Despite recent geo-political challenges, investor appetite for boosting ESG assets under management (AUM) have remained steady. According to Bloomberg, ESG-related assets under management are predicted to hit $40 trillion by 2030. At AGS, we’ve underscored the importance of ESG materiality assessments to business success, and the significance of involving stakeholders in the process. In this article, we will dive a little deeper into the topic of ESG frameworks, analysing the different types of frameworks and which ones are useful in different circumstances. While there is convergence on creating a common framework for ESG measurement, there are at present various frameworks that are used to communicate to specific audiences, such as investors, regulators and ratings agencies. Knowing which to use and when, and how to optimise alignment, is key to fully leveraging ESG reporting for business success and stakeholder trust. Yet, PWC highlights that 94% of investors surveyed in 2023 believe corporate reporting contains at least some level of unsupported sustainability claims (i.e., greenwashing). The way to avoid this is to fully understand your ESG metrics.
An ESG metric is simply a measure of ESG factors listed as part of ESG reporting frameworks. These factors can include carbon emissions, energy use, employee well-being etc. Knowing what metrics to utilise is crucial for ESG success. Yet, according to KPMG, there is still no one-size-fits-all approach to ESG data, management, usage or reporting. This complicates efforts to drive value from the real metrics that matter to each individual organization. However, this only strengthens the case for utilizing a comprehensive ESG materiality assessment to understand what metrics are appropriate for your enterprise.
Broadly speaking, ESG metrics are usually closely aligned to a sector-based approach to ESG materiality. This is partly because both business activities, and investment themes most often align along sectoral themes. It’s also important to remember that every investor will have their own approach to ESG investing: This could be excluding certain sectors, or activities from their portfolio, or adopting thematic, and/or impact approaches. This is why the metrics you choose are as much about an organisation’s ‘Values’, and the values of its investors and stakeholders, as they are about building enterprise value.
According to a recent MSCI research report on ESG Ratings, while E, S & G issues are industry specific, investors and rating agencies often overlook how specific combinations or ‘weightings’ of E, S & G factors relate to long term portfolio success. This is evidence that even at the level of ESG scoring and ratings, there is still debate over what should be measured and reported for any underlying asset, investment or business when it comes to ESG. In fact there are currently over 600 ESG ratings/reporting frameworks globally in use. That is why its crucial businesses take the time to understand what ratings frameworks are most useful, and follow ongoing research to continue to hone strategy, as it relates to relevant best practice. As just one example, MSCI’s own ESG Ratings framework offers 35 ESG key issues that can be combined in various combinations for given sectors. While not perfect it is a useful tool for understanding the link between ESG portfolio performance and business on the ground, helping companies become leaders rather than ESG laggards. You can read more about ESG Ratings providers here.
An ESG reporting framework provides a set of guidelines and standards used to create clear, well structured, and actionable sustainability reports. Reporting frameworks lean on three main methods for creating a picture of ESG performance. These are questionnaires, reverse (externally conducted) reports, and reporting frameworks. When considering which reporting frameworks to use businesses should consider their industry, look at competitors and engage stakeholders actively. For instance, in the real estate industry, GRESB (Global Real Estate Sustainability Benchmark) offers detailed questionnaires that provide companies with a picture of their ESG performance compared to leaders in their industry, offering useful insights into what to report on and where action is needed to compete effectively.
In the table below are the most popular frameworks that all industries can use to report on ESG factors.
| ESG Reporting Frameworks | Description |
|---|---|
| GRI (Global Reporting Initiative) | A global framework providing a benchmark for companies to report to, with metrics relating to sectors and broader reporting metrics. GRI also feeds neatly into ‘Sustainalytics’ ESG ratings. |
| SASB (Sustainability Accounting Standards Board) | Focused on financially materiality and industry-specific ESG risk reporting. In a new collaboration with GRI, both SASB and GRI now align with the new international ISSB sustainability reporting standard. |
| ISSB (International Sustainability Standards Board) | Due to be released as reporting standards in 2025. It is a move to enhance the comparability of ESG data of companies. |
| CDP (Formerly the Climate Disclosure Project) | Offers the largest disclosure system globally. It generates a score, that can inform the ESG report but is widely considered to focus on the E in ESG. |
| SBTi (Science Based Targets Initiative) | Creates a framework for disclosing GHG emissions data and progress on Science Based climate targets. This can feed into the E section of the ESG report, offering suitable metrics based on various parameters. |
To help enhance the effectiveness and usefulness of an ESG report there are a number of reporting guidelines that can be used in tandem with the more formal reporting frameworks. These include the United Nations Sustainable Development Goals (SDGs), targets and metrics. These help companies and portfolio level reports demonstrate how they are tackling the SDGs. For climate reporting until 2024, the Taskforce on Climate Related Financial Disclosures (TCFD) recommendations, offered a framework for reporting on how companies are managing climate risks and opportunities. The TCFD has now been subsumed by the ISSB, yet still offers a useful guideline for climate reporting incorporated in IFRS S2 Climate Related Disclosures.
Understanding how to report on ESG performance requires organizations to get serious about identifying suitable metrics to help measure progress and demonstrate commitment to improvement. There is no one size fits all reporting framework, and often a combination of more than one is needed for ESG reporting excellence. Understanding the thread that ties ESG performance, with investor values and the requirements of ESG ratings providors is a huge opportunity for companies to lead their sector and make the most of climate and ESG related opportunities. ESG reporting excellence can help businesses to attract talent, and retain investors, customers, while improving their reputation and brand. A metric driven approach can also help reduce costs, improve employee engagement, increase innovation, all catalysing competitive advantage.
