporting frequency, and credibility in the market. Some widely used frameworks include the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosures (TCFD), and Carbon Disclosure Project (CDP).
Determine Relevant ESG Indicators: Review your company's operations, industry, and stakeholder expectations to determine the most relevant ESG indicators to track. Common ESG indicators include carbon emissions, energy consumption, water usage, waste management, diversity and inclusion, human rights, and community engagement. Select indicators that align with your company's goals, industry best practices, and stakeholder interests.
Set Measurable Targets: Once you have identified the relevant ESG indicators, set measurable targets that align with your company's long-term vision and values. Establishing specific goals helps track progress and demonstrate your commitment to continuous improvement. For example, you could set targets to reduce carbon emissions, increase diversity in leadership.
There are several existing ESG reporting frameworks and guidelines that firms can use to report on their ESG performance.
Here are some of the most widely used frameworks and guidelines:
Global Reporting Initiative (GRI) - GRI is a widely used framework for sustainability reporting, which provides guidelines for organisations to report on their economic, environmental, social, and governance performance. Private equity firms can use the GRI framework to report on the ESG performance of their portfolio companies. Used in over 100 countries, with a significant presence in Europe, Asia-Pacific, and North America. According to The KPMG Survey of Sustainability Reporting (2022) which examined the disclosure practices of the world’s biggest 250 companies by revenue (the G250), as well as a larger pool of the top 100 businesses in each of 58 countries, 78% of the G250 now adopt the GRI Standards for reporting (up from 73% in 2020);
Sustainability Accounting Standards Board (SASB) - SASB is a nonprofit organisation that provides industry-specific ESG reporting standards for publicly traded companies in the United States. Private equity firms can use the SASB standards to report on the ESG performance of their portfolio companies, particularly those that are publicly traded. Mainly used in the US, with some adoption in Europe and Asia-Pacific. According to SASB, over 2664 companies globally use its standards for reporting since 2020.
Task Force on Climate-related Financial Disclosures (TCFD) - TCFD provides guidelines for companies to disclose climate-related financial risks and opportunities in their financial filings. Private equity firms can use the TCFD guidelines to report on the climate-related risks and opportunities of their portfolio companies. Widely adopted globally, with a strong presence in Europe and North America. According to the TCFD, over 1,000 organisations globally have expressed support for its recommendations.
Carbon Disclosure Project (CDP) - CDP is a global disclosure system that enables companies, cities, states, and regions to report on their environmental impact and climate change-related risks. Private equity firms can encourage their portfolio companies to participate in the CDP and use the information provided by the CDP to report on the ESG performance of their portfolio companies. Used in over 90 countries, with a strong presence in Europe, North America, and Asia-Pacific. According to CDP, over 9,600 companies disclosed environmental data through its platform in 2020, representing a 14% increase from 2019.
International Integrated Reporting Council (IIRC) - IIRC provides a framework for companies to report on their performance across six capital categories: financial, manufactured, intellectual, human, social and relationship, and natural. Countries where commonly used: Widely used in Europe and Asia-Pacific, with some adoption in North America. According to the IIRC, over 2,500 companies in more than 70 countries use its integrated reporting framework, and integrated reporting is increasingly becoming a mainstream practice globally.
Sustainable Finance Disclosure Regulation (SFDR) is a European regulation that aims to increase transparency on the sustainability characteristics of financial products and services. It sets out requirements for financial market participants to disclose information on how they integrate sustainability risks and factors into their investment decisions, as well as how they consider the impact of their investments on sustainability. The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation, therefore, mainly used in the European Union.
Corporate Sustainability Reporting Directive (CSRD): The CSRD is a proposed update to the European Union's current Non-Financial Reporting Directive (NFRD) and is expected to come into force in 2023. The CSRD will require companies to disclose sustainability information that is relevant, comparable, and reliable, in order to help investors and other stakeholders make informed decisions. The CSRD will also extend reporting requirements to more companies, including small and medium-sized enterprises (SMEs). It will apply to companies operating in the European Union (EU).
Science-Based Targets Initiative (SBTI): The SBTI is a collaboration between CDP, the United Nations Global Compact (UNGC), the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF). The SBTI provides a framework for companies to set targets that are aligned with the Paris Agreement's goal of limiting global warming to well below 2°C above pre-industrial levels. The SBTI assesses the feasibility and adequacy of companies' emissions reduction targets, and provides guidance on how to set targets that are based on the latest climate science. Companies that set science-based targets are recognised as leaders in corporate climate action. Countries where commonly used: The SBTI is a global framework that is used by companies from a wide range of industries and countries. The largest number of companies setting science-based targets come from Europe, followed by North America and Asia. ****Over 1,000 companies have committed to set science-based targets, representing a combined market capitalization of over $23 trillion. The largest number of companies setting science-based targets come from Europe, followed by North America and Asia. The use of science-based targets is becoming increasingly popular as a way for companies to demonstrate their commitment to tackling climate change and meet the expectations of investors, customers, and other stakeholders.
United Nations Global Compact (UNGC) - UNGC is a framework that provides guidelines for companies to report on their sustainability performance. It is used by companies to align their strategies and operations with ten principles in the areas of human rights, labor, environment, and anti-corruption. Used in over 160 countries, with a strong presence in Europe, North America, and Asia-Pacific. According to the UNGC, over 12,000+ signatories across 160 countries have committed to its ten principles on human rights, labor, environment, and anti-corruption, making it the world's largest corporate sustainability initiative.
Got started. What’s next?
Once an ESG (Environmental, Social, and Governance) reporting framework has been established, the next steps typically involve implementing the framework, monitoring performance, and refining the reporting process.
Implement the Framework: Implementing the ESG reporting framework involves putting in place the necessary systems, processes, and controls to gather and report on the relevant ESG data. This may involve gathering data from various internal departments, conducting audits, and engaging with external stakeholders. Are you still thinking of doing this with Excel and manual inputs? Take a look around, there will definitely be solutions to automate your process!
Monitor Performance: Once the framework is implemented, it's important to monitor and track performance against the identified ESG goals and targets. This will involve establishing regular reporting cycles and reviewing the data to identify trends, areas for improvement, and potential risks.
Refine the Reporting Process: As the ESG reporting process matures, it's important to continuously refine and improve the reporting process to ensure that it remains relevant, accurate, and aligned with the organization's goals and objectives. This may involve revising reporting criteria, expanding the scope of reporting, or introducing new reporting metrics.
Communicate Results: Finally, organizations must communicate their ESG performance to internal and external stakeholders. This may involve publishing regular ESG reports, hosting stakeholder engagements, and responding to stakeholder inquiries. Some companies may conduct annual or biannual ESG reporting and review, while others may opt for more frequent or less frequent assessments depending on their circumstances.
Conclusion
Overall, establishing an ESG reporting framework is just the first step towards embedding ESG considerations into an organisation's operations. Ongoing monitoring, refinement, and communication are crucial to ensure that the organisation remains accountable and transparent in its ESG performance.
ESG reporting is becoming more and more critical for all types of companies. By utilizing established frameworks and following best practices, companies can showcase their dedication to sustainability and social responsibility. This helps to ensure that their operations align with sustainable and socially responsible practices. ESG reporting not only benefits the environment and society but also promotes the long-term success and resilience of the business.
