26 September, 2022 / Analysis
Five ESG reporting frameworks investors need to know
Clarifying the acronym-prone sets of global standards
The ‘alphabet soup’ of ESG is particularly prominent when it comes to reporting frameworks, which are systems investors and companies can use to collate and report information about things such as their greenhouse gas emissions, and which are usually referred to using acronyms.
A recent report from ESG fintech GaiaLens looked into the most commonly used reporting frameworks, finding the Global Reporting Initiative (GRI) to be most popular among asset owners in Europe and the US.
Using the analysis from the GaiaLens report, here we have outlined five ESG reporting frameworks and how they are used:
Launched some 25 years ago in Boston, and now headquartered in the Netherlands, the GRI is an independent global standard setter for impact reporting. GaiaLens found around 80% of the world’s largest 250 companies globally now use GRI standards, which is significantly higher than other frameworks.
“A comprehensive update of what was called G4 to the new GRI Standards in 2018 has worked to future-proof the standards, standardising language and creating a modular format, which made navigation easier,” the report said.
GRI is free to use and has been translated into 12 languages so far. It is also adaptable to what sector a company is in, and compatible with many other frameworks.
The Taskforce on Climate-related Financial Disclosures (TCFD) was assembled by the Financial Stability Board following The Paris Agreement (which came out of COP24 held in December 2018). In 2017 it published voluntary recommendations, developed by the market, for the market, to help companies disclose more effective climate-related financial information through existing reporting channels.
In developing its recommendations, the Task Force drew from existing climate-related reporting frameworks and created recommendations that rest on the four pillars of governance, strategy, risk management, and targets and metrics. There are 11 specific TCFD recommended disclosures.
It makes up the third most popular ESG reporting framework, used by 30% of the largest asset owners on both sides of the Atlantic, and has become mandatory for some companies in some regions such as the UK.
The United Nations has set 17 Sustainable Development Goals (SDGs) and 169 underlying targets that aim to provide a ‘blueprint to achieve a better and more sustainable future for all’.
Although not designed for use by the investment industry, they have been co-opted as pinpointers for showing which goals companies or funds are aligned to.
GaiaLens found 44.5% of asset owners were using the 17 SDGs to guide their ESG reporting.
The Sustainability Accounting Standards Board (SASB) has developed a set of standards that identifies the subset of ESG issues most relevant to financial performance in each of 77 Sustainable Industry Classification System (SICS) industry groupings. They are designed to help companies disclose financially-material sustainability information to investors.
GaiaLens found SASB has nearly doubled its adoption among US asset owners as compared with Western Europe-based asset owners: 33% of CIOs and investment decision-makers inside the largest asset owners in the US have adopted the SASB ESG guidance framework and standard, while only 19% of Western Europe’s asset owners are applying the SASB Standard.
The EU Taxonomy, which went live on 12 July 2022, is a classification system that establishes a list of environmentally sustainable economic activities. It provides companies, investors and policymakers with definitions for which economic activities can be considered environmentally sustainable.
It could play a key role in helping the EU increase sustainable investment and implement the European ‘green deal’, but its list of activities considered sustainable has also been criticised.
The EU Sustainable Finance Disclosures Regulation (SFDR), which is not set to apply until early 2023 after further scrutiny by the EU Parliament and the EU Council, already has achieved adoption among 10% of the largest Western European asset owners, GaiaLens found.
The European Commission adopted agreed technical standards for SFDR back in April 2021. It is to be used by financial market participants when disclosing sustainability-related information. Financial market participants will provide detailed information about how they tackle and reduce any possible negative impacts that their investments may have on the environment and society in general.
Part of the Bonhill Group.