As ESG-focused strategies continue to attract investors, there is a growing interest in establishing frameworks that can help companies meet specific environmental, social, and governance criteria — the better to help investors evaluate company performance in light of ESG standards.
ESG frameworks are important because they can allow market participants to reference a common set of guidelines when evaluating companies for investment purposes. In theory, consistent ESG frameworks could help encourage more efficient and transparent markets.
Although there are a number of ESG frameworks in use, however, the ESG sector as a whole still lacks a set of clear-cut criteria that have found universal approval or acceptance. Most recently, the Securities and Exchange Commission (SEC) put its own new set of ESG disclosure rules on hold.
Key Points
• ESG frameworks include specific criteria and metrics to help firms assess and disclose their progress toward environmental, social, and governance goals.
• ESG frameworks aim to standardize methodologies that will support transparency and accountability, and thereby serve all stakeholders.
• While there are a dozen or more existing ESG frameworks worldwide, most are non-binding (mandatory guidelines tend to be implemented in local jurisdictions).
• The SEC released a set of mandatory disclosure rules in March of 2024; these were put on hold a month later, owing to legal challenges.
• In the absence of ESG standards mandated by financial regulators, individual firms are left to select appropriate frameworks and/or develop proprietary disclosures.
What Is an ESG Framework?
ESG frameworks include principles, guidelines, and often metrics to help firms measure and, importantly, report their progress regarding specific environmental, social, and governance standards — which in turn helps investors interested in green investing.
• Environmental factors may include carbon emissions, sustainable energy use, pollution regulation, climate impact, and more.
• Social factors may include a company’s involvement and support of local community issues, worker safety, as well as diversity, equity and inclusion in the workforce.
• Governance factors may include a company’s leadership selection process, accounting practices, data privacy, and transparency in reporting.
As such, ESG frameworks are an attempt to standardize both methodologies and metrics employed in ESG disclosures to better serve all stakeholders.
The State of ESG Frameworks
Although there are numerous organizations (including policy groups and regulatory agencies) that have developed frameworks for ESG reporting in recent years, there has yet to be a single set of standards to insure that companies are held accountable for managing certain risk factors, and that investors are afforded some reliability in terms of their ESG investment choices.
While the SEC approved a set of ESG disclosure rules in March 2024, a month later, owing to legal challenges, these rules were put on hold.
In short: With no official ESG standards required by U.S. financial regulators or other governmental bodies, the question of which framework to adopt is left up to the individual firm.
Likewise, the lack of agreed-upon ESG frameworks means that investors must shoulder the responsibility for understanding which standards and/or metrics a company may be following, and whether this meets their own standards for investment.
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What Is the Goal of an ESG Framework?
ESG frameworks give companies a way to define key principles, standards, and goals in each area (i.e., pertaining to the environment, societal factors, and corporate governance) in order to facilitate accurate ESG reporting. These frameworks may include metrics to measure progress toward specific goals.
Thus, ESG frameworks serve three main purposes:
1. To provide guidelines for companies in terms of their operations and outcomes.
2. To enable consistent reporting that enables investors to evaluate companies.
3. To help governments track regulatory compliance, and identify areas for improvement or disciplinary action.
ESG Frameworks and Risk
In addition to helping support positive ESG outcomes, companies that adhere to an ESG framework may also be able to mitigate certain ESG risk factors that can impact company performance long term.
For example: Reducing the demand for fossil fuels as part of product manufacturing can be beneficial for the environment, and it also may help protect a company from price shocks from oil or gas shortages — which can help its bottom line.
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Benefits of Using an ESG Framework
To the extent that an ESG reporting framework can act as a blueprint for progress in specific areas, it may be more likely that organizations that embrace a certain framework are able to drive more positive outcomes in desired areas.
In that light, an ESG framework can enable companies to expand the scope of their business reporting to a wider universe of stakeholders.
• From an environmental perspective, using ESG to guide corporate actions can mitigate the chance of government oversight; and it may reduce a firm’s overreliance on natural resources, and help to limit insurance and legal costs if environmental safety guidelines are followed.
• From a social perspective, ESG-influenced policies can improve working conditions, employee retention, reduce the likelihood of labor disputes that can impact productivity, build community support, and improve a firm’s image.
• When it comes to governance, ESG policies can improve transparency at all levels of a firm; protect data privacy; reduce fraud; and potentially reduce operational costs through the better alignment of all stakeholders within a firm.
Large financial institutions, such as public pension funds, have started incorporating ESG criteria into their investment selections. In addition, there are now ESG-focused ETFs and mutual funds being offered by mutual fund companies, online investing platforms, and brokerage firms.
Types and Examples of ESG Frameworks
In the last 20 years or so, over a dozen ESG frameworks have been established. And while some methods may overlap with each other, and in the last few years some have been consolidated, the existing frameworks each provide a separate set of standards, metrics, and reporting requirements that organizations can consider.
Despite the confusing number of options, some frameworks or disclosure systems seem to be taking the lead in terms of wider adoption, particularly with the expansion of the International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards.
While some firms have adopted all or parts of these frameworks, others have created proprietary sets of criteria, metrics, and reporting methods that, in some cases, may complement existing frameworks.
Following is a brief summary of some prominent ESG frameworks:
Global Reporting Initiative (GRI)
The Global Reporting Initiative, established in 1999, is an independent organization that helps companies and governments assess and report their impact on ESG issues such as climate change, human rights, and corruption. Although the GRI standards are voluntary, nearly 80% of the world’s biggest companies by revenue have adopted the GRI reporting standards, making it the most widely adopted framework.
International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards
The IFRS establishes corporate accounting standards and policies overseas; it’s the equivalent of the U.S. Generally Accepted Accounting Principles (US GAAP). Because a growing number of companies need a way to incorporate sustainability into their accounting and reporting disclosures, the IFRS Foundation set up the International Sustainability Standards Board (ISSB) in 2021.
The ISSB disclosure standards are voluntary, and build on previous frameworks, a few of which have since been folded into the working IFRS Sustainability Disclosure Standards, including: the Task Force on Climate-Related Financial Disclosures (TCFD), Climate Disclosure Standards Board (CDSB) and others.
Sustainability Accounting Standards Board (SASB) Standards
The SASB Standards were established in 2018 to enable the disclosure of sustainability-related information that would be considered financially material; the framework detailed key ESG issues across 77 different industries. These standards were absorbed by the IFRS Foundation in 2022, and as such are now overseen by the ISSB, which maintains the SASB Standards for organizations that prefer this method.
CDP
The CDP (formerly the Carbon Disclosure Project) is an international non-profit that helps not only companies, but state and local governments to evaluate and disclose key environmental impacts such as carbon and greenhouse gas emissions, water quality protection, and deforestation on a voluntary basis.
Companies are given a score on separate areas; the questionnaires have been modified to align with the IFRS climate disclosure requirements (above), and continue to evolve. According to CDP, over 23,000 companies around the world rely on the CDP disclosure framework.
United Nations Global Compact
The U.N. Global Compact is considered one of the world’s largest corporate sustainability initiatives; it is “principle based” in that this U.N. pact is non-binding and offers 10 voluntary principles that organizations can use to establish or enhance policies based on human rights, labor practices, the environment, and anti-corruption measures. These 10 Principles are aligned with the 17 Sustainable Development Goals (SDGs), which continue to serve as global guidelines and voluntary frameworks for greater corporate accountability.
The Takeaway
For investors who are exploring ways to invest sustainably, or invest in companies committed to ESG goals, it can be helpful to understand the landscape of ESG standards and reporting frameworks. While there are a number of existing ESG frameworks, a handful have been more widely adopted, which can be useful for ESG-focused investors to know.
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