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TCFD, CSRD, SFDR… the list of acronyms can be disconcerting to the uninitiated. Despite the potential confusion surrounding ESG regulations and frameworks, this signals a growing momentum towards greater transparency and management of ESG issues.
This article discusses the different regulatory frameworks in the EU, with a special focus on ESG reporting regulations.
Many ESG frameworks function as reporting frameworks, ratings frameworks, etc. For the purpose of this article, we will focus on regulatory frameworks. ESG regulatory frameworks are a set of rules on managing, measuring, and reporting the environmental, social, and governance (ESG) aspects of business. These are directives that have legislative power, so companies are required by law to adhere to those requirements. Regulations vary by country and region, but all serve to enhance transparency on the non-financial impact that companies create. ESG regulations hold businesses accountable for their negative impacts such as environmental degradation, abuse of employee welfare, and unethical business conduct, among many other ESG issues.
For monitoring purposes, they require specific information to be disclosed in a certain manner. Some outline how reporting should be done, the metrics and format in which sustainability information should be presented. While they outline the types of data that must be reported as part of corporate disclosures, they do not necessarily provide guidance on the entire reporting process. They remain useful, however, in guiding the selection of information for reporting. Disclosures required by law are non-negotiable and as such, companies must reference the relevant framework that applies to them, in addition to any other supporting frameworks. Regulatory frameworks can be highly specific to a particular topic or can be broad-based to cover general sustainability topics.
Let’s take a look at some of the most common frameworks and what they’re targeted at.
Besides the regulatory requirements on reporting, many companies use a reporting framework when disclosing ESG performance. They provide structure and depth to your disclosures, outlining metrics and indicators for a range of ESG topics beyond what may be required by law. The Global Reporting Initiative (GRI) Standards, Sustainability Accounting Standards Board (SASB) Standards, CDP Disclosure Standards, Dow Jones Sustainability Index (DJSI), and MSCI ESG Ratings framework are all commonly used frameworks for sustainability reporting. There is no framework that is ‘best’, only what works best for your needs. Before choosing a framework, ask your business these three questions:
These questions should help you understand your objectives and criteria for managing and reporting ESG performance, and they should narrow down the list of frameworks. If your business is particularly vulnerable to certain ESG risks, you can consider using a topic-specific framework to manage and report on those risks. Sector-specific frameworks can also help to provide a sharper focus and better coverage of material issues. Frameworks can be combined for better effect, so more than one can be used together. It is very likely that you will need to use more than one framework anyway, given legislative requirements that target specific topics.
When managing and reporting ESG performance, data is paramount to your success. The one thing the most comprehensive frameworks have in common is a grounded approach to data. It is important for measuring progress and to substantiate your disclosures, and will only become more important as your ESG management and reporting journey matures. So it is essential to lay the groundwork early on. But this is also where it gets tricky as ESG data differs from financial data. The task of collecting, managing, and processing a large volume of data is made even easier with the help of sustainability software designed to handle ESG data and analytics. These often have traceability features to ensure accountability as well as report auto-generation features. Crucially, sustainability software ensures your disclosures meet all reporting criteria based on the sustainability reporting framework of your choice.