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This page contains all relevant information regarding ESG. What is ESG? What is ESG reporting and how do I comply with the correct legislation? ESG scores are also covered here.
ESG stands for Environmental, Social and Governance. In other words, sustainable business based on three pillars. ESG is the international term for corporate social responsibility (CSR) as we know it here. The rationale for ESG is derived from 17 sustainable development goals established by the United Nations. To apply ESG, the United Nations has transformed these development goals into 10 principles.
Capturing an ESG report is a big challenge. ESG metrics vary by industry, company size and complexity. Legislation also plays a role. There are several standards for preparing an ESG report.
Sustainability Accounting Standards Board
The SASB has developed an ESG framework to make it easier for companies to write a report on ESG. SASB distinguishes between sectors in their framework and differentiates the framework based on the chosen sector. This is because the focus of one sector may be different from that of another sector. The framework is not a fill-in-the-blank form, but rather a comprehensive list of topics one must write about in order to deliver a good ESG report. The ESG framework was developed in the United States and therefore also adheres to American standards.
Taskforce on Climate-related Financial Disclosures
The TCFD was designed by the Financial Stability Board in 2015 to create unity in ESG reporting. The TCFD stems from the United Nations and focuses mainly on banks, insurers and investment companies. The goal of the TCFD is to make companies in the financial sector more transparent about sustainability in order to develop a more stable and sustainable economy.
Climate Disclosure Standards Board
The CDSB was a widely used standard to create sustainability reports, however, since mid-2022 it has been consolidated into the IFRS Foundation to help with the work of the newly created International Sustainability Standards Board (ISSB). This means that the CDSB now follows the same guidelines as the TCFD and the SASB, making the CDSB redundant. The mission of the "new" IFRS Foundation remains the same: to create consistency in the way companies report on ESG.
Global Reporting Initiative
GRI is an independent international organization that supports companies in taking responsibility of the impact they make. GRI has developed the GRI Standard in order to create unity in the way in which the impact of companies is communicated. The GRI Standard consists of three series of standards: the GRI Universal Standards, which apply to all sectors. The GRI Sector Standards, which are specifically adapted to different sectors. And the GRI Topic Standards where disclosures of relevant topics can be found. The GRI Standards can be used to prepare a complete ESG report or specific topics can be used to mention on the website or a partial report.
UN Principles for Responsible Investment
The UN PRI is an international network of investors working together to implement six principles. These principles are also known as "The Principles". These principles revolve around making the implications of sustainability clear to investors.These principles are as follows:
There are many laws and regulations regarding ESG. These are mainly established at the European level. These laws mainly apply to large corporates, but because often their entire supply chain must comply with the laws, this legislation often trickles down to smaller companies. Also, in the coming years, SMEs will be increasingly involved in laws and regulations.
An ESG score is a score given to a company based on how it performs in environmental, social and governance areas. It is often expressed numerically.
At the moment ESG scores are mainly used internally to see how the company scores on various aspects of ESG. It is not (yet) mandatory to publish an ESG score, although it is quite possible that a company that scores well will mention this on its website. ESG scoring is still relatively new, and can therefore be somewhat vulnerable. Many companies that offer ESG scoring rely on information provided by companies themselves. As a result, it is possible that there is a gap between the score and reality. A good ESG scoring consists of a mix of information from companies themselves, Natural Language Processing (NLP) and machine learning such as AI.
In addition to (new) legislation on ESG reporting, there are other reasons to invest in obtaining an ESG score. A younger investor generation is currently emerging. They tend to be more conscious and look at sustainability more often when they want to invest. An ESG score shows that you are engaged in sustainability as a company and can make you more attractive to investors.
Also, several studies show that a company that scores well on ESG is also a sustainable company that shows good numbers for many years. This is extra attractive for investors, even if they are not necessarily looking for an ESG investment. Not only investors find companies that care about sustainability interesting, also employees increasingly opt for a sustainable company.
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