ESG Frameworks and Standards

ESG stands for Environmental, Social, and Governance. ESG Investing is a term that is often used synonymously with sustainable investing, socially responsible investing, mission-related investing, or screening. ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.

Intergovernmental Initiatives and ESG Frameworks

Principles of Responsible Investment

The Principles for Responsible Investment (PRI) were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices. The process was convened by the United Nations Secretary-General Kofi Annan in 2005. The PRI partners with the UN Environment Programme Finance Initiative (a collaboration between the UN Environment Programme and the private financial sector) and the UN Global Compact (a multi-stakeholder leadership initiative). The Principles were launched in April 2006 at the New York Stock Exchange. Since then the number of signatories has grown from 100 to over 3,000. Signatories to the PRI commit to adopt and implement its six aspirational principles (the “Principles”):

• to incorporate ESG issues into investment analysis and decision-making processes;
• be active owners and incorporate ESG issues into asset ownership policies and practices;
• seek appropriate disclosures on ESG issues by investee companies;
• promote acceptance and implementation of the Principles within the investment industry;
• work together to enhance our effectiveness in implementing the Principles; and
• report on their activities and progress towards implementing the Principles.

UN Sustainable Development Goals

The Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by all United Nations Member States in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. The 17 SDGs are: (1) No Poverty, (2) Zero Hunger, (3) Good Health and Well-being, (4) Quality Education, (5) Gender Equality, (6) Clean Water and Sanitation, (7) Affordable and Clean Energy, (8) Decent Work and Economic Growth, (9) Industry, Innovation and Infrastructure, (10) Reducing Inequality, (11) Sustainable Cities and Communities, (12) Responsible Consumption and Production, (13) Climate Action, (14) Life Below Water, (15) Life On Land, (16) Peace, Justice, and Strong Institutions, (17) Partnerships for the Goals. The SDGs are accompanied by a total of 169 associated targets and 232 approved indicators. Many targets have been given a specific year (between 2020 and 2030) by which they should be achieved in order to meet the related goal, and the indicators specify the information that should be used to help measure compliance towards each target. The SDGs are viewed as a framework for shaping and prioritizing business strategy and associated reporting. Over time, they have been incorporated in a growing number of ESG assessment frameworks. The SDGs are also beginning to shape investment structures. For example, issuers have begun to market SDG bonds, which are bonds earmarked to raise money for projects that align with SDGs. In June 2020, the UN Development Programme released new standards for consultation that aim to guide private equity fund managers and bond issuers in directing investments towards the SDGs.

Task Force on Climate-related Financial Disclosures

In 2015, the G20 asked the FSB to develop a framework for consistent climate-related financial risk disclosures for use by companies, insurance companies and investors. The G20 undertook this initiative in recognition of the growing imperative to ensure that the global financial system is resilient to emerging climate-related risk.

The Task Force on Climate-Related Financial Disclosures (TCFD) was created in later 2015 by the Financial Stability Board (FSB) to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. The TCFD published its final recommendations in June 2017. In the words of the FSB, “the disclosure of climate-related financial information is a prerequisite for financial firms not only to manage and price climate risks appropriately but also, if they wish, to take lending, investment or insurance underwriting decisions based on their view of transition scenarios.” Approximately two-thirds of FTSE 100 companies referenced TCFD in their 2019 annual reports, an increase from 39% in 2018.

The Task Force consists of 31 members from across the G20, representing both preparers and users of financial disclosures. The TCFD is chaired by Michael R. Bloomberg, founder of Bloomberg L.P.

Other Global Non-Governmental ESG Frameworks

CDP Global

Founded in 2000, CDP was the first platform to link environmental integrity and fiduciary duty. CDP Global (formerly the Carbon Disclosure Project) is an international not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP reports that in 2020, 515 investors with $106 trillion in assets and over 147 large purchasers with over $4 trillion in procurement spend have requested companies disclose their environmental data through CDP. Since 2002 over 8,400 companies have publicly disclosed environmental information through CDP. The platform is intended to allow companies, cities, states and regions to measure and manage risk and opportunities on climate change, water security and deforestation, with the goal of prompting investors, companies and local/regional governments to make the choices necessary for a sustainable economy.

Climate Disclosure Standards Board (CDSB)

The Climate Disclosure Standards Board (CDSB) is an international consortium of business and environmental NGOs. CDSB is committed to advancing and aligning the global mainstream corporate reporting model to equate natural capital with financial capital. CDSB has developed a framework for reporting environmental and climate change information in mainstream corporate reports. This framework helps companies explain how environmental matters affect their performance and show how they are addressing associated risks and opportunities to investors in annual or integrated reports. The CDSB seeks to benefit a range of stakeholders: investors, analysts, companies, regulators and accounting firms. 374 companies across 32 countries are currently using the CDSB Frameworks. With companies across 10 sectors using the frameworks, CDSB approach provides consistency and comparability for investors and other stakeholders. CDSB Frameworks are currently referenced in 7 stock exchanges across the world, covering all continents.

Global Reporting Initiative (GRI) 

Global Reporting Initiative (GRI) is an international independent standards organization, whose Sustainability Reporting Standards are reported to be the most widely used standards for reporting on ESG impacts globally, and have been developed through multi-stakeholder contributions. GRI Standards support both comprehensive reports and selected disclosures. GRI provides disclosure standards for companies to communicate their impact on critical sustainability issues such as climate change, human rights, governance and social well-being. GRI focuses on creating standards and guidance to advance sustainable development, harmonizing the sustainability landscape, leading efficient and effective sustainability reporting and driving effective use of sustainability information to improve performance. First launched in 2000, GRI’s sustainability reporting framework is now the most widely used by multinational organizations, governments, small and medium enterprises (SMEs), NGOs and industry groups in more than 90 countries. In 2017, 63 percent of the largest 100 companies (N100), and 75 percent of the Global Fortune 250 (G250) reported applying the GRI reporting framework.

The International Integrated Reporting Council (IIRC)

The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession, academia and NGOs. The coalition promotes communication about value creation as the next step in the evolution of corporate reporting. The IIRC has established the Integrated Reporting Framework, which helps companies to produce a concise, investor-focused report that examines an issuer’s performance and prospects through the lens of six “capitals” (financial, manufactured, human, natural, intellectual and social and relationship).

Sustainability Accounting Standards Board (SASB) 

The Sustainability Accounting Standards Board (SASB) is a non-profit organization, founded in 2011 by Jean Rogers to develop sustainability accounting standards. SASB issues sustainability accounting standards to help public companies disclose material and decision-useful ESG information to investors in their mandatory filings, based on their industry, in line with the notion that under existing regulation, material information should be disclosed. SASB currently offers 77 different industry-specific standards. The number of companies that use its industry-specific standards is expected to roughly double to 300 by next year. 

The Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) are to merge into one organization by mid-2021 with the aim of offering investors and companies a comprehensive corporate reporting framework to drive global sustainability performance. The newly formed Value Reporting Foundation, to be headquartered in London and San Francisco, will advance initiatives by SASB, the IIRC, the CDP charity, the Climate Disclosure Standards Board (CDSB) and the Global Reporting Initiative (GRI) to work toward a comprehensive corporate reporting system. The merger is expected to simplify sustainability disclosure. The Value Reporting Foundation may also integrate other groups focused on enterprise value creation, including the CDSB.

Reference:

1. https://corpgov.law.harvard.edu/2020/09/21/esg-disclosures-frameworks-and-standards-developed-by-intergovernmental-and-non-governmental-organizations/