Now is the time to get involved in the ESG reporting topic in more depth. With new incoming ESG reporting requirements and with the pressure from stakeholders, ESG and sustainability investments are on the rise. ESG-linked loans quadrupled in Europe from ~$28.5 billion in 2017, to $108 billion in 2019 and they keep on growing. Therefore it is obviously worth your attention.
The biggest factor in this topic is that there are no strict standards for reporting. It could be an advantage as it movies you more freedom, but it also can be hard to follow, as there is no solid guidance. To help you in this journey we prepared an article that explains the ESG reporting standards and provides you with some helpful software tools.
The importance of ESG for businesses and investors
As you approach this topic for the first time you may wonder: do I even need this? Well yes, and indeed – very much. ESG frameworks play a crucial role in sustainable investing, as they assist individuals or other corporations in assessing if a company aligns with their values and evaluating its overall value for its specific objectives.
By utilizing ESG frameworks, investors and stakeholders can gain insights into a company’s performance in areas such as carbon emissions, waste management, labour practices, diversity and inclusion, executive compensation, and board composition, among others. This information can help them make informed investment decisions that align with their values and sustainability goals.
Furthermore, ESG frameworks can enable investors and stakeholders to assess the long-term viability and resilience of a company. Companies that prioritize sustainability and responsible business practices are often better positioned to manage environmental and social risks, adapt to changing market dynamics, and maintain stakeholder trust over the long run. This can ultimately impact the financial performance and value of a company.
What is ESG reporting?
To get deeper into this topic you should know that ESG reporting is a process through which companies disclose data related to their environmental, social, and corporate governance practices, typically through formal reports or disclosures in financial statements, sustainability reports, or dedicated ESG reports. Its purpose is to provide stakeholders, including investors, with transparency on a company’s ESG performance, commitments, and progress towards sustainability goals, while enhancing investor understanding. It also aims to inspire other organizations to improve their own ESG performance by setting an example and sharing best practices, thus driving positive change in the corporate world.
ESG reporting standards and frameworks
When determining which ESG frameworks and standards to use, it’s essential to understand the distinction between these two terms, as explained below:
ESG framework: A framework provides a broad set of principles that guide and shape the understanding of a particular topic, such as ESG. An ESG framework provides guidance on the direction of ESG reporting but does not prescribe a specific methodology for collecting information, data, or producing reports. Frameworks can be used with ESG standards or when a well-defined standard is unavailable.
ESG standard: Standards, however, are specific and focused. They contain detailed criteria that specify what needs to be reported. In the context of ESG, standards dictate how information and data should be collected and how reports should be produced, including the topics and business areas to be included. Standards make frameworks more actionable by ensuring comparable, consistent, and reliable disclosure practices.
ESG Frameworks types
ESG frameworks can be categorized into three main types:
1. Voluntary disclosure frameworks:
Under these frameworks, companies proactively disclose their sustainability-related policies, practices, performance data, and other information related to ESG criteria. These frameworks often take the form of questionnaires. Some popular voluntary disclosure frameworks are:
- Carbon Disclosure Project (CDP): The CDP collects voluntary disclosures of non-financial data such as greenhouse gas emissions (GHGs) and environmental performance, focusing on water security, forest health, and carbon footprint. Companies are benchmarked against industry peers, and the results are publicly available.
- Global Real Estate Industry Benchmark (GRESB): GRESB is a framework specific to the real estate sector, collecting voluntary disclosures related to ESG data, assets, and portfolios of buildings. The results are publicly available.
- Dow Jones Sustainability Indices (DJSI): DJSI is another building-specific framework that provides a subscription-based survey of ESG data, assets, and portfolios related to real estate. The results are publicly available.
3. Guidance frameworks:
Guidance frameworks provide recommended methodologies and guidance to help companies identify, manage, and report on their ESG performance. Some popular guidance frameworks are:
- Sustainability Accounting Standards Board (SASB): SASB provides voluntary frameworks focusing on financial information relevant to investors. The aim is to provide information to the SEC that investors can use to compare business performance on critical ESG issues.
- Global Reporting Initiative (GRI): GRI voluntary disclosures cover a broad range of ESG topics and management approach components, with standards that are universal, sector-specific, and topic-specific. Companies can apply these standards based on their industry and impact.
- Task Force on Climate-Related Financial Disclosures (TCFD): TCFD provides voluntary disclosures focused on climate-related risks to financial systems. The recommendations are based on four thematic areas: Governance, strategy, risk management, and metrics and targets, considering both the impact of climate change on a business and the impact of the business on the climate.
- Carbon Disclosure Standards Board (CDSB): CDSB is an initiative of the CDP that aims to standardize the reporting of environmental information, focusing on an organization’s financial performance and impact on natural capital.
- International Integrated Reporting Council (IIRC): IIRC aimed to accelerate the adoption of integrated reporting and merged with SASB in 2021 to form the Value Reporting Foundation (VRF). The goal is to create a global baseline for corporate sustainability disclosure.
3. Third-party aggregators:
These frameworks assess a company’s performance based on aggregated and publicly available data collected from filings, publications, websites, and reports. Some main third-party aggregator players are:
- Bloomberg Terminal ESG Analysis: Public information from annual and sustainability reports, CSR reports, and websites is aggregated and assessed, but access requires a subscription.
- Institutional Shareholder Services (ISS E&S) Quality Score (ISS): Sustainability and CSR reports, integrated reports, and publicly available company policies are aggregated and assessed, with results publicly available.
- MSCI: MSCI aggregates data from various sources, including government and NGO datasets, company disclosures such as sustainability reports and proxy reports, and media sources, to show a company’s exposure to ESG risks and how it compares to industry competitors. Subscriptions are needed to access the data.
- Sustainalytics: Sustainalytics aggregates and assesses company data based on public company-sourced findings and media reports.
ESG reporting challenges
As with everything, ESG reporting holds its challenges, that are worth acknowledging. Knowing the main risks or difficulties can help you make a better decision when implementing the practices into your business and minimise or avoid errors that it holds. The main ones are:
1. Absence of a uniform standard
Currently, there is no universally accepted standard for sustainability frameworks and disclosures. This lack of standardization results in conflicting data requirements from various reporting frameworks such as TCFD, SASB, GRI, CDP, GRESB, and others. This creates confusion for organizations trying to embark on sustainability reporting, as it is difficult to determine which framework to follow without proper research and goal-setting.
2. Dynamic and evolving landscape
Adding to the challenge of multiple frameworks, the sustainability reporting landscape is constantly changing. Political and regulatory dynamics lead to frequent updates and revisions in reporting framework rules. This makes it difficult for organizations to stay updated and comply with changing legislation, which may result in penalties or non-compliance.
3. Data accuracy and completeness
Data collection is a significant challenge for most organizations. The inconsistent landscape and absence of a standard make it difficult to ensure data accuracy and completeness. While there are some measurement tools like the GHG Protocol, there is uncertainty around measurement processes and reporting methodologies, leading to potential inaccuracies in reported data.
Due to the lack of clear reporting standards and challenges with data accuracy, there is a risk of greenwashing. Organizations may focus on minimum compliance requirements without setting meaningful sustainability goals or implementing impactful initiatives. This may result in misleading or superficial sustainability disclosures that do not reflect genuine progress towards sustainability objectives.
5. Political backlash and anti-ESG sentiments
ESG (Environmental, Social, and Governance) reporting has faced criticism and backlash from both sides of the political spectrum. Some argue that ESG metrics are not financially relevant and create unnecessary investment risks, while others view it as a distraction from traditional economic growth imperatives. These differing perspectives and political dynamics can impact the acceptance and adoption of ESG reporting, further complicating the sustainability reporting landscape.
Carbon footprint reports
As a part of ESG and sustainability practice measuring and managing an organization’s carbon footprint is a crucial step towards achieving net-zero emissions and forms the foundation of any sustainability strategy. A carbon footprint report is a comprehensive assessment that quantifies the greenhouse gas emissions generated by an organization, including direct and indirect emissions from its operations and supply chain. It enables companies to assess climate risks and opportunities by identifying emissions hotspots throughout their value chain. Many companies globally measure and report their carbon footprint to stakeholders, utilizing the findings to inform and guide their sustainability efforts. These reports inform decision-making, guide sustainability strategies, and demonstrate accountability to stakeholders, showcasing the organization’s commitment to addressing climate change and advancing sustainability goals.
How can ESG Sofware help companies & investors?
As I mentioned, ESG reporting software is a powerful tool that can benefit organizations and investors. It enables organizations to gather and analyze ESG data, track their performance over time, compare their ESG performance to peers, and identify areas for improvement. Additionally, some ESG reporting software can automate the ESG reporting process, simplifying compliance with reporting requirements and making it more efficient for companies.
On the investor side, ESG reporting software can be used to screen companies for ESG risks and identify leaders in ESG performance. It also helps investors track the ESG performance of their portfolios over time, providing valuable insights for decision-making. Moreover, ESG reporting software can validate sustainability claims made by organizations and identify controversial companies, saving time and effort in further investigation.
Here are a few examples of software supporting sustainability in this year:
To read more abut their adnetages and qualities read our article on Top 10 Sustainability Management Tools in 2023.
In conclusion, our environment faces unprecedented challenges, and companies are stepping up to prioritize sustainability. Organizations have to optimize their resource management and reduce their carbon footprint. In this case, the ESG reporting comes in.
As more and more government requirements appear and stakeholders’ demands increase, each company should pay more attention to the emerging issues and solutions in this field. It is great to understand the difference between ESG standards and their frameworks. It’s also best to acknowledge the main challenges in this topic and avoid them in the future. Finally, you should also get insights on the topic of carbon footprints, as it plays a significant role in ESG reporting.
It all may seem confusing and overwhelming, especially if you don’t have the time to get all the latest insights in this area. Luckily, with SolveQ’s experience, you can lay back and easily fulfill your ESG requirements. Our company specialises in creating custom software for ESG solutions that help business improve their sustainability actions. We can also support companies and expand their already existing software if that is wat your bussies is looking for.