5 ESG Frameworks to Know

TCFD, CSRD, SFDR… the list of acronyms can be confusing, especially when getting started with the ESG topic. However, these very ESG regulations and frameworks signal a growing momentum for more transparency and management in reporting ESG issues.

In this article, we explain the different regulatory frameworks in the EU that focus on ESG reporting requirements.

What are ESG frameworks?

Many ESG frameworks serve as reporting frameworks, evaluation standards, or regulators for the general handling of ESG issues. The regulatory frameworks provide a set of rules for managing, measuring, and reporting on the environmental, social, and governance aspects (ESG) of companies.

These are guidelines that have the force of law, so companies are legally obligated to comply with these requirements. The regulations vary depending on the country and region, but they all serve to increase the transparency of the non-financial impacts of companies.

ESG regulations hold companies responsible for, among other things:

• Environmental destruction: Companies must ensure that their activities and products do not harm the environment and comply with environmental standards.
• Social responsibility: Companies are responsible for the well-being of their employees and must fair and safe working conditions.
• Corporate governance: Companies must ensure that their business practices are ethical and transparent. They must also ensure effective corporate governance.
• Human rights: Companies must ensure that their activities do not violate human rights.
• Sustainability: Companies must ensure that they operate sustainably and are committed to a sustainable future.

For monitoring purposes, these frameworks also require:

• That certain information must be disclosed in a certain way for monitoring purposes.
• That the determination of metrics and format of sustainability information must be presented.

While they outline the types of data that need to be reported in corporate reporting, they do not necessarily provide guidance for the entire reporting process. However, they are still useful for facilitating the selection of information for reporting.

Legally required disclosures are also not negotiable, which is why companies must know and refer to the framework that applies to them. Regulatory frameworks can be very specific to a particular topic or broadly designed to cover general sustainability issues.

ESG Frameworks you should know

Let’s take a look at some of the most common frameworks and what they’re targeted at.

• Corporate Sustainability Reporting Directive (CSRD): Newly adopted rules for EU-based companies. It is used to report on their environmental and human rights records in alignment with the European Sustainability Reporting Standards (ESRS).
• EU Taxonomy: Classification system to identify economic activities that are considered ‘green’ and therefore create more transparency around sustainable financing definitions.
• Lieferkettensorgfaltsgesetz (German Supply Chain Act): Due diligence law that requires German companies to publish an annual report. This should include their efforts to assess, mitigate, and remedy environmental and human rights risks in their supply chain.
• EU Supply Chain Due Diligence Directive: Requirement for EU-based companies. This one is to conduct due diligence on environmental and human rights violations in their supply chain. It also includes the disclosure of compliance in a public report.
• Sustainable Finance Disclosure Regulation (SFDR): ESG reporting requirements with indicators, methodologies, and templates for financial market players in the EU.

How to choose a framework for your needs

Besides the regulatory requirements on reporting, many companies use a reporting framework when disclosing ESG performance. It provides structure and depth to your disclosures, outlining metrics and indicators for a range of ESG topics beyond what may be required by law.

These frameworks are all commonly used for sustainability reporting:

• Global Reporting Initiative (GRI) Standards
• Sustainability Accounting Standards Board (SASB) Standards
• CDP Disclosure Standards
• Dow Jones Sustainability Index (DJSI)
• MSCI ESG Ratings

There is no framework that is ‘best’, only what works best for your needs. Before choosing a framework, ask your business these three questions:

1. Do you need to meet regulatory requirements on ESG management or disclosures? Your company may be bound by law to follow a specific framework, such as the climate disclosure laws in the UK, EU, and the US that require companies to report according to the TCFD recommendations.
2. Do you need to meet investor requirements, and what framework do they use to assess sustainability performance? Check with your investors if they have a preferred framework, or what ESG issues interest them.
3. What ESG aspects are most material to your business, and which framework covers those aspects? A comprehensive materiality assessment should be undertaken to identify and prioritise material matters.

By answering these questions, you will gain a deeper understanding of the goals and criteria for managing and reporting your ESG performance. This will narrow down the list of frameworks available. If your company is particularly vulnerable to certain ESG risks, you may consider using a theme-specific framework.

Industry-specific frameworks can also help achieve a sharper focus and better coverage of essential topics. Frameworks can also be combined to achieve a better impact, allowing for more than one framework to be used together.

It is very likely that you will need to use more than one framework anyway, as legal requirements are focused on specific topics.

The most important task: know your data

When managing and reporting on your ESG performance, your collected data is crucial. This is why the most comprehensive frameworks always define a solid approach for information collection and content. The data is ultimately used to measure progress and support your statements, and becomes even more important as your ESG management and reporting matures.

Therefore, it is important to establish the basics early on. However, this is also where it becomes difficult: ESG data is different from financial data. Collecting, managing, and processing the huge and very diverse amounts of data is a very complex task.

Without the help of sustainability software specifically designed for processing ESG data and analysis, this endeavor can be time-consuming and expensive. Modern sustainability software, on the other hand, can take on many tasks, such as:

• Providing traceability functions to ensure accountability
• Offering features for automatic report generation.

It is crucial that the sustainability software ensures that your statements meet all reporting criteria based on the sustainability reporting framework you have chosen.

How we help you

• We explain the various frameworks and help you understand what data and disclosures you need to collect to align with your chosen framework.
• We simplify the collection of ESG data in your organisation by offering one central platform and integrations into ERP, HRM, CRM, EMS etc., to automate data collection.
• We facilitate data collection from your suppliers and ensure that relevant information such as Scope 1, 2, and 3 emissions is obtained in a complete and accurate manner. We will handle the burden of information exchange with your suppliers.
• We help you complete the information requests from regulators or investors and guarantee the protection of business-critical information.

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