ESG reporting framework: Best guide for a sustainable investing

“Climate risk is investment risk. We believe that sustainability should be our new standard for investing” is what Larry Fink, CEO of BlackRock has said.

In recent years, the environmental, social, and governance (ESG) reporting framework has gained in popularity and has an impact on a growing number of investors wishing to make safer and more profitable investments.

Environment, Social, Governance, three pillars that increasingly condition funding decisions within companies, without sacrificing performance. As an investor, it is no longer possible to ignore environmental, social, and governance (ESG) issues.

But what is an ESG reporting framework? Why is it important? How to choose your ESG reporting framework? And especially, what are the best ESG reporting frameworks?

Let’s discover all in this article!

ESG stands for environmental, social, and governance. Investors have always sought to invest their money well. These are also the goals of the ESG reporting framework.

ESG reporting framework consists of making an investment in shares or bonds of a company that meets certain standards related to the environment, society, and governance. In other words, this strategy aims to assess not only traditional financial criteria (yield, etc.) but also the behavior and actions of an economic actor before embarking on an expenditure.

Although the term ESG has only recently appeared in the press, its roots can be traced back to the Victorian era. At the time, some manufacturers realized that their companies could be more efficient if their employees were well housed and if they had access to training and health. Since then, ESG has grown into a diverse range of products and services.

As we mentioned earlier, the ESG reporting framework takes into account 3 criteria:

• The environment
• The society
• The governance

The analysis of the ESG environmental standard in the context of an ESG reporting framework consists of evaluating the strategy implemented by an economic actor to:

• Improve waste management,
• Reduce polluting gas emissions,
• Reduce energy consumption,
• Prevent from disasters such as soil contamination or oil spills.

It includes aspects related to work and product reliability, risks such as data security, and stakeholder opposition. The analysis of the ESG social standard focuses on:

• Respect for employee rights,
• Management policy,
• The policy of parity and hiring of PRMs (people with reduced mobility),
• Training policy,
• Prevention of work accidents.

It includes elements relating to corporate or the quality and effectiveness of the board of directors. Regarding this ESG standard, its analysis covers, among other things:

• Transparency of executive compensation,
• The fight against corruption,
• The company's relationship with its various shareholders,
• The direction,
• Board of directors.

Contrary to popular belief, the ESG reporting framework is not a strategy primarily that had an impact on people who want to actively contribute to protecting the environment. Certainly, many investors prefer this type of investment to prevent their capital from participating in climate problems.

However, you should know that one of the main advantages of investing in a fund that takes into account good ESG (environmental, social, and governance) practices lies in its performance. Indeed, compliance with ESG standards allows a company to significantly improve its performance, insofar as it reduces the risk of sanctions linked to practices that are dangerous for the environment.

In addition to sanctions, an economic actor respecting social and corporate standards is much less exposed to internal crises which can have a negative impact on its performance.

• Increase performance: ESG reporting framework allows you to stay on course even in turbulent markets and to obtain a return adapted to market conditions with fewer fluctuations.

• Control the risks: ESG reporting framework improves risk management. This is why we support strategies that follow ESG principles so that your portfolio is ready for the future and that of your children.

• Transmit values: With the right ESG reporting framework, you can initiate a positive impact yourself. Make your money grow for companies that really take responsibility.

In other words, the ESG reporting framework allows you to invest your capital in funds that contribute to long-term development.

On the performance side, investing in these types of funds allows you to benefit from better returns because companies that integrate the ESG reporting framework are much less impacted by sanctions related to non-compliance with certain environmental regulations and to crises driven among other things by practices that disrespect the rights of employees.

Since the ESG reporting framework has a huge impact on your business, it is important to choose the right ESG framework that meets your needs.

There are lots of ESG reporting frameworks standards for you to choose from. Here are some of the most typical frameworks.

The Global Reporting Initiative, or GRI, is an NGO created in 1997 from the association of CERES (Coalition for Environmentally Responsible Economies) and UNEP (United Nations Environment Program). It includes other stakeholders (companies, organizations, associations, etc.) from around the world.

It was created to establish a repository of indicators to measure the level of progress of companies' programs in terms of sustainability. It proposes a series of guidelines in order to reflect the different levels of performance in economic, social, and environmental terms.

For each area of ​​application, the GRI performance indicators are structured into 2 levels according to their degree of importance: basic indicators and additional indicators. The ESG areas taken into account are:

• The economy,
• The environment,
• Human rights,
• Social relations and working conditions,
• Product responsibility,
• The society.

Sustainability Accounting Standards Board is an NGO created in 2011 whose purpose is to set standards for financial reporting. Its action is specifically directed towards industrial activity, which the organization tries to subject to compliance with ESG standards.

SASB's informative work enables the communication between companies and investors in terms of financing and risk management, promoting decisions based on ESG standards and sustainability.

In establishing its standards for information to be provided on sustainability, SASB takes into account the following five constituent elements:

• environment,
• share capital,
• human capital,
• innovation and business model,
• leadership.

SASB has developed a comprehensive set of accounting standards covering 77 sectors. Furthermore, the SASB provides investors with a guide to help them identify the issues they will need to discuss with companies about financially significant issues as well as an implementation guide for businesses that explains the issues and approaches to consider when adopting ESG standards.

International Integrated Reporting Council (IIRC) is an international coalition made up of major players in the market. Its objective is to take into account and catalyze future evolutions in terms of ideas and actions aimed at redefining reporting 21st-century companies.

It's a new reporting model company designed to consolidate the business market and improve the decision-making process of financial capital. This ESG model allows a company to present, especially under the form of integrated periodic reports, its ability to generate value in the short, medium, and long term.

The TFCD (Task Force on climate disclosure) is a working group created at the end of 2015 during COP21 by the G20 Financial Stability Council. Its aim is to highlight financial transparency linked to climate impacts. It is about making markets more efficient, economies more stable and resilient.

The primary mission of this ESG reporting framework is to reveal information on the financial risks associated with climate and climate change so that investors, borrowers, insurers, and shareholders can justify their decisions with all the data available. It should also help companies assess the risks arising from their activities, and raise public awareness on this essential issue.

The TCFD recommendations are the result of in-depth work and a strong consensus between the financial sector and companies with high GHG emissions.

Created in 2007 during the World Economic Forum in Davos, the CDSB is an organization that is part of the emerging dynamic of durable finance. It is made up of eight organizations:

• CERES,
• Carbon Disclosure Project (CDP),
• Climate Registry (TCR),
• International Emissions Trading Association (IETA),
• World Council for Business Sustainable Development (WBCSD),
• World Economic Forum (WEF),
• World Resources Institute (WRI).

The objective of the CDSB is the creation of a global framework for the reporting and monitoring of companies in the area of ​​climate change.

Therefore, it does not aim to create a new standard but to constitute a collaborative forum intended to improve current practices and standards, by associating financial performance with climate-related impacts.

A global framework that should also make it possible to respond to legal and regulatory changes in environmental matters.

To do this, the CDSB offers companies an information reporting framework relating to ecology and climate change allowing them to provide investors with the data necessary for an efficient allocation of capital, by making in particular possible an assessment of the potential costs and risks associated with climate change.

The CDP (formerly the Carbon Disclosure Project) is an international non-profit organization, which functions as an online platform to make public the environmental data of companies and cities.

Founded in 2000 in the UK, in the same spirit as the Global Reporting Initiative (GRI), the CDP aims to reveal the environmental impacts of businesses and cities, while the GRI focuses on international states and organizations. However, the CDP now also measures the ecological footprint of states and regions.

Companies that share their environmental data respond to a request from their investors, shareholders, and their customers. They then fill out CDP questionnaires on climate change, deforestation, and water security, depending on their field of activity.

The CDP assigns ratings to companies from the completed questionnaires, which should help them identify their environmental risks. With the data analyzed in this way, the CDP encourages companies to reduce their greenhouse gas emissions, prevent deforestation, and secure their water supply.

In September 2015, the United Nations unveiled the "Sustainable Development Goals", the 17 universal priorities for durable development. They cover major economic, social and environmental challenges and have become the international guideline for all those who want to act in terms of sustainability.

Each of the 17 SDGs is detailed by targets (169 in total) which define the priorities of the various objectives and the actions to be implemented.

Many companies around the world have recognized this role and are putting in place policies to positively contribute to the SDGs. This involves, for example, creating new products and services providing access to energy, clean water for example, or by setting up production processes that are more respectful of people and the ecology (which overlaps with the company's CSR strategy).

The Principles for Responsible Investment (PRI) were launched by the United Nations in 2006. It is a voluntary commitment aimed at the financial sector and encourages investors to integrate Environmental, Social, and Governance issues (ESG) in the management of their portfolios, but in a broad sense.

The PRI is one of the means of moving towards a generalization of taking into account the extra-financial aspects by all the financial professions.

There are 6 principles. Investors who undertake to respect them must:

• Take ESG issues into account in their decision-making processes;
• Take ESG issues into account in their policies and shareholder practices;
• Ask the companies in which they invest to publish reports on their ESG practices;
• Promote acceptance and application of PRI among asset managers;
• Work in partnership with financial sector actors who are committed to respecting the PRI to improve their efficiency;
• Report on their activities and progress in applying the PRI.

The principles for responsible investment are addressed to three types of potential signatories:

• Asset owners, which are organizations that represent asset owners. These are, for example, pension funds or insurance companies.
• Investment managers, which are investment management companies serving institutional markets that manage assets as providers of third parties.
• Professional Services Partners, which are companies that provide products to asset owners and managers.

Investors who sign these principles undertake to apply them insofar as they are compatible with their fiduciary responsibilities.

A review of the strategy deployed is fundamental to determining how to invest in a long-lasting way. For a manager, integrating ESG reporting framework can amount to analyzing in detail each company in its finance universe from durable angles, in parallel with traditional analysis.

Whereas for other professionals, integrating ESG criteria may mean that they have the notion of sustainability in the back of their mind and that they sometimes use it when investing.

An investor will refuse to support a company active in a sector that he condemns (gambling or weaponry, for example), which has recourse to questionable procedures (animal experimentation, serious violation of human rights) or whose values just don't match it.

The politics and conditions change and vary by country. It is important to choose an ESG framework that fits the reporting standard of each country and each business. For example, the EU’s Corporate Sustainability Reporting Directive (CSRD) is different from the UK’s.

“It's going to become more and more integrated. We will no longer have a choice, that is to say, that the ESG reporting framework will be mandatory. For example, in Morocco, as soon as a company is listed on the stock exchange, it is an obligation" according to Marie-Josée Privyk, Director of ESG Innovation at Novato.

Over the past decade, companies have come to realize that ignoring the ESG reporting framework is a risk in itself. Since the ESG reporting framework has a huge impact on business, lots of companies are ready to invest in it. It is an entire industry that is changing and restructuring.

Data digitization is becoming a trend for businesses. To make the ESG reporting framework more easily accessible and treatable, not only by humans but by machines. Artificial intelligence metric systems could eventually be used to be able to glean all the data in real-time. This would improve the information in the sustainable evolution report and allow continuous adjustments on the part of investors and businesses.