Encapsulated by an acronym, ESG is itself awash in them: SDG, PRI, TCFD, SASB, GRI, MSCI … to name a few. Each corresponds to a different ESG standard, framework, rating agency or index, which in turn have different focuses and requirements. Yet a growing number are compatible and collaborating, creating a complex, constantly evolving landscape. Here’s an overview of some key names shaping the ESG conversation:
The Agenda Setters
Three organizations tend to come up in most discussions about ESG and act as reference points and agenda-setters:
UNSDG (United Nations' Sustainable Development Goals)
The SDGs are often a starting point for a company’s ESG activities. Adopted by United Nations member states to tackle the world’s most pressing societal challenges by 2030, the 17 SDGs range from ending poverty and hunger to providing quality education, gender equality and sustainable communities. Companies commit to address the key SDGs most relevant to their business.
PRI (Principles for Responsible Investment)
Representing more than $100 trillion in assets, PRI is an investor initiative supported by the United Nations that sets guidelines for asset owners and asset managers when making investment decisions. PRI’s 2,800 signatories must report on their responsible investment activities every year. It recently began removing investor signatories that do not adhere to its requirements.
TCFD (Task Force on Climate-Related Financial Disclosures)
The TCFD provides a global framework for reporting on climate in financial statements. It looks to give valuable information to investors, lenders and insurers on a variety of risks associated with climate change. Amid growing regulatory and public pressure, more than 1,000 organizations now support the TCFD. For now, the TCFD remains voluntary but that will soon change; the UK’s latest Green Finance Strategy mandates that by 2022 all listed companies and large asset owners disclose in line with the TCFD.
Standards & Frameworks
At a more granular level are ESG standards and frameworks, which essentially set guidelines to help companies measure and disclose ESG activities. There are at least a dozen such standards and frameworks, ranging from a focus on climate to financials to economic and social impacts. The two most commonly used are:
GRI (Global Reporting Initiative)
Founded in 1997, GRI is the most widely used ESG standard globally and allows companies to communicate their material ESG issues (self-assessed) to a broad range of stakeholders. As well as mapping to the SDGs, companies can align with the European Union’s Non-Financial Reporting Directive (NFRD), which requires large companies to disclose information on the way they operate and manage ESG issues. The GRI Standards focus on the economic, environmental and social impacts of a company, and hence its contributions—positive or negative—towards sustainable development.
SASB (Sustainability Accounting Standards Board)
SASB connects sustainability issues to financial performance. It focuses on ESG issues that are “financially material” and “industry-specific,” meaning its Standards are customized to 77 different industries. Companies voluntarily choose to report against their Standards, and also determine how they disclose that information, whether via stand-alone SASB reports, in regulatory filings, or embedding the data within an annual sustainability report.
GRI’s and SASB’s Standards are designed to fulfill different purposes and are based on different approaches to materiality, yet many companies use both sets of Standards to meet the needs of various audiences. TCFD Recommendations and SASB Standards are also compatible and frequently used together.
Most companies experience ESG through ratings agency surveys. Unlike standard setters, these agencies rate companies and compile rankings. Two of the largest and most commonly cited are:
The firm ranks more than 7,500 companies and 46 of the 50 largest global asset managers pay for those rankings. MSCI ESG Ratings are designed to help investors understand ESG risks and opportunities and integrate these factors into their portfolio. They analyze data across 37 key ESG issues, and rate companies against sector peers on a AAA-CCC scale, which is retained through ongoing monitoring. Significant score changes trigger a full review and re-rating.
Its ratings are based on a “two-dimensional materiality framework” that measures a company’s exposure to industry-specific material risks, and how well they are managing those risks. It also includes the company’s approach to corporate governance. Those scoring poorly can access a report and purchase detailed feedback and support.
Companies view a draft report, to which they can respond before it is made available to Sustainalytics’ clients, which include many of the world’s leading pension funds and asset managers.