Building a sustainable business requires paying attention to environmental, social, and governance (ESG) issues; hence the need for an ESG framework
An ESG framework is a set of standards, policies, and procedures that help an organization understand and manage its ESG risks. Having an ESG framework isn’t just good for your company’s reputation; it also makes sense from a risk management standpoint.
Also, if an organization doesn’t align with best practices, it can get bad press, which is another reason why so many investors are putting ESG at the center of their asset management processes.
Institutional and individual investors now care more about ESG, so companies that want to grow must have an ESG framework. [Click to tweet]
This article will show you what you need to know about creating an ESG framework for your organization.
Why does your company need an ESG framework?
An ESG framework helps a company standardize how it reports on ESG issues and decide what its goals are. The framework typically offers insights into the following areas:
- The ESG metrics you should track and report and what you intend to achieve with your ESG reporting. For example, you could track air pollution as an environmental metric or employee engagement as a social metric to appeal to stakeholders who may have an interest in impact investing or sustainable investing.
- The structuring of your ESG report in terms of content
- The structuring of your ESG strategy, processes, and tools, such as the people you will need to fulfill your ESG commitments
- Your ESG commitment benchmark, because standards vary, depending on the industry. For example, the consequences of ESG failure are more severe in the oil and gas sector than in other industries. Thus, they typically have a higher commitment benchmark, stricter standards, and regulatory bodies providing oversight.
Types of ESG frameworks
ESG frameworks typically cater to three different types of stakeholders, namely investors, government, and management.
ESG frameworks that target investors focus on helping them make wise decisions regarding a potential investment’s sustainability performance. They also target financially visible activities in a company.
National and regional governments use government-targeted frameworks as guides to help them provide services related to sustainability and support for their constituents. An excellent example is the United Nations Sustainable Development Goals (UN-SDGs).
Management-targeted frameworks focus on organizations and translate sustainability-related concepts into tangible outcomes.
The following is a list of ESG frameworks based on these different stakeholder categories.
The Climate Disclosure Standards Board (CDSB) is a non-profit organization focusing on water, forests and climate change. The goal of the CDSB framework is to give investors and financial markets information by putting information about climate change into regular financial reporting. It also enables reporting on environmental emissions to provide structure for data collection. However, the board was consolidated into the IFRS Foundation on 31st January 2022 to support the work of the newly established International Sustainability Standards Board (ISSB).
The Carbon Disclosure Project (CDP) runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. They are the largest single repository of company-wide greenhouse gas (GHG) emissions and are the gold standard for environmental reporting.
The Dow Jones Sustainability Index (DJSI) analyzes companies’ corporate economic, environmental, and social performance and assesses issues such as corporate governance, risk management, branding, climate change mitigation, supply chain standards, and labor practices. The index tracks the performance of the world’s leading companies in terms of ESG criteria. Therefore, for a company to get the DJSI, it must be within the top 15% of its industry and must achieve a score within 30% of its industry’s top-performing companies.
GRESB used to be called the Global Real Estate Sustainability Benchmark. It gives investors and managers validated ESG performance data and peer benchmarks to help with business intelligence, industry engagement, and decision making.
The Global Reporting Initiative provides a flexible framework for creating ESG reports—whether standalone sustainability, non-financial, or integrated ESG reports. Their framework is the most widely used among the world’s largest companies.
The International Organization for Standardization (ISO) provides companies with global standards for all ESG-related activities.
International Sustainability Board (ISSB) provides a comprehensive global baseline of sustainability-related disclosure standards. These standards provide investors and other capital market participants with information about companies’ sustainability-related risks, helping them to make informed decisions.
The Science Based Targets initiative (SBTi) challenges companies to set science-based targets for reducing their GHG emissions and transitioning to a low-carbon economy. This, in turn, helps these companies to boost their competitive advantage.
The United Nations Sustainable Development Goals (UN-SDGs) is a framework consisting of 17 goals that address global challenges such as poverty, inequality, climate, economic prosperity, corruption, labor, and human rights.
To summarize, the frameworks that mostly cater to investment purposes are:
The CDP and UN-SDG frameworks apply to government; and for management, the SBTi and ISO frameworks apply.
How to decide on an ESG framework for your reporting
Seeing that different ESG frameworks are designed to meet different needs, it is up to you to adopt one that will be a good fit for your company and the industry in which you operate. However, before deciding on a framework for your ESG reporting, it is crucial to take the following steps first:
Step 1: Conduct a materiality assessment
A materiality assessment helps you to identify and highlight what counts as ESG priorities for your company. It also enables you to answer questions like:
- Who are your primary stakeholders?
- What ESG metrics are essential to the identified stakeholders?
- Why are they important to them?
Furthermore, your materiality assessment should include benchmarking exercises that will help you assess your ESG performance based on specific indicators compared with industry standards and competitor performance.
Step 2: Establish the baseline for your ESG reporting
Establishing a baseline helps you measure your company’s progress in accomplishing your ESG goals because you need to show investors where you started to express how much progress you have made.
Step 3: Set your ESG goals
With the baseline in place, it is easier to state the ESG goals you want to accomplish. They may include maintaining good performance, improving weak areas, and optimizing overall efficiency.
Step 4: Analyze performance gaps
A gap analysis helps you know what is working and what isn’t. It also shows you how far the company has to go to accomplish its ESG goals and enables you to set reasonable time frames for making changes.
Step 5: Decide on an ESG framework to adopt for your reporting
Once you have done the above steps well, it will be easier to decide which of the listed ESG frameworks will work best for your reporting.
Do you have a framework for reporting your ESG activities? If not, which of the above frameworks are you going to adopt?