Navigating the Complexity of ESG Reporting Frameworks
Environmental, social and governance (ESG) reporting frameworks have become increasingly important for companies in recent years as investors and consumers alike seek to understand a company’s impact on the environment and society. However, the various frameworks that exist can be confusing for companies looking to align their reporting with industry standards. This article will explore the congruence and disconnection of some of the most commonly used ESG reporting frameworks, including CDP, RE100, SBTi, TCFD, WRI and GRI, and what this means for companies that wish to align with them.
One of the key challenges for companies is that each framework focuses on different aspects of ESG and has its own reporting requirements. For example, the Carbon Disclosure Project (CDP) focuses specifically on a company’s greenhouse gas emissions, while the Global Reporting Initiative (GRI) has a broader focus that includes a range of environmental, social and governance issues. Additionally, some frameworks, such as RE100 and Task Force on Climate Disclosure (TCFD), are primarily focused on the renewable energy and financial ESG disclosures of companies. This lack of alignment and standardization can make it difficult for companies to understand which framework is most relevant to them and how to align their reporting accordingly.
Measuring Scope 1, 2 and 3 emissions is an important aspect of ESG reporting and it is crucial to be aware of the different methodologies that each framework uses. Scope 1 emissions are direct emissions from sources that are owned or controlled by the reporting company, such as combustion of fossil fuels in boilers or vehicles. Scope 2 emissions are indirect emissions from the generation of purchased electricity, heat or steam. Scope 3 emissions are all other indirect emissions that are consequences of the activities of the reporting company, but occur from sources not owned or controlled by the company, such as employee commuting, suppliers Scope 1-2 emissions or the disposal of waste.
The frameworks also have different levels of rigor and granularity in their reporting requirements. For example, GRI’s guidelines are considered to be more flexible and voluntary compared to CDP, RE100 and TCFD which are mandatory and designed to be specific in their measurement criteria. Further, reporting frameworks are evolving and converging over time, leading to enhanced disclosure of a company’s overall emissions that encompasses needs that were not addressed in the past.
For example, one major reporting framework has announced changes and another is on the brink of creating additional, and potentially profound changes, to their guidelines.
- RE100 released new technical criteria guidelines in Q4 2022 that limit the use of EACs (Environmental Attribute Certificates) if the generation of the asset began operation more than 15 years ago. This means that if a voluntary buyer wishes to prove EACs and are not the original offtaker of the project, they must meet this criteria to have it count towards their Scope 2 emission reductions. That said, this new criteria does align with other frameworks like CDP and benefits the ease of certifying these claims from companies like Green-e.
- WRI, who controls the Greenhouse Gas Protocol (GHG Protocol) has an open commentary period from December 2022 to March 2023 for major changes to their Scopes 1-3 reporting methods. According to GHG Protocol, “the aim of any updates will be to align with best practice approaches to ensure GHG Protocol standards for scope 1, scope 2 and scope 3 are effective in providing a rigorous and credible accounting foundation for businesses to measure, plan and track progress toward science-based and net-zero targets in line with the global 1.5°C goal. Any future updates will seek harmonization and alignment with accounting rules under development through major disclosure initiatives”. Changes like this will also impact the reporting metrics for CDP and the Science Based Target initiative (SBTi).
One area where we have not seen much guidance yet is in regard to scope 3 emissions. Scope 3 emissions refer to a company’s value chain and have a significant contribution to the overall carbon footprint of a company. However, there is currently a lack of comprehensive reporting frameworks for scope 3 emissions which makes it complex to track and sometimes acts like the wild wild West! The implications make it difficult for stakeholders to compare and assess the performance of different companies when there are not clear guidelines, leading to inconsistent and unreliable data – not to mention challenging to form and meet goals. Luckily, this is changing across the industry. In addition to the GHG Protocol, there are many active groups working to solve this problem by developing standards across industries. Green Builder Media has taken the initiative by creating a working group to address ESG issues in the housing sector and set industry-specific standards. The current method of rating companies using ESG frameworks is highly variable due to the discrepancy in the number of criteria used, the measurement of the criteria, and the weight given to each criterion. 76% of top asset managers use multiple ESG data providers to make investment decisions, but the inconsistent nature of ESG scores is a challenge. Further, the industry you are reporting on matters also. Green Builder Media has called out that “the home building industry is known for being resource intensive and as such emphasizes the environmental aspects of ESG more than the other two pillars. The prioritization of one pillar can be detrimental to a company’s ranking. Therefore, within the housing sector, experts should advocate for environmental standards to be weighed more than social or governance standards to achieve a more accurate ranking”. The variability in scoring can only be fixed if universal standards on scope, measurement, and weight are adopted for each industry. This will help create a level playing field for all companies and ensure that investors have access to accurate and comprehensive information when making investment decisions.
If your company is wishing to align with multiple frameworks, it is important to understand the specific requirements of each one and to prioritize based on your specific goals. In general, it is advisable for companies to first focus on the framework that is most relevant to the industry and then to align with additional frameworks as needed. This ensures accuracy of reporting and being transparent with the framework you first choose to report on. It’s also worth noting that some of these frameworks have a cost attached to their services, so it’s important to weigh that factor in when deciding which ones to use.
We suggest you start with the basics. Consider looking into what is required from the GHG Protocol. This is a wonderful first step in accurately measuring your current emissions, which is vital to know if you want to set goals. After this, you truly can set goals that are realistic and achievable. For example, SBTi’s framework provides companies with science-based targets for overall carbon footprint reduction. After you have established your baseline footprint and set goals, it is then time to implement the practices you choose. This can come from energy efficiency, procuring renewable energy, switching your company’s fleet to electric vehicles and honing in on your supply chain’s emissions to help them lower their footprint as well – which has a massive impact as one could imagine. Lastly, you will want to measure and report on your progress. This is where a reporting agency like CDP can play a role. Their primary goal is to encourage organizations to measure, disclose, and manage their environmental impact in order to drive sustainable business practices and reduce the impact of climate change. CDP provides a standardized and transparent platform for companies to disclose their environmental impact, which can help to build trust with stakeholders. They also provide valuable insight and recommendations for companies to improve their environmental performance, which is extremely helpful when trying to navigate the ESG landscape.
Despite the recognized inconsistencies, ESG is absolutely essential as a measure of a company’s sustainability and social responsibility and is also a good indicator of future business success. Efforts towards standardization will immensely benefit investors and companies to streamline reporting and evaluation. Systems to measure a company’s financial health have long held the spotlight and had the time to evolve into the robust system it is today, but it should not be the only aspect with which to evaluate companies and their performance and health. By understanding the specific requirements of each framework and prioritizing based on specific goals, companies can navigate this landscape effectively and align their reporting with industry standards. That is exactly why WCS hosted an event last year focused on the details – what you need to do to get started or build on your existing ESG reporting to stay up to date and prepare for new requirements. Become a member today to watch the recording and join similar discussions in the future!