In a previous article, we explored the difference between ESG, sustainability, and CSR. Now, we are turning our focus to the differences between standards, frameworks, and ratings. While these terms are often used interchangeably, they have distinct meanings that are important to understand.
ESG standards, frameworks, and ratings provide the foundation for non-financial disclosures that help ensure capital flows to sustainable businesses.
In this article, we explain the differences between standards, frameworks, and ratings in more detail and expand on how these terms improve company reporting and drive forward the sustainability agenda.
ESG Standards
ESG reporting standards are agreed-upon quality requirements that reporting entities are expected to meet. These standards contain specific and detailed criteria or metrics for ‘what’ should be reported on each topic and will, in general, have the following features in common:
- A public interest focus
- Independence
- Due process
- Public consultation.
These features help to ensure that the information being reported is relevant and comparable to stakeholders.
There are a number of different ESG disclosure standards in use today, each with its own strengths and weaknesses – some of the most widely used standards include:
- GRI Standards: The Global Reporting Initiative (GRI) is the most widely used ESG reporting framework. GRI Standards are principles-based, meaning that they provide guidance on how to report on ESG issues, but they do not dictate specific metrics or data points.
- SASB Standards: The Sustainability Accounting Standards Board (SASB) develops industry-specific ESG disclosure standards. SASB Standards are more detailed than GRI Standards, and they focus on the sustainability issues that are most likely to affect a company’s financial performance.
- ISSB Standards: The International Sustainability Standards Board (ISSB) has developed a set of global ESG disclosure standards. The ISSB Standards are still under development, but they are expected to be more comprehensive and rigorous than existing standards.
In July, the European Financial Reporting Advisory Group (EFRAG) released the ESRS, the new European Sustainability Reporting Standards. The ESRS underpins the EU’s sustainability disclosure regulation, the CSRD, which will apply to over 50,000 companies once they start reporting for the first time in the 2024 financial year.
ESG Frameworks
Frameworks offer a way to organise and structure information. They provide a flexible ‘frame’ for thinking about a problem, but don’t dictate a specific solution. Frameworks can be thought of as a set of guiding principles that help people to make sense of the complex information in an ESG report.
Unlike standards, there are plenty of frameworks available for companies to use in their reporting – some of the most widely used ESG reporting frameworks include:
- CDP: The Carbon Disclosure Project (CDP) is a non-profit organisation that collects climate-related data from companies. CDP’s reporting framework is used by over 9,000 companies worldwide.
- GRI: The Global Reporting Initiative (GRI) also has a reporting framework, which is used by over 10,000 companies worldwide. GRI’s framework is more comprehensive than CDP’s, and it covers a wider range of ESG issues.
- TCFD: The Task Force on Climate-related Financial Disclosures (TCFD) is a group of international financial regulators that developed a set of recommendations for climate-related financial disclosures. The TCFD recommendations are not a reporting framework per se, but they are widely used by companies that are reporting on climate-related risks.
The difference between standards and frameworks
So, what is the best way to understand the difference between ESG standards and frameworks?
- ESG standards are like the key ingredients list on a food label. They tell companies what they must include in order to be considered a high-quality ESG disclosure.
- ESG frameworks are like the cooking instructions. They help companies put together the disclosure in a way that is clear, consistent, and easy to understand.
Standards and frameworks are complementary and should be used together. Standards provide the context and quantifiable objectives for frameworks, which in turn ensures that reports from multiple organisations are comparable and consistent. Many frameworks also incorporate the standards, to ensure that a company is reporting to the appropriate level.
Together, they make it easier and clearer to understand and compare reports, regardless of the organisation that produces them. Additionally, they allow stakeholders, such as investors and ratings bodies, to compare efforts and outcomes of businesses.
ESG Ratings
If standards are like the ingredients, and frameworks are like the recipe, then ESG ratings are the critics’ reviews when the dish is served. ESG ratings and rankings assess the quality, or ‘maturity’, of sustainability practices at an organisation.
ESG ratings can be a helpful tool for investors and other stakeholders looking to invest in sustainable businesses. Organisations will often pay for rankings to appeal to these stakeholders, but they aren’t without certain flaws. For example, providers typically use their own methodologies to determine an overall ESG rating, which can lead to inconsistencies and uncertainty when comparing different businesses with different raters.
In the UK, ratings providers may be subject to voluntary rules, which could become mandatory in the future. The Financial Conduct Authority (FCA) is looking to do this to ensure that ratings are consistent and trustworthy and that investors can allocate their finance appropriately.
Some of the most well-known ESG rating agencies include:
- MSCI
- Sustainalytics
- RobecoSAM
In conclusion
ESG standards, frameworks, and ratings are the foundation for non-financial disclosures. They help ensure that capital flows to sustainable businesses, which incentivises others to follow suit.
While ESG is not perfect, with different perspectives on what constitutes a “positive” sustainable business, it is a step in the right direction.
The standards, frameworks, and ratings will likely evolve over time, but by remaining consistent, finance can reach the areas that need it most to ensure a just transition to a more sustainable future.
