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The Evolution of ESG Frameworks and what to expect in the future

ESG Frameworks

The different types of ESG frameworks and standards

ESG frameworks and standards are a set of guidelines that help businesses measure and report on their environmental, social, and governance (ESG) performance. There are a number of different ESG frameworks and standards available, each with its own strengths and weaknesses.

Here are some of the most popular ESG frameworks and standards:

  • Global Reporting Initiative (GRI):

    The Global Reporting Initiative (GRI) has earned its reputation as the gold standard in ESG reporting. It provides a comprehensive framework for organizations to disclose their environmental, social, and governance impacts and activities. The GRI Standards are the most widely used ESG reporting framework globally, adopted by thousands of organizations in over 90 countries.

    The GRI Standards are lauded for their comprehensive nature, covering an extensive range of ESG topics. They provide detailed guidance on what to report, how to report, and the performance indicators to use. This not only allows companies to address critical issues but also ensures consistency and comparability of ESG information. The GRI Standards offer a flexible structure that enables organizations to tailor their reporting to their unique circumstances, while still adhering to globally recognized guidelines.

    Businesses that embrace the GRI Standards showcase a commitment to transparency, accountability, and sustainable practices. By reporting on a wide spectrum of ESG issues, they can effectively communicate their impact on the environment, society, and governance, ultimately fostering trust among stakeholders, including investors, consumers, employees, and regulatory bodies.

Also Read: How Boards Can Champion ESG: Steering Towards Sustainable Success

  • Sustainability Accounting Standards Board (SASB):

    The Sustainability Accounting Standards Board (SASB) provides a different approach to ESG reporting, focusing on material ESG factors directly linked to financial performance. SASB standards are industry-specific, designed to address the unique ESG risks and opportunities faced by organizations within each sector.

    SASB standards acknowledge that not all ESG issues are of equal significance to every industry. For instance, water scarcity may be a material concern for companies in the Food and Beverage sector, but less relevant to the IT sector. By tailoring standards to specific industries, SASB enables companies to prioritize their ESG disclosures based on what is most likely to impact their financial performance. This investor-focused approach helps businesses communicate with shareholders and other financial stakeholders more effectively.

    As investors increasingly integrate ESG factors into their decision-making processes, SASB standards provide a valuable framework for businesses to report on ESG issues that matter most to their bottom line. It allows for the alignment of ESG reporting with financial reporting, demonstrating the interconnectedness of sustainable business practices and economic success.

  • Corporate Sustainability Reporting Directive (CSRD):

    The Corporate Sustainability Reporting Directive (CSRD) represents a significant milestone in the world of ESG reporting. Introduced within the European Union (EU), the CSRD builds upon the existing Non-Financial Reporting Directive (NFRD) to expand ESG reporting requirements.

    Under the CSRD, large public companies and all listed companies with over 500 employees will be mandated to report on their ESG performance. This directive significantly broadens the scope of ESG reporting, reinforcing the EU’s commitment to harmonizing and enhancing sustainability disclosure.

    The CSRD is slated to come into effect in 2023, marking a pivotal shift in ESG reporting in the EU and potentially influencing reporting standards and regulations globally. By expanding the reach of ESG reporting to more companies, the CSRD aims to ensure that a broader array of organizations integrate sustainability and responsible practices into their operations, and disclose their impacts transparently.

  • Task Force on Climate-related Financial Disclosures (TCFD):

    The Task Force on Climate-related Financial Disclosures (TCFD) was established by the Financial Stability Board to address a pressing issue: climate change and its financial implications. TCFD offers guidance on how companies can effectively disclose climate-related risks and opportunities within their financial filings.

    Climate change is a global concern, and businesses are increasingly held accountable for their contributions to this challenge. The TCFD framework helps organizations assess and report on the financial risks associated with climate change, such as regulatory changes, physical risks, and transition risks. Simultaneously, it encourages them to explore opportunities related to climate adaptation and mitigation.

    TCFD’s emphasis on climate disclosure aligns with the global momentum toward addressing climate change and its impact on business operations. By providing a structured approach to climate reporting, TCFD supports the integration of climate-related data into financial decision-making processes, ultimately facilitating the transition to a low-carbon and resilient economy.

  • International Sustainability Standards Board (ISSB):

    The International Sustainability Standards Board (ISSB) represents a significant leap forward in the pursuit of global harmonization in sustainability disclosure. Established to develop a global baseline of sustainability disclosure standards, the ISSB aims to ensure that organizations worldwide adopt consistent and comparable ESG reporting practices.

    This new organization acknowledges the need for a unified set of standards that transcends geographical boundaries and industry sectors. By creating a global benchmark for sustainability reporting, the ISSB facilitates the ability of investors, regulators, and other stakeholders to assess and compare the performance of organizations on a worldwide scale.

    The ISSB represents the evolution of ESG reporting toward greater consistency, comparability, and transparency. Its standards are expected to play a pivotal role in streamlining sustainability disclosure, thereby simplifying the process for organizations and providing stakeholders with a more accurate and relevant understanding of ESG performance.

Also Read: ESG Reporting Frameworks and Standards: Which One is Right for Your Business?

  • Science Based Targets initiative (SBTi):

    The Science Based Targets initiative (SBTi) empowers companies to take a science-based approach to setting and achieving greenhouse gas (GHG) emissions reduction targets. The initiative assists organizations in aligning their carbon reduction efforts with the latest climate science and the goals of the Paris Agreement.

    SBTi is particularly relevant in a world grappling with the urgent need to address climate change. It helps businesses define targets that are consistent with the level of decarbonization required to limit global warming to well below 2 degrees Celsius, which is a key objective of the Paris Agreement.

    Companies that participate in SBTi demonstrate a commitment to taking tangible action against climate change. By setting and achieving science-based targets, they contribute to the global effort to reduce GHG emissions, mitigate climate risks, and transition to a low-carbon future.  

  • Carbon Disclosure Project (CDP):

    The Carbon Disclosure Project (CDP) is a well-established non-profit organization that provides a platform for companies to disclose their environmental impact, particularly in areas such as carbon emissions, water usage, and deforestation.

    CDP’s platform allows organizations to measure, manage, and report their environmental data, making it available to investors, policymakers, and the public. The organization collects and disseminates this information, enabling comparisons and benchmarking, and fostering greater transparency in environmental impact reporting.

    By participating in CDP, companies demonstrate a commitment to disclosing their environmental footprint and working to reduce their negative impacts. It offers a standardized framework for businesses to address key environmental issues and enables them to meet the growing demand for sustainability information from a variety of stakeholders.

    In summary, these diverse ESG frameworks and standards serve as vital tools for organizations across various sectors and geographies. Whether it’s the comprehensive and adaptable nature of the GRI Standards, the industry-specific materiality focus of SASB, or the regulatory impact of the CSRD, these frameworks are instrumental in guiding businesses toward more transparent, sustainable, and responsible practices. As ESG reporting continues to evolve, and with the emergence of global initiatives like the ISSB, businesses can expect greater harmonization, comparability, and a more streamlined approach to sustainability disclosure. Furthermore, as climate change remains a pressing concern, TCFD, SBTi, and CDP play pivotal roles in addressing environmental challenges and driving the global transition to a low-carbon, sustainable economy.

Evolution of new standards and timelines

The Evolution of ESG Standards:

The evolution of ESG standards reflects the growing importance of sustainability and responsible business practices on a global scale. These standards have continually adapted to meet the changing needs of businesses, investors, regulators, and other stakeholders. Here’s a closer look at the evolution of ESG standards and their impact:

1. Responding to Stakeholder Demands:

The journey of ESG standards began with a response to the increasing demands from stakeholders, including investors, consumers, and advocacy groups. These stakeholders sought more transparent and comprehensive reporting on the environmental, social, and governance aspects of business operations.

2. The Emergence of GRI and SASB:

The Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) were early pioneers in ESG reporting. GRI’s comprehensive framework and SASB’s sector-specific approach offered companies options for ESG reporting that catered to different reporting needs and priorities.

3. Regulatory Drivers:

ESG standards have been influenced by regulatory changes in various jurisdictions. For instance, the European Union’s Non-Financial Reporting Directive (NFRD) laid the groundwork for the Corporate Sustainability Reporting Directive (CSRD). These regulatory initiatives are shaping the evolution of ESG reporting by making it mandatory for a broader range of companies to disclose their ESG performance.

4. Industry Focus and Materiality:

The SASB framework introduced the concept of materiality, emphasizing the importance of reporting on ESG factors that are most relevant to a company’s financial performance. This approach recognized that not all ESG issues are equally significant to every industry or organization.

5. Climate-Centric Reporting:

The urgency of climate change led to the creation of the Task Force on Climate-related Financial Disclosures (TCFD). TCFD’s focus on climate-related risks and opportunities marked a significant shift in ESG reporting toward addressing one of the most pressing global challenges.

6. Global Harmonization:

The formation of the International Sustainability Standards Board (ISSB) represents a new milestone in the evolution of ESG standards. The ISSB is working to create a unified set of global sustainability disclosure standards, marking a significant step toward harmonizing ESG reporting on a global scale.

Timelines for New ESG Standards

Understanding the timelines for new ESG standards is crucial for businesses as they adapt to changing reporting requirements. Here is a more in-depth look at the key milestones:

1. CSRD Implementation

The CSRD is scheduled to be implemented in the European Union on 1 January 2024. Large companies and all listed companies will be required to report on their ESG performance in accordance with the CSRD. The CSRD will significantly expand the scope of ESG reporting in the EU, requiring companies to report on a wider range of ESG factors and to provide more detailed information.

2. ISSB Development

The International Sustainability Standards Board (ISSB) is in its formative stages. It is expected to take several years for the ISSB to develop a comprehensive set of global sustainability disclosure standards. However, the ISSB has already made significant progress, and it is expected to publish its first standards in 2023.

3. Other Notable Developments

In addition to the CSRD and ISSB, there are a number of other notable developments in the ESG standards landscape. For example:

    • The US Securities and Exchange Commission (SEC) is currently considering new rules that would require public companies to disclose more information about their climate risks and ESG performance.
    • The UK government has proposed new ESG reporting requirements for large companies and financial institutions.
    • China has also announced plans to develop a national ESG reporting framework.

4. Ongoing Evolution

The evolution of ESG standards is ongoing and continuous. As ESG gains more and more prominence, it is likely that more countries will introduce ESG regulations, and existing standards will continue to evolve to meet the changing demands of the global business landscape.

What businesses can do to prepare

Businesses can prepare for the evolution of ESG standards by taking the following steps:

  • Understand the current and future ESG reporting requirements in the jurisdictions where they operate.
  • Develop a robust ESG data collection and management system.
  • Identify the ESG factors that are most material to their business.
  • Set ESG targets and develop a plan to achieve them.
  • Communicate their ESG performance to stakeholders in a clear and transparent manner.

By taking these steps, businesses can ensure that they are well-positioned to comply with new ESG reporting requirements and to demonstrate their commitment to sustainability. Book a demo now!

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