The ESG Reporting Matrix
Your guide to understanding the alphabet soup of ESG reporting
ESG (Environmental, Social, Governance) is an extensive industry with a considerable number of reporting frameworks and enough terms and acronyms to fill a dictionary. With an almost overwhelming number of options available, it can be hard to know where to begin or how to plan your next steps.
This guide will provide clarity, strategies, and actionable insights that will help you get started with your ESG disclosure process by:
- Defining and categorizing some of the different ESG frameworks and disclosures
- Emphasizing similarities between frameworks and how they can be connected
- Identifying tools and best practices for picking the right frameworks and disclosures for your organization
- Examining emerging ESG trends and their impact
- Providing first steps toward the systematic creation and management of a scalable, cohesive, and effective ESG strategy
Why bother with ESG?
“Why are we disclosing in the first place?” This is a crucial question to answer at the beginning of this process. If you’re going to be dedicating time, resources, and personnel to pursuing one or more of these frameworks, what are some of the reasons? Here are four common reasons why organizations consider ESG disclosure.
Attract investors
In today’s landscape, investors are using ESG as a screening method for choosing where to invest. If a company doesn’t have any ESG efforts or activity, it is at risk of being passed over for organizations that are publicly dedicated to ESG and that incorporate sustainable practices into the core of their business operations.
Streamline operations
Working towards an ESG framework is a rather involved process; as such, you’re likely to learn a lot about your company and your operations. The insights you uncover during the process, particularly those you gain from studying the interactions and cooperation between different departments, can help identify opportunities for increasing efficiencies and streamlining operations.
Mitigate enterprise risk
When you’re considering incorporating ESG into your organization, you’re inherently taking a long-term approach to your business. This can lead you to uncover risks that, while not currently urgent or apparent, could have significant impact on your organization down the road. And after identifying these risks, you’ll also gain a better understanding of how prepared your organization is to respond to them and you’ll be able to create strategies for risk mitigation.
Comply with regulations
Complying with governmental regulations is a priority for any business. Whether a regulation affects only a small portion of your business or the entire entity, compliance is still mandatory. It’s also important to keep your eye out for trends and future regulations that might affect your company even further than just what’s currently in place. Having a strategy and being prepared for future regulations will improve your bottom line in the long run as you can avoid fees and other adverse impacts associated with noncompliance.
Still not convinced?
These reasons all sound great on paper. Still, the bottom line is that, if you’re going to be investing capital, allocating resources, and spending your and your employees’ time on ESG, you’ll need further proof of the positive outcomes to convince your company leadership and get approval.
The last few years have seen record inflows when it comes to sustainable funds. ESG funds and ETFs have surged in the past two years as well, leading to record investment there as well.
Why all the sudden investment in ESG?
Studies have shown and proven a direct relationship between ESG and financial performance, which has validated the efforts of companies with sustainable business practices already in place, increased the interest of investors, and pushed even more companies to begin focusing on ESG and disclosure.
Section 1
Defining the alphabet soup of ESG
There are many different frameworks in the ESG industry, and it can be challenging to keep track of them all. The frameworks can be classified into three categories as a way of ensuring you’re able to identify the ones that meet the needs of your organization and your stakeholders: reporting frameworks, guidance frameworks, and third-party aggregated frameworks.
Reporting frameworks
Reporting frameworks tend to take the form of a questionnaire or survey that requires your organization to provide quantitative and/or qualitative data. These frameworks typically provide you with a scorecard or rating or other scoring structure. These scores and ratings can be used to benchmark your organization against industry peers and competitors, reported to stakeholders who have requested them, and included in your marketing materials and other strategies that you utilize to share your organization’s dedication to ESG with the public.
Guidance frameworks
Guidance frameworks provide a structure that can help shape your ESG efforts and determine what kind of deliverable you use to share your results. A common type of deliverable is a corporate social responsibility (CSR) report, which showcases your organization’s current efforts and highlights your plans and goals for future improvements. Guidance frameworks help you decide what will be included in your reports, from providing the correct context, reaching the right audience(s), and ensuring you’re reporting on the most material topics to your stakeholders.
Third-party aggregated frameworks
Third-party aggregated frameworks take an independent look at your organization’s ESG activities and performance using publicly available data like publications, website information, annual reports such as CSR reports, and more.
GRESB
The GRESB reporting standard benchmarks the ESG performance of real assets. Real estate and ESG investors, managers, and the wider industry actively participate in the development of GRESB Assessments to ensure sustainability performance metrics reflect the issues most material to the industry.
CDP
CDP (formerly the Carbon Disclosure Project) manages a global environmental disclosure system used by more than 8,400 companies. Companies disclose by completing any or all of the three CDP questionnaires of climate change, forests, and water security.
UNPRI
The United Nations adopted the Principles for Responsible Investment to encourage investors to implement six sustainable investment principles. Each signatory must report their responsible investment activities each year using the UNPRI Reporting Framework.
SASB
The SASB Standards allow you to track and communicate sustainability actions most financially-material to your investors. There are 77 different industry-specific SASB Standards.
GRI
The Global Reporting Initiative (GRI) created the first set of sustainability standards in the world. The newest GRI Standards developed three series (economic, environmental, and social) of 34 topic-specific standards to help companies report on the most material issues to their investors and other stakeholders.
TCFD
The Task Force on Climate-related Financial Disclosures (TCFD) guides companies on disclosing climate-related financial risks to investors, lenders, insurers, and other stakeholders. This guidance identifies multiple climate-related risks and opportunities to disclose.
SAM Corporate Sustainability Assessment
The SAM Corporate Sustainability Assessment (CSA) annually evaluates the sustainability practices of more than 7,300 companies. Participants choose to fill out a questionnaire specific to their industry, and CSA assigns a sustainability score for each completed questionnaire. These scores help companies compare their sustainability performance to peer companies.
Section 2
Framework alignment
ESG reporting doesn’t exist in a vacuum within your organization. Many ESG frameworks provide ways to bridge the gap between sustainability and other aspects of your organization, such as finances.
For example, when you utilize SASB Standards, you’ll report on the ESG topics and issues that are financially material to your organization. If you’re working on a GRI-aligned report, your efforts around business communications will very likely overlap with your marketing efforts as you report on relevant topics that are material to stakeholders.
The data-story continuum
Another way of looking at framework alignment is as a data-story continuum. This focuses on categorizing what you get out of different frameworks and who the results are relevant to.
For example, ESG reporting frameworks tend to focus on data and provide you with a score or rating at the end of the process. In contrast, guidance frameworks help you structure your ESG story and create the narrative around it. So reporting frameworks lean toward the data in the continuum and guidance frameworks lean toward the story.
Another aspect of the continuum to focus on is the audience. The audience should correlate to the stakeholders that you report to or who want to see your results. These groups generally include investors, employees, and customers and can also include more external entities like government or local communities.
The relevant audience on the continuum’s data side will usually include investors, government entities, and any reporting frameworks you’re submitting to. When you’re complying with regulations or submitting to one or more reporting frameworks, these audience members tend to be looking mostly or solely at your data or the score you receive from your submission. When it comes to the story, your relevant audience will be focused less on your organization’s data and more on the narrative. They want to understand your ESG story, and include employees, customers, and potential advocates and evangelists.
Alignment example: TCFD & SASB
With the potentially overwhelming number and variety of ESG frameworks to choose from, it can be hard to tell which of them are aligned in ways that make your disclosure process easier. To provide an example of framework alignment, we’re going to look at just two: The Task Force on Climate-related Financial Disclosures (TCFD) and the SASB Accounting Standards.
Source: BloombergNEF
TCFD provides guidance to companies on disclosing climate-related financial risks to investors, lenders, insurers, and other stakeholders. It identifies multiple climate-related risks and opportunities to disclose.
The most significant difference between the TCFD and SASB frameworks is that TCFD provides recommendations specific to how climate-related issues can impact your organization’s financial performance, whereas SASB focuses on a broader range of sustainability issues and their impact on financial performance. However, SASB and TCFD have more in common than not. The two frameworks are intentionally aligned; in fact, there’s guidance within the SASB framework on how you can satisfy TCFD recommendations during your disclosure process.
While there are many frameworks available in the industry, the good news is that the organizations that created them understood that during their inception and worked to incorporate intentional alignments with each other. While SASB and TCFD mainly focus on the financial impact of sustainability and climate-related issues, they also allow you to uncover non-financial risks and opportunities and serve in part to orient your organization within the broader spectrum of ESG.
When you compare the broader range of frameworks, you’ll notice apparent examples of alignment, particularly because there many overlapping requirements. For instance, CDP, a framework specific to climate-related issues, is almost perfectly aligned with TCFD, and choosing to submit to CDP will satisfy all of the TCFD requirements at the same time. With this alignment already baked into the disclosure process, there’s absolutely no reason that your organization shouldn’t work toward both frameworks.
Overlap among ESG reporting frameworks is common; here are a few examples:
- SASB Standards, CDP reporting, & GRI Standards are intentionally aligned to make disclosure easier and more attractive for organizations
- GRESB provides a broader range of guidance, but it shares about half of the disclosure requirements with SASB
- UNPRI aligned with GRI, with the inclusion of its 17 SDGs (Sustainable Development Goals)
- DJSI is more industry-specific in some areas but intentionally aligns with climate-related questions of CDP and suggested disclosures of SASB
Section 3
Understanding what's right for you
Some of the biggest questions you’re probably asking yourself are “How do I know the right path for my organization? What frameworks should we report to?” There are three important factors to consider when you start trying to answer these kinds of questions:
Audience
- Who is the audience of your disclosures?
- What do you want your audience to understand about your ESG efforts?
- Are there different stakeholder groups that should be informed of your ESG work?
Drivers
- What is motivating you to think about ESG disclosure?
- Are there conflicting opinions within your organization and stakeholder groups?
- Are there risks in not adopting a new ESG reporting or disclosure framework?
Resources
- What resources do you have that can be dedicated to this?
- Do you have enough personnel available during peak reporting seasons?
- Do you have the capacity to produce a standalone report?
- Are there cases where you’d need to introduce outside help to keep with timelines?
Audience
Consider who you want reading your disclosures and what you want them to understand about your ESG efforts. When it comes to the data-story continuum, ESG disclosures can add depth and showcase your organization’s dedication to issues and topics that resonate with your audience.
Remember that different groups will be interested in different aspects of your ESG efforts. For example, investors likely have criteria that differ from what your employees would take an interest in. It’s essential to identify and understand these different interests to tailor your communication strategies to share relevant information and results for each group.
Drivers
Understanding the motivations and drivers behind your dedication to ESG is essential for selecting the frameworks you disclose to and strategies that you implement. A typical driver is increased scrutiny from investors that has been the trend in recent years. Others include requests from employees or the need to comply with government regulations.
You may run into situations where motivations and strategies conflict within your organization. For example, your leadership may be pushing strongly for ESG disclosures, but your compliance department is hesitant about the information made public through them. These situations are very normal during the disclosure process. When picking frameworks and disclosures, it’s crucial to keep in mind the forces driving these new disclosures, the potential risks that can come from not moving forward, the issues that your efforts are focusing on, and other facets of your organization’s motivation.
Resources
Identifying and securing the resources you need to commit to ESG disclosure takes time. Do you have the capability with your organization’s current resources, or will you need additional means to achieve your goals? It’s important to take stock of the resources and personnel you have on hand when you begin to create a strategy, as these will partially dictate the scope of what you can realistically achieve.
If resources are limited, you may need to rethink parts of your strategy, perhaps by focusing on ESG disclosure frameworks whose requirements don’t put as much of a strain on what you have available. However, even if it doesn’t look like your internal resources are enough to secure the desired outcome of your ESG efforts, it doesn’t mean you can’t accomplish what you set out to do. External sources like ESG consultants augment your available resources and provide additional expertise and insights that you may not have considered otherwise.
Section 4
Industry trends
Over the last decade, ESG has made great strides and now has a large sphere of influence across virtually every industry. And with the widespread disruptions caused by the COVID-19 pandemic, ESG is getting more focus and attention than ever. Three trends that have caught on and are receiving a lot of attention are climate resilience, measurable goal setting, and standalone reports.
Climate resilience
Climate resilience is in the spotlight because of the impending threat of climate change and the risks it carries. It brings with it the threat of disruptions to everyday life and business continuity plans at the forefront for helping businesses prepare for unforeseen circumstances. Every company should evaluate long-term risks like climate change when making plans to adapt to future disruptions.
TCFD has seen increased interest from organizations on an international scale as companies work to curb their environmental impact and slow the onset of climate change.
Measurable goal setting
A decade ago, companies could make vague statements about their commitment to their environmental impact. It’s becoming increasingly important to back up these statements with material ESG KPI data and plans in today’s business landscape.
Setting and communicating ESG goals with measurable outcomes is imperative for businesses; these goals can take many forms and tackle a variety of issues, such as the reduction of energy footprint by 50% in five years or a detailed plan for diversity in management. Some disclosure frameworks, such as CDP, provide year-over-year comparisons of your goals, which allow you to track and promote your progress.
Standalone reports
Standalone reports can come in a variety of forms; one of the more common is a corporate social responsibility report. CSR reports tell a concise story of your organization’s ESG efforts. They are made publicly available so that any stakeholder, from employees to investors, can review them and easily understand your organization’s ESG efforts and dedication.
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