Navigating ESG Reporting: Key Frameworks, Standards, and Ratings

In the rapidly evolving world of sustainable investing, environmental, social, and governance (ESG) reporting has become increasingly complex and multifaceted. As buy-side firms seek to integrate ESG factors and considerations into the investment decision-making and reporting processes, a clear understanding of the ESG ecosystem is crucial. In this blog, we provide an overview of the key ESG reporting frameworks, standards and ratings funds and asset managers need to understand in order to enhance ESG data management, disclosure, and performance evaluation.

Understanding the ESG reporting ecosystem

The ESG reporting ecosystem includes four major components: frameworks, disclosure standards, ratings and indices, and regulatory and legislative frameworks.

There are four major ESG reporting frameworks:

• Global Reporting Initiative (GRI): A comprehensive sustainability reporting framework focused on the disclosure of economic, environmental, and social impacts.
• Sustainability Accounting Standards Board (SASB): Industry-specific standards identifying material sustainability topics and associated metrics.
• Task Force on Climate-related Financial Disclosures (TCFD): Recommendations for the disclosure of climate-related financial risks and opportunities.
• United Nations Principles for Responsible Investment (UNPRI): A set of principles for integrating ESG factors into investment and ownership decisions.

There are three ESG disclosure standards:

• CDP (formerly the Carbon Disclosure Project): A global disclosure system for environmental impact reporting, including climate change, water security, and deforestation.
• Integrated Reporting (IR) Framework: Promotes the integrated reporting of financial and non-financial information to provide a more holistic view of an organization’s value creation.
• ISO 26000: Guidance on social responsibility, covering topics such as human rights, labor practices, and community involvement.

There are five key ESG ratings and indices:

• MSCI ESG Ratings: Evaluates the resilience of companies in relation to long-term, industry-relevant ESG risks.
• S&P Dow Jones Sustainability Indices: A group of benchmarks that track the performance of companies based on their ESG practices.
• FTSE4Good Index Series: Measures the performance of companies demonstrating strong ESG practices.
• Sustainalytics ESG Risk Ratings: Assesses companies’ exposure to and management of material ESG risks.
• Bloomberg ESG Scores: Assesses company or government disclosure and performance on a wide range of ESG and thematic scores.

Finally, there are three ESG regulatory and legislative frameworks:

• EU Sustainable Finance Disclosure Regulation (SFDR): Mandates the disclosure of sustainability-related information by financial market participants.
• EU Taxonomy Regulation: Establishes a classification system for sustainable economic activities.
• S. SEC Climate-Related Disclosure Rules: Proposed rules to enhance climate-related disclosures for public companies.

As buy-side firms navigate this ESG ecosystem, it is essential to consider the following key points, all of which affect a firm’s ability to use ESG data effectively and comply with relevant regulations:

Materiality assessment: Firms should conduct a thorough materiality assessment to identify the ESG factors that are most relevant to investment strategies, portfolio companies, and stakeholders.

Reporting alignment: Aligning ESG reporting with recognized frameworks, such as SASB or TCFD, can enhance the consistency, comparability, and credibility of disclosures.

Rating provider selection: Carefully evaluate ESG rating providers based on their methodologies, data sources, and alignment with your ESG priorities and investment approaches.

Regulatory compliance: Stay informed of evolving ESG regulations, such as the EU SFDR, and ensure that your reporting and disclosure practices meet the necessary requirements.

Data quality and integration: Leveraging a comprehensive ESG data management solution can help buy-side firms streamline the collection, validation, and integration of ESG data from various sources.

With a deep understanding of the ESG reporting ecosystem, firms can strategically align practices with the most relevant frameworks, standards, and ratings. Eventually, funds and asset managers can use this knowledge to strengthen ESG data management, enhance transparency, and take a leadership position in sustainable investing.

Moreover, the effective integration of ESG reporting into broader investment decision-making and risk management processes can contribute to superior long-term investment performance and the creation of lasting value for clients and stakeholders.

How IVP Can Help

The IVP ESG Management platform is specifically designed for buy-side firms, providing a comprehensive way to source, manage, and effectively utilize ESG data for investing and reporting. By leveraging our ESG platform, firms can streamline portfolio construction, enhance asset allocation, strengthen risk management and compliance practices, and ensure accurate regulatory reporting. In addition, IVP offers an ESG Center of Excellence that serves as a valuable resource for funds seeking to establish a reliable framework for ESG investing.

Learn more about the IVP ESG Management platform right now or contact sales@ivp.in to set up a live or online demo.