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When a company decides to embrace certain environmental, social, and governance (ESG) standards, ideally it will adhere to a set of ESG criteria and metrics that help the organization report its progress toward these ESG goals.
ESG reporting is considered separate from standard financial reporting. However, investors are increasingly interested in understanding a company’s progress and risk mitigation efforts in light of ESG factors.
Investors can use a company’s ESG reporting to gauge whether it is indeed making positive changes in these areas. Unfortunately, while there are more than a dozen ESG frameworks that can be used for corporate ESG reporting, no one system has been universally adopted.
However, there are a handful of ESG frameworks that are commonly used for ESG reporting. By understanding the current state of ESG reporting and how it works, investors can be in a better position to decide which investments reflect their own values.
Key Points
• ESG reporting is separate from financial reporting, but formal ESG disclosures are more common today owing to the relevance of ESG standards to business outcomes.
• Over time, many organizations have sought to establish ESG criteria and metrics that would enable companies to be evaluated in terms of their progress toward ESG goals.
• Although a single global set of ESG standards doesn’t exist, there are over a dozen frameworks that companies use for ESG reporting worldwide.
• ESG reporting is important because it helps companies to be accountable for their progress, and can enable investors to compare companies in terms of how well they meet ESG standards.
• While ESG reporting is not mandatory, organizations in various countries are working on creating required reporting standards.
ESG Basics
Like many types of sustainable investing, ESG may be referred to in different ways, including green investing, socially responsible investing (SRI), and impact investing.
The three pillars of ESG are based on specific environmental, social, and governance factors. Environmental standards help assess the ways a company works to preserve and protect the physical environment. Social factors include the treatment of workers, communities, customers, suppliers, and vendors. Governance criteria track issues of leadership, fraud prevention, accounting practices, data privacy, and more.
Common ESG Criteria Companies Use
As a rule of thumb, when learning about ESG frameworks and metrics, it’s important for those interested in green investing to consider how these may or may not apply to different companies across various industries. A retail company may commit to reporting certain metrics that are relevant to its products and manufacturing, whereas a biotech firm would likely embrace other standards.
The following are some ESG factors commonly used as standards in ESG frameworks:
Environmental factors: These can help ESG investors assess a company’s energy use and carbon emissions, its management of air, water, and ground pollutants, its efforts to preserve biodiversity (e.g., limiting deforestation), and its environmental initiatives.
Social factors: These reflect a company’s commitment to fair labor practices, safe working conditions, equitable hiring, engagement with local communities, product safety, and sustainability throughout the supply chain (e.g., sustainable material sourcing and green shipping).
Governance factors: These can include fair and transparent accounting methods, committing to a diverse board and management, avoiding conflicts of interest in leadership, being accountable to shareholders, and upholding shareholder rights.
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ESG Reporting Frameworks
As mentioned above, there are more than a dozen ESG reporting frameworks. These have been created by business organizations, nonprofits, and others. It’s not mandatory that companies use these frameworks when doing ESG reporting, although there are ongoing efforts by the Securities and Exchange Commission and the European Union to create required reporting standards.
Existing frameworks are generally voluntary guidelines of which metrics should be reported, how they should be disclosed, and how often.
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Although the frameworks can be useful tools, the fact that there are so many of them means that it’s hard to compare companies and gauge which data and ESG metrics are most meaningful.
Nonetheless, a number of governmental and nongovernmental organizations have worked to develop standards to help companies be more transparent about their commitment to meeting certain ESG criteria. Here is a summary of three of the most commonly used ESG frameworks:
Global Reporting Initiative (GRI)
The GRI is an independent entity that helps businesses and governments evaluate and report their progress in terms of certain ESG standards.
Although this is a voluntary framework, according to a 2024 report by global accounting firm KPMG, some 71% of the world’s biggest companies by revenue have adopted GRI reporting standards, making it the most widely adopted framework.
International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards
The IFRS Foundation set up the International Sustainability Standards Board (ISSB) in 2021, largely because a growing number of companies were looking for a more efficient method for ESG reporting. The ISSB then built upon several existing sustainability standards in order to create the voluntary IFRS Sustainability Disclosure Standards that many companies now follow.
Sustainability Accounting Standards Board (SASB) Standards
Related to the IFRS Sustainability Disclosure Standards are the SASB Standards, which were established to provide a way for companies across 77 different industries to report key ESG metrics. Although the SASB Standards were absorbed by the IFRS Foundation, they are still maintained as a separate set of standards by the ISSB for companies that prefer to use this method.
Benefits of ESG Metrics
There are several upsides of ESG reporting for both companies and investors. These include:
• Companies can track and report their progress toward ESG goals using a common set of standards.
• This layer of transparency incentivizes companies to be accountable for their progress (or lack thereof).
• Companies may save money by adhering to certain ESG standards, potentially improving efficiency or reducing waste.
• Companies that abide by ESG standards may help mitigate certain risk factors.
• Adhering to an ESG framework helps build trust and a positive image with investors, communities, and other stakeholders.
Key ESG Metrics
Environmental, social, and governance standards encompass a large number of potential issues that companies can be responsible for. Here are a few.
Carbon Footprint
Measuring a company’s carbon footprint and its progress toward reducing it is one of the most common ESG metrics. Lowering carbon emissions can help companies become more efficient, comply with emissions regulations, lower pollutants, and more.
Steps that a company might be taking to reduce their footprint include:
• Switching factories and offices to renewable energy
• Switching to electric transport or reducing the use of conventional transport
• Reducing waste
• Switching to raw materials that result in fewer emissions
• Reusing and recycling materials
• Purchasing carbon offsets and carbon removal to cancel out any emissions that it cannot eliminate
Energy Efficiency
Another important ESG metric is energy efficiency. Energy efficient companies not only seek to minimize the use of fossil fuels and conventional forms of energy, but to shift to a meaningful use of renewable energy sources.
In addition to the environmental benefits, companies using less energy may save money, potentially increasing profits and benefitting both the companies and investors.
Ways that companies can improve their energy efficiency include:
• Using energy-efficient bulbs and natural light when possible
• Turning off lights and appliances/equipment when not in use
• Increasing the use of electric or hybrid vehicles
• Minimizing air travel and shipments or investing in green shipping options
• Managing the use of heat, refrigeration, and air conditioning
Employee and Worker Health and Safety
The health and safety of workers is a key social metric in light of ESG standards. Companies that go beyond legal compliance with federal Occupational Health and Safety Standards (OSHA) may demonstrate a deeper commitment to protecting their workforces in terms of total worker health — physically, mentally, and environmentally.
Efforts may include providing:
• Proper equipment and training
• Fire protection and emergency procedures
• Abatement of safety hazards
• Psychological support systems
Evaluations of employee health and safety can indicate to investors how good a company is at managing risk and operational procedures that can impact the bottom line. It also includes a holistic take on how the workforce is faring in order to help ensure lower turnover and avoid burnishing a company’s reputation.
Product Manufacturing and Safety
The way products are made and how safe they are are also important ESG metrics. There is greater awareness of whether materials are sourced responsibly and a focus on supply chain transparency. In addition to meeting standards for sourcing and supply chain transparency, reporting can include:
• The number of product recalls
• Product certifications
• Adherence to federal and state regulations
• Disclosure of fines or legal action related to product manufacturing
Product safety is also essential in a financial sense because a commitment to reliable products builds consumer trust and fosters bottom-line stability.
Composition of the Board of Directors
The structure, makeup, and practices of the board of directors are vital ESG metrics relating to governance. Having diverse voices and opinions on the board, and checks and balances in place to prevent corruption, is key to the success and sustainability of a business.
Companies that disclose their leadership practices may be more accountable than those that don’t. Either way, it’s incumbent on investors to consider a company’s governance structure within a meaningful context (i.e., the relevant industry and the company’s mission and goals).
Diversity and Inclusion
In terms of meeting social standards, companies must foster diversity amongst employees and leadership. Adhering to clear standards around equitable hiring and labor practices can support a stronger, potentially more effective workforce.
Establishing a positive and inclusive company can range from hiring to education to including multiple languages in the workplace.
The Takeaway
ESG standards and reporting frameworks, while far from perfect, can provide investors with metrics for evaluating companies’ ability to uphold certain environmental, social, and governance factors.
Although there isn’t one set of standards for ESG reporting as yet, thousands of companies worldwide use various ESG frameworks to support their disclosures. It’s important for investors to look into the metrics companies report and make decisions for themselves about the criteria that are important to them.
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FAQ
What does ESG reporting mean?
ESG reporting is the disclosure of a company’s information regarding environmental, social, and governance issues. While environmental standards assess how a company works to preserve and protect the natural environment, social standards look at how it treats its workers, communities, customers, suppliers, and vendors. Governance reporting assesses such issues as leadership, fraud prevention, accounting practices, and data privacy.
What are examples of ESG?
ESG reporting considers a wide range of factors. A company’s carbon footprint, energy efficiency, employee health and safety, product manufacturing and safety, board of director composition, and diversity and inclusion measures may be assessed.
What ESG reporting frameworks exist?
There are more than a dozen different frameworks. Examples include the Global Reporting Initiative, the International Financial Reporting Standards Sustainability Disclosure Standards, and the Sustainability Accounting Standards Board Standards.
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