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Whether you’re beginning your ESG journey or taking a moment to level-set as you look ahead to next year, selecting the right ESG frameworks and standards to align with and report to can seem like an overwhelming task, with too many moving pieces (and acronyms!) to count. Since ESG reporting is largely voluntary and market-based, shifts and changes in public opinion and industry perception can be numerous and fast-paced. There are also many frameworks and disclosures to consider.
To help you make sense of this rapidly-evolving landscape – and, yes, all the acronyms – we’ve broken down the main players and defined their primary differences and points of overlap. We’ve also highlighted some of the key things to consider when researching the ESG frameworks and standards best suited for your company.
There are three different categories of ESG-related guidance: standards, frameworks, and raters and rankers. While the distinctions between the three are sometimes loosely defined, and there is occasional crossover, understanding the high-level differences between these types of organizations can be helpful as you determine the overall path that is best for your company.
It is important to be aware of these differences when choosing a framework, standard, or rater and ranker. Frameworks and standards tend to be internationally-recognized and are often created by non-governmental organizations or non-profits; generally, these organizations are thought of as independent entities. ESG standards usually feature clearly-defined KPIs, while ESG frameworks may be more qualitative in nature and allow for greater interpretation. In practice, both ESG standards and frameworks typically take the form of a survey or set of guidelines that companies are either required to disclose privately and/or in their public reports (such as CR or financial disclosures) that are then scored by these independent entities.
Finally, raters and rankers are generally tailored to specific investors or third-party research firms seeking to evaluate investments with respect to ESG. An important difference is that while there may be specific KPIs involved, the ESG data inputs are often collected by the third-party research firms (rather than being provided by the ranked company) and are sourced from publicly-available information. A company then receives a rating or ranking, and may or may not have the opportunity to provide input.
First and foremost, a driving factor behind any type of ESG disclosure is whether or not it is required by law. The SEC recently announced a requirement for public companies to disclose performance on a set of ESG KPIs focused primarily on climate risk and GHG emissions. This mandatory requirement is set to take effect in 2024, and will apply to all public companies as part of their annual financial disclosures. It is also important to note that there are many state and local laws in the United States that may overlap with voluntary ESG disclosures. These can include local energy and water benchmarking requirements, as well as building performance standards and other carbon disclosure requirements. The deadlines for these disclosures often occur near the deadlines for ESG reporting, so it is important to plan ahead, manage your time wisely, and be aware of the potential overlapping information required for all.
When choosing the right ESG framework or standard, it is important to align the framework’s goals and intents with your company’s goals and intents. To effectively do this, you must first understand which ESG topics are most “material” or important to your organization. Since each framework and standard will have slightly different focuses (e.g. some are more heavily skewed towards “E”-related topics while others may equally weigh “E”, “S”, and “G”), it is important to choose a framework that reflects your company’s priorities.
Download our Annual ESG Quick Start Guide for practical tips on conducting a materiality assessment and more.
For example, if carbon is a clear winner at the very top of your materiality assessment, you may opt for a standard or framework that focuses on carbon, such as the Carbon Disclosure Project (CDP). You may also find that depending on the industry, there are frameworks that can help you both define and evaluate high-priority ESG topics. For commercial real estate, GRESB was established for this very purpose and can be a great place to start.
It is also important to weigh the needs of your stakeholders. Investors are often a key audience for ESG-related information, and you may find that they already utilize a specific framework that reflects their priorities. Many investors require their portfolio companies to align with specific frameworks and standards, and some of the larger institutional investors and capital market organizations may also subscribe to specific raters and rankers, such as MSCI or Sustainalytics (for a list of larger investor funds and their ratings providers, click here). If this is the case, investors may then encourage their portfolio companies to provide any additional data needed by the rating and ranking organizations in their public disclosures. By and large, investor requests often prove to be among the most significant drivers for companies disclosing ESG information, so it is important to make sure that your chosen disclosure strategy aligns with your investors’ expectations.
Whether by happy coincidence or through more intentional efforts to create industry alignment, there are certain frameworks and standards that require similar and even overlapping information. Focusing on these frameworks can be a good strategy to maximize your resources.
For example, both TCFD and SASB focus on the financial impact of sustainability and climate-related issues, and have purposefully aligned some of their standards. As a result, they share overlapping disclosures, and even offer guidance on how to comply with each other. CDP has also incorporated most TCFD requirements, so disclosing to the CDP will set you up well to also comply with TCFD. Finally, DJSI and CDP have overlapping requirements in the climate section, while UNPRI and GRI both require alignment with the UN’s Sustainable Development Goals (SDGs).
If you are thinking about aligning with one standard or framework, it is worth a search to see if another framework also requires similar disclosures. This will allow you to kill two birds with one stone and report to two or more frameworks and standards in one year with minimal additional effort. To identify the specific points of overlap between frameworks, our gap analysis template can serve as a good starting point.
Finally, ESG as a practice is constantly evolving, and so it is critical to stay on top of changing dynamics in the industry and new regulations and policies. Over the past decade, we have witnessed carbon emissions, climate resilience, and health and wellness evolve from avant-garde considerations into mainstream business drivers, bringing with them new frameworks and standards to reflect this increased focus. Notable examples of now-mainstream frameworks include SASB and TCFD, which were developed in direct response to growing interest in these topics.
Today, organizations are increasingly focused on the risks associated with operating a business as global temperatures rise, severe weather events increase, and unprecedented events (like COVID-19) present significant challenges to business continuity and overall operations. While there are many frameworks and standards to navigate today, there will no doubt be more (with different requirements and KPIs) to evaluate and report to in the future – the SEC’s recent ruling being only the latest example. On the whole, it is important to keep tabs on shifting industry trends and ensure your business is prepared to adapt to any changes by updating your materiality assessment annually and monitoring market and policy changes at all levels.
While there are many factors to consider when choosing an ESG framework or standard, note that not all of these factors hold equal weight. The relative weight of these factors can vary by individual company needs. By simply identifying and categorizing these factors as we have done above, you will begin to see which factors take priority over the others. Now is the perfect time to take a step back and reevaluate your ESG priorities for the upcoming year. So dive in and don’t be afraid to shift focus or take on a new challenge!
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