ESG standards are principles that help corporations focus on three factors: environment, social impact, and governance. Businesses and companies adopting ESG principles are expected to take measures to reduce waste, limit CO2 output, and lower pollution. They are also expected to promote inclusive and diverse employment practices throughout every level of their company’s workforce.
The outcome of a company’s implementation of ESG standards is an important screening tool for potential investments by socially conscious investors.
ESG Standards
ESG standards can help determine the future financial performance of companies.
The primary factors of ESG standards are as follows:
Environmental
Environmental factors include the impact of climate and potential challenges, such as energy consumption, waste production and management, climate change, pollution, and more.
Social
Social factors pertain to how an organization treats the community, including employee engagement programs, human rights, health care plans, employee and customer protection measures, and diversity and inclusion initiatives.
Governance
Any organization’s internal functioning and administration factors generally relate to how the organization is managed. This can include management structure, compensation, internal controls, accountability policies, shareholder rights, etc.
How are ESG standards used?
Investing:
- ESG investing screens investments based on corporate policies and advises companies on how to act responsibly to encourage environmentally sound behaviour.
- Numerous mutual funds, brokerage firms, and robo-advisors now offer investment products that utilize ESG principles.
- ESG investing can also be used by an investor to prepare a portfolio to avoid companies that engage in illegal or unethical practices.
- ESG investment funds have expanded in volume in recent years, forcing people to claim that companies are insincere or misleading when they tout their ESG achievements.
- Mid-cap investors are considering ESG investing as a critical component of their investments.
- ESG scores and related metrics are being found on investment profiles and ETF pages across financial media, and they may also be available on mid-cap investment pages. These metrics can help mid-cap investors make more informed decisions in considering different investment opportunities.
Who Sets ESG Standards?
ESG standards are set by the SASB (Sustainability Accounting Standards Board), which was founded in 2011 by Jean Rogers as an independent, non-profit company. The goal of SASB was to create criteria for corporations to provide or disclose sustainability or ESG reports to investors and other persons that provide financial resources.
SASB’s goal was to develop industry-specific disclosure standards, known as SASB Standards, across social, environmental, and governance topics. These standards facilitate communication about financially material, decision-useful info between companies and investors.
The International Sustainability Standards Board (ISSB) and the International Financial Reporting Standards Foundation (IFRS Foundation) merged in 2022 into a single body called the International Sustainability Standards Board (ISSB).
How to create ESG standards for your company.
- Construct a long-term goals framework.
- Create a budget.
- Evaluate corporate opportunities.
- Accumulate expertise and build an ethical framework.
- Build a sustainability team.
- Assess your progress.
- Promote your achievements.
Is ESG reporting mandatory?
Here in Canada, there is no legislation mandating the regulation of companies’ environmental, social, and governance practices in relation to securities disclosure, but the idea is gaining more comprehensive support in some local communities, including the Trudeau government’s latest budget.
Currently, under Canadian legislation, no laws mandate the disclosure of environmental, social, and governance (ESG) activities. However, disclosures of governance-related activities are well publicized and public. MLT Aikins states that ESG disclosure will become mandatory in Canada in 2024, with the rollout occurring gradually.
The government prepared a plan in 2022 for federally regulated financial institutions to start reporting on climate-related financial risks.
ESG Reporting Frameworks
What are the main ESG reporting frameworks?
The three most significant ESG reporting frameworks are Global Reporting Initiative (GRI) Standards, Task Force on Climate-related Financial Disclosures (TCFD), and SASB Standards.
- Globally, GRI Standards are the most widely used ESG reporting standards. They help companies report on the most significant impacts on the environment, economy and society. In addition, GRI disclosures cater to a broad range of stakeholders instead of focusing on shareholders.
- TCFD is a principles-based framework for climate-related financial disclosures.
- SASB Standards focus on the needs of shareholders for information and are designed to produce financially-material, decision-useful, and cost-effective information. SASB Standards are commonly used by public companies, with more than half of the companies in the S&P Global 1200 Index and nearly 1,300 businesses using SASB Standards.
How many ESG reporting frameworks are there?
The regulation of ESG reporting has only recently been firmed up, so companies currently have numerous options. Selecting the best strategy depends on the company’s needs. Several frameworks are broadly used and respected, with these being divided into three different groups:
- Voluntary disclosure frameworks
- Guidance frameworks
- Third-party aggregators
Voluntary disclosure frameworks
Companies can choose between CDP, Global Real Estate Sustainability Benchmark (GRESB), and Dow Jones Sustainability Indices (DJSI) for voluntary disclosure frameworks. Under this framework, a company generally discloses its sustainability-related policies, practices, and performance data. These agencies often use questionnaires for evaluation and ranking.
Guidance frameworks
Under guidance frameworks, companies can choose between the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), and Task Force on Climate-related Financial Disclosures (TCFD).
Guidance frameworks help companies decide what to include in their reports. They cover topics such as providing the correct context, reaching the right audience, and ensuring the information consists of the most material issues for stakeholders.
Third-party aggregators
Third-party aggregators include options such as Bloomberg Terminal ESG Analysis, Institutional Shareholder Services (ISS), MSCI, and Sustainalytics, to collect data.
The third-party aggregators collect statistics on companies from various sources, including mainstream regulatory filings, CSR reports, and publicly available documents and data.
In conclusion, ESG standards are a set of guidelines that companies can use to ensure they are operating in a socially and environmentally responsible manner. While not all companies have adopted these standards, more and more are doing so as investors increasingly demand them. By adhering to ESG standards, companies can not only improve their reputation and attract more investment but also positively impact the world.