Environmental, Social, and Governance (ESG) frameworks are structured systems that provide guidelines for organizations to assess, manage, and disclose their performance in these three critical areas. These frameworks are essential tools for companies looking to integrate sustainability and responsible practices into their core operations. ESG frameworks contribute to standardizing reporting, aiding investors, stakeholders, and the public in evaluating and comparing the sustainability and ethical performance of different companies. As the importance of sustainable practices continues to grow, the adoption of ESG frameworks has become a key indicator of a company’s commitment to responsible business conduct.
Globally, governments and corporations interpret ESG frameworks differently. While ESG frameworks provide a structured approach for governments to formulate and implement policies that address ESG issues, they also enable corporations to demonstrate their commitment to sustainable and responsible business practices. These frameworks are designed to guide companies in assessing and disclosing their ESG performance, allowing investors and stakeholders to evaluate their sustainability practices. Companies often choose the framework that aligns with their industry, objectives, and stakeholder expectations. The adoption of these global ESG frameworks has become increasingly important as awareness of sustainable and responsible business practices continues to grow. On the other hand, the relevance of ESG frameworks for governments lies in their ability to guide policy, enhance transparency, attract responsible investments, address environmental challenges, promote social well-being, and contribute to international collaboration. As sustainability becomes increasingly integral to global governance, the adoption of ESG principles by governments is likely to grow in importance.
Historical Perspective:
The history of ESG disclosures is marked by a gradual evolution in response to societal, regulatory, and investor demands for increased transparency and accountability in corporate behavior. The Freshfield Report present in United Nation’s Principles for Responsible Investment (UNPRI) report from 2006and “Who Cares Wins,” published under United Nations Environment Programme Finance Initiative in 2004 were the first of few to address ESG problems. The later report made it mandatory for corporates to include ESG factors within the financial assessment of a business for the first time which envisaged sustainable investments in future. Thereafter, many regional upgrades such as international summits on climate change have increased the use of ESG frameworks worldwide.
Widely used ESG frameworks:
1. International Financial Reporting Standards S1 and S2:
In 2023 Financial Stability Board, which created the TCFD had announced its demobilization owing to the fulfilling of its remit. The TCFD’s primary objective was to develop a set of recommendations for consistent and comparable disclosure of climate-related financial risks and opportunities by companies. The TCFD framework, structured around four thematic areas on governance, strategy, risk management and metrics and targets, was designed to help organizations in assessing and disclosing their climate-related risks and opportunities, providing a basis for investors, lenders, insurers, and other stakeholders to make more informed decisions.
Following the recommendations, the International Financial Reporting Standards (IFRS) S1 and S2, which completely embrace the TCFD’s recommendation were established. S1 concentrates on general disclosures of financial information connected to sustainability, whereas S2 is primarily concerned with climate related disclosures. S1 addresses a wide range of issues related to the environment, society, and governance (ESG) and is made to meet the needs of businesses across industries. It is also set up with the intention of providing comparable and pertinent information to a company’s internal and external stakeholders. S2 is a step up in terms of standardized climate-specific disclosures and gives businesses a comprehensive framework to assess their impact and manage their opportunities and risks associated with climate change. Additionally, it also encourages businesses to supply a steady and thorough flow of information that can facilitate all kinds of stakeholders in taking well-informed decisions.
2. UN Global Compact (UNGC): The UNGC is a voluntary initiative launched by the United Nations in 2000 to encourage businesses and organizations worldwide to adopt sustainable and socially responsible policies. The Global Compact is based on ten principles that cover human rights, labor, the environment, and anti-corruption. These principles are derived from various UN declarations and conventions and provide a framework for businesses to align their strategies and operations with broader societal goals.
The ten principles of the UNGC are listed below:
| Human Rights | Labor | Environment | Anti-Corruption |
| Businesses should support and respect the protection of internationally proclaimed human rights. They should make sure they are not complicit in human rights abuses. | Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining. They should eliminate all forms of forced and compulsory labor. They should abolish child labor. They should eliminate discrimination in respect of employment and occupation. | Businesses should support a precautionary approach to environmental challenges. They should undertake initiatives to promote greater environmental responsibility. They should encourage the development and diffusion of environmentally friendly technologies. | Businesses should work against corruption in all its forms, including extortion and bribery. |
3. Global Reporting Initiative (GRI): The GRI is an independent international organization that provides a widely used framework for sustainability reporting. GRI’s mission is to help businesses, governments, and other organizations understand and communicate their ESG impacts in a consistent and transparent manner. The GRI Standards are the most widely adopted global standards for sustainability reporting.
Key features of GRI include:
- Sustainability reporting Framework: GRI provides a comprehensive framework for sustainability reporting that covers a range of economic, environmental, and social aspects. The framework is designed to be flexible, allowing organizations to choose the most relevant indicators and metrics based on their industry, size, and specific sustainability issues.
- GRI Standards: The GRI Standards are a set of guidelines and indicators that organizations can use to report on their sustainability performance. The standards are organized into three universal sets: Economic, Environmental, and Social. Within each set, there are specific standards and indicators that organizations can use to structure their reporting.
- Materiality Principle: GRI emphasizes the importance of materiality, encouraging organizations to focus on reporting issues that are most significant to their stakeholders and business operations. This ensures that the sustainability report provides relevant information for decision-making.
Summary
In conclusion, exploring the key components of various ESG frameworks reveals a multifaceted approach to sustainable business practices. They collectively contribute to the global efforts toward sustainability and responsible business practices. Organizations often use a combination of these frameworks based on their specific needs, industry focus, and stakeholder expectations. As ESG considerations continue to gain importance in the business world, the ongoing development and refinement of these frameworks will be essential to provide organizations with robust tools for transparent and meaningful reporting on their environmental, social, and governance impacts.
