Environmental, Social, and Governance disclosures are now a key focus area for organizations ranging from businesses to prospective consumers and investors. Within the last twenty years, organizations have improved stakeholder disclosures as expectations from investors, regulatory bodies, and consumers have become more stringent.
Presently, there are a wide variety of organizations that provide ESG frameworks for different purposes. Most focus strongly on the business and physical risks related to climate change. This post summarizes the most ubiquitous ESG frameworks and provides thoughts on the purposes, benefits, and drawbacks of each.
Underpinning the purpose of these frameworks is the need for comparable data of consistent and high quality. This allows for consistent evaluation across companies, industry sectors, and geographies stakeholders and investors.
These frameworks are focused more exclusively on climate change and climate-related business impacts. In practice, these guidelines are supplementary to broader ESG frameworks and are catered very specifically to greenhouse gas emissions.
GHG Protocol (GHGP)
A protocol is a standardized set of rules and guidelines. In 2001, the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) published the first Corporate Standard GHGP to define how to account for and report emissions. Now, as the world’s most widely used greenhouse gas accounting standard, the GHGP is complementary to and referenced by most climate-focused frameworks.
Task Force on Climate-related Financial Disclosures (TCFD)
TCFD provides broad disclosure recommendations that primarily focus on the financial impact and risk of climate change. It has been rapidly adopted since its 2017 inception and has been ingrained in the regulatory framework in the EU, Singapore, Canada, Japan, South Africa. In the near future, adoption in New Zealand and the UK is expected.
TCFD is an open-source, free guideline that provides general disclosure categories (Governance, Strategy, Risk Management, Metrics and Targets), but does not specify specific frameworks to use. TCFD recommends that their guidelines are used in conjunction with other existing frameworks (i.e., ISSB, GRI, CDP) to enable appropriate disclosures.
Carbon Disclosure Project (CDP)
CDP is a non-profit organization that runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP primarily focuses on climate change but has recently begun to work with forestry and water consumption.
Participation in CDP shows that your organization takes climate change and climate risks seriously. It serves as an indicator that your organization is committed to reducing GHG emissions. Participation requires the payment of administrative fees.
Science-Based Targets Initiative (SBTi)
SBTi is an action-driving organization that encourages businesses to set targets based on the science of meeting a 1.5ºC limit to global temperature rise. By participating with SBTi and setting targets, organizations have the opportunity to receive support and review from SBTi staff.
According to SBTi, the benefits of setting science-based targets are to protect the planet, account for future business risk, and receive benefits associated with participation. Similar to Carbon Disclosure Project, SBTi requires payment for participation.
Full ESG Frameworks
In comparison with the climate-specific frameworks and guidelines, these frameworks provide guidance for disclosing metrics associated with all aspects of ESG. These metrics can include labor compliance information, diversity and equity, safety performance, environmental performance, and more.
Global Reporting Initiative (GRI)
GRI was created in 1997 and is currently the most widely used and most universal ESG disclosure framework. GRI Standards provide guidance on assessing material ESG risks and cover general, sector-specific, and topic-specific disclosures. GRI Standards enable organizations to disclose, review and compare metrics with any organization across the globe in any industry.
GRI Standards are open source and free to use. Organizations can report within these standards by “Reporting in Accordance with GRI Standards” or by “Reporting with Reference to GRI Standards.” Each of these approaches has specific requirements that must be met, both of which involve notifying GRI.
IFRS Sustainability Disclosure Standards
The International Sustainability Standards Board (ISSB) was established in 2021 by the IFRS Foundation and, as of August 2022, has consolidated the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB). This new organization is currently tasked with merging the guidelines provided by the consolidated organizations – the SASB standards and the CDSB Framework. There are two new ISSB sustainability standards, Climate-related Disclosures and General Requirements for Disclosure of Sustainability-related Financial Information. These new simplified and further harmonized standards will help fuel capital markets by considering ESG risks on performance and valuation. As of late 2022, these new standards are still in development through a public consultation process. The ISSB recommends that organizations continue to use SASB standards for sustainability disclosure until the IFRS Sustainability Disclosure Standards are available for use.
SASB Standards are the second most frequently used ESG disclosure framework (after GRI). They differ from GRI because they take an industry-based approach with specific disclosure requirements applicable to 77 different industries. SASB Standards are open-source documents and are free to download, but some licensing restrictions may apply depending on the use of the Standard.
ESG and Financial Risk
Since climate change poses physical and transition risks to a business, more investors are beginning to factor in ESG when choosing to invest in a company. A wide range of lists, rankings, indices, and investment vehicles now exist to enable sustainability-minded investment decisions. Unlike other ESG disclosure programs, these financial disclosures are designed to attract investors and generally end with a company being rated against its peers.
Dow Jones Sustainability Index (DJSI)
The Dow Jones Sustainability World Index is an index fund that is composed of companies that are leading in terms of global sustainability. As detailed in the methodology paper, S&P Global sends a questionnaire to companies called the Corporate Sustainability Assessment (CSA) in April of each year. This assessment defines a company’s S&P Global ESG Score, which determines whether a company’s stock should be included in a relevant DJSI index.
MSCI ESG Ratings
In their methodology paper, MSCI identifies 35 key ESG evaluation issues, resulting in letter scores being provided for each pillar of ESG. These ratings are designed to look at the financial significance of ESG issues and assess how well companies manage risks compared to their peers. In contrast to DJSI, MSCI ESG ratings are readily available through their website.
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