Intro 2 : Introduction to ESG

Background

During the 1980s era, organizations around the world were speculating on how to deal with rising environmental challenges and other negative externalities which were resulting from pro-profit making industries.
As a result, the Environment, Health and Safety (EHS) and corporate sustainability movement concept evolved as a result of national and international conferences by various stakeholders. Unfortunately, even after various talks and movements, management and marketers saw this as an opportunity for making profit by showing greenwashed reports before investors and customers without actually being environmentally and socially conscious.
Around the early 2000s, regulations around corporate social responsibility (CSR) started to begin. Even though CSR is more of a corporate philanthropy act, it was made a mandatory and responsible action by regulatory authorities. However, the seriousness about climate change, social sustainability and governance was lacking in the system, thus the term ‘ESG’ or ‘Environmental, social & governance’ was coined in the year 2005 in a remarkable study titled “Who Cares Wins.”

In this context, responsible investing calls for a broader understanding of all three parameters of ESG, where:

E - Environment

stands for all environmental factors which are directly or indirectly getting impacted by the organization, and thus requires planned risk management.
For example: carbon footprint, greenhouse gas emissions, water management, soil management and waste management etc, are some of the ongoing environmental concerns.

S - Social

stands for an organization’s relationship with different stakeholders, that includes how, whom and where a company operates with.
For example: how diverse and inclusive employment is in the company or are the wages fair and just for employees? How are communities affected by the company's location and operation?

G - Governance

refers to corporate governance, it describes the direction and management of a company. In order to better understand how shareholder rights are perceived and upheld, how incentives for leadership are aligned with stakeholder expectations, and what kinds of internal controls are in place to encourage accountability and transparency throughout the company.

Importance of ESG Reporting

Reporting about ESG becomes very important for a company to uphold sustainable and ethical practices for a good business.

Following are few reasons of why it is important to report ESG:

• Ability to identify and manage risks and opportunities related to environment and social
• Attract and retain investors
• Build trust and transparency with investors and other stakeholders
• Positive brand reputation which also impacts stock market prices
• Opens door for more opportunities.
• Global reporting mandates seem inevitable in the near future.

In the absence of legislation, the growing market need for more and better ESG and sustainability-related data and disclosures has given rise to a proliferation of voluntary ESG disclosure standards and frameworks to help meet this requirement.There are multiple voluntary organizations for reporting sustainability standards and frameworks, however let’s first understand the difference between standards and frameworks.

A standard refers to a particular standard of excellence for reporting. It includes explicit guidelines for "what" or ESG indicators, ought to be published on a certain subject. It improves the foundation of the request by focusing on the public interest, independence, due process, and public consultation.

A framework is a more comprehensive, contextual "frame" for data. It is a set of guidelines that shapes how we comprehend a certain subject while also specifying the way in which information should be gathered and reported.

Some Key Organizations of ESG standards :

Global Reporting Initiative (GRI) - It's an independent international organization which follows multistakeholder practice and helps businesses to report their impacts by providing them a common global means of communication.
Founded in 1997 in the USA, has existed for more than 25 years now and has its presence in more than 100 countries with a clientele of around 10,000 reporters. It is an industry agnostic reporting standard with topics ranging from environment, economic and social.
In 2000 GRI launched its first version of guidelines; since then it has implemented and had significant events like in 2020 GRI Academy was launched for online training for sustainability professionals. In 2022 GRI celebrated its 25 years as the catalyst for a sustainable future.
GRI provides a user-friendly standard reporting for all industries be it a small organization, ngo or a large business.It enables businesses to report their impacts in transparent manner and to create an open dialogue about its impacts to multiple stakeholders.

European Financial Reporting Advisory Group(EFRAG)-
Established in 2001 by the European Commision, a private group which focused on two major pillars one being the financial reporting pillar and the other focus area is sustainability reporting.

EFRAG financial pillar works to represent the European perspective in the International Accounting Standards Board's (IASB) standard-setting process when it comes to financial reporting, and it also advises the European Commission on the International Financial Reporting Standards (IFRS).
In its sustainability reporting activities EFRAG provides technical advice to the European Commission in the form of draft EU Sustainability Reporting Standards accompanied by bases of conclusions and cost benefit analysis. A first set of finalized standards of sustainability and working paper was released by the end of 2022 with additional sector specific standards and standards for small and medium size enterprises is expected to be released by mid 2023 in order to make it mandatory for Corporate Sustainability Reporting Directive.

International Financial Reporting Standards - IFRS is a non profit organization, which was set up in 2001 with an aim of providing transparency, accountability and efficiency in globally accepted accounting and sustainability standards.
The International Accounting Standards Board sets the IFRS accounting standards, the board consists of independent groups of experts who are responsible for the development and publication of IFRS accounting standards for all including small and medium. Thus, this will help to tackle the need for access to financial reporting standards for investors to trust and cross invest with a common global financial language.
The IFRS Interpretations Committee created Interpretations of IFRS Accounting Standards, which must be approved by the IASB (formerly IFRIC).

International Sustainability Standards Board (ISSB)-
International sustainability standards board was established by International financial reporting standards in November 2021. ISSB assessed the need of international investors who are looking for companies who are reporting on climate and other environmental, social, and governance (ESG) issues that are of a high standard, transparent, and comparative.

The Climate Disclosure Standards Board (CDSB) has been merged into the ISSB, and by June 2022, the Value Reporting Foundation (VRF), which is made up of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council, will also be merged (IIRC). The board was set up with the intention to deliver a comprehensive global baseline of sustainability related disclosure standards which shall provide investors and other stakeholders with relevant information regarding the companies sustainability related risks and opportunities in order for them to make informed decisions.

Sustainability Accounting Standard Board - It is an independent, not for profit organization which was established in 2011 for the purpose of setting standards for companies to disclose their sustainability and ESG information for all stakeholders.
SASB establishes industry specific standards and has identified a subset of environment, social and governance for 77 industries.
In the recent development the Value Reporting Foundation, which housed the SASB Standards, merged into the IFRS Foundation on August 1, 2022, becoming the first International Sustainability Standards Board (ISSB). The ISSB now has control over SASB Standards.

Carbon Disclosure Project (CDP)-
CDP is an international not for profit organization which was founded in 2000 with a vision for people and planet by focusing on investors, businesses ,states and nations on building a sustainable economy. It runs the global environmental disclosure system with the focus on climate change, water security, and deforestation.
CDP runs globally through the CDP worldwide group, CDP North America, Inc. and CDP Europe AISBL. It also has regional offices and local partners spanning over 50 countries.