An ESG report is published by a company about the ESG (Environmental, Social, Governance) impacts (numerical measure of ESG performance) which enables the company for more transparency.
- ESG reporting refers to the process of converting the quantitative and qualitative outcomes of the three categories into a single unit that is made available to company stakeholders.
- This in turn surges the transparency of the company’s performance in different ESG categories, beneficial for the stakeholders.
- Disclosing the ESG reporting reveals sustainability in each company’s performance. This transparency develops a positive relationship with investors and will remain as a vital focus for the upcoming years.
- Enormous upswing in ESG reporting has been observed in the past few years. From the year 2011 to 2018, the number of companies that provide ESG reports raised from 20 to 86%, demonstrating the connotation of ESG reporting.
- With the increasing ESG reporting certain companies are voluntarily disclosing ESG information in their annual reporting system. Based on this, the investors can get a larger picture of company’s performance and invest to generate sustainable returns.
- In different circumstances, companies that lack ESG reporting may concern the investors for being non-transparent and overpass them for probable investments.
- The various factors under the three category are interlinked to the financial success, a higher ESG scoring/performance leads to beneficial investment from potential investors.
- The investors classify the companies based on its ESG scores with the possibility to offer good revenues.
- The urge to quantify ESG performance in business has been steadily growing, various analysis agents offer several process to calculate ESG scores for clients, hence ESG data systems becomes irrational (biased). A reliable scoring system should be systematic, objective and reproducible (persistent). To overcome the biased scoring, the scores can be correlated against universally established benchmarks/frameworks.
ESG framework is mainly designed for companies and investors those who need to assess how the ESG issues causes an impact on financial performance. The most used ESG frameworks are
Global Reporting Initiative (GRI) framework: it was created in the year 1997, which is the first and mostly used framework. In this approach, the companies reported their practice publicly on its economic, environmental and social impacts, which help to identify how the companies affect the world.
United Nations Sustainable Development Goals (SDGs): this addresses global challenges with 17 goals which aimed at establishing better future for people and planet. This includes eradicating hunger and poverty, nourishing environmental protection, attaining peace, widening access to education and reassuring responsible consumption.
Morgan Stanley Capital International (MSCI): it is a privately created ESG framework by Morgan Stanley which is used to measure long term resilience and ESG risks by scoring system, and its rating range from CCC (laggard) to AAA (leader). This framework helps the firms to identify the ESG risk in investment.
Sustainability Accounting Standards Board (SASB): In 2018, the board has published ESG standards specific to 77 industries, which explains financial metrics and their execution. SASB ESG framework is suitable for a firm which assesses their financial performance based on the ESG practices.
Task Force on Climate-related Financial Disclosures (TCFD): Financial Stability Board (FSB) established TCFD in 2015, to support the Paris climate agreement goals. This aims to establish a framework for companies to build efficient climate- related financial disclosures all over their existing reporting practices.
International Integrated Reporting Council (IIRC): It was established in 2010, often used together with SASB standards. The IIRC defines its framework as “a process found based on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications.” (www. boardclic.com).
The Workforce Disclosure Initiative (WDI): It plays a significant role in addressing and improving the corporate transparency and accountability on workspace issue. It provides the companies and investors with comprehensive and comparable data and assist to rise quality job all over the world.
The Climate Disclosure Standards Board (CDSB): This is an international consortium of NGOs which was established to help the organization to incorporate the climate change data in their financial report. This framework has been used by 374 companies across 32 countries.
These frameworks address the innumerable methods used for determining, assembling and reporting different ESG indicators. Different ESG indicators can be employed by these frameworks which increases the complexity of ESG ratings. Apart from the various frameworks, some of the individual indicators should be taken into consideration which includes health and safety, corruption and instability, carbon emissions and corporate governance. The most significant factors which determines the quality of ESG reporting are
- Reliability of the data sources
- Excellence in methodology
- Scrutiny on material issues
The seven steps have been followed to implement and develop an ESG strategy. They are as follows: Executing materiality assessment, to assess the present state, objectives and goal setting, evaluate the gaps to attain future state, developing a strategic ESG framework, quantify the key performance of ESG indicators, and developing the report.