up:: [[Sustainability and Sustainable Design]] tags:: #on/ESG # Environmental, Social, and Governance (ESG) ESG, which stands for *Environmental, Social, and Corporate governance*, involves practices and metrics to assess a company beyond its financial performance. Investors use ESG criteria to evaluate *non-financial issues impacting long-term financial viability*. The ESG framework encompasses environmental, social, and governance aspects. > **ESG:** Addresses environmental, social, and governance issues for investor assurance. > **Sustainability:** Embedded in core business strategy, aiming for positive value creation. #### Components ##### Environmental (E): - **Energy:** Assess energy efficiency, use of fossil fuels vs. renewables. - **Greenhouse Gases:** Address emissions to align with government targets. - See [[Scope 1, 2, 3 Emissions]] - **Water:** Focus on water efficiency amid growing scarcity. - **Pollution:** Manage waste and chemical disposal to avoid negative impact. - **Waste:** Minimize waste production for efficiency and reputation. - **Materials:** Source materials sustainably and with recyclability in mind. - **Encroachment on Nature:** Avoid harming natural ecosystems to maintain reputation. ##### Social (S): - **Employee Treatment:** Prioritize equity, inclusion, and fair remuneration. - **Community Engagement:** Pay taxes, hire locally, and support local initiatives. ##### Governance (G): - **Importance:** Governance is crucial as it drives overall ESG performance. - **Values and Targets:** Clearly define economic, social, and environmental goals. - **Dialogue among Executives:** Discussing goals is as vital as setting them. - **Board Oversight:** Boards should oversee ESG strategy, focusing on risk management. #### Frameworks The guide provides insights into Environmental, Social, and Governance (ESG) reporting, emphasizing the increasing importance of ESG metrics for organizations. It addresses the *challenges of the fragmented ESG reporting landscape* and the need for clear guidelines. ##### Key Points 1. **Introduction:** - Global consensus on ESG risk as investment risk. - Organizations required to disclose ESG performance alongside financial reporting. - Lack of standardized format for ESG reporting creates complexity. - High-stakes nature of ESG reporting, requiring auditability and comparability. 2. **Select ESG Frameworks for Reporting:** - ESG reporting landscape is crowded; choosing the right framework is crucial. - Consider *materiality and relevance* when selecting a framework. - Assess double [[Materiality]], incorporating financial and market/environmental perspectives. - Evaluate impact and influence to prioritize actions within ESG reporting. 3. **Consult Different Sources for Guidance:** - Stakeholder expectations vary; consider preferences of investors, boards, employees, etc. - Geographic relevance plays a role in selecting frameworks. - Industry sectors may align with specific ESG reporting frameworks. - Framework coverage varies, impacting the choice of reporting standards. 4. **Adopt a Dedicated ESG Reporting System:** - Increasing scrutiny on ESG data necessitates *reliable and auditable information*. - ESG data often held in disparate systems; specialized software recommended. 5. **Prepare for Future ESG Reporting Trends:** - ESG disclosures evolving rapidly; *AI-driven data scraping gaining prominence*. - Consider strategies to regain control over data used in AI-driven ESG valuations. - Steps to protect ESG valuation: identify key rating agencies, understand their data needs, and ensure accurate publicly available information. 6. **Conclusion:** - Harmonization of ESG reporting frameworks expected in the future. - Perspectives on the future include regulatory changes, industry coalescence, and inter-framework consolidation. 7. **Appendix: ESG Frameworks in Detail:** - Detailed information on relevant frameworks for different industries, including LEED, BREEAM, GRESB, SASB, and others. ![[Pasted image 20240226101818.png]] The U.S. [[Securities and Exchange Commission (SEC)]] and the European Union (EU) are set to implement new ESG disclosure regulations modeled after frameworks like TCFD, with *SEC rules expected in 2023 for reporting in 2024*. Industry sectors are aligning with preferred frameworks, with the property sector favoring GRESB. Framework consolidation is occurring, with IFRS Foundation and GRI specializing, and IIRC and SASB merging into the Value Reporting Foundation. Key events in the timeline include IFRS's consultation on sustainability reporting, Larry Fink's 2020 letter on climate risk, and the EU's introduction of the [[Sustainable Finance]] Taxonomy. The ISSB issues its first sustainability disclosure standards in June 2023. The SEC proposes a climate disclosure rule in 2022, with new regulations expected in mid-2023. The conclusion emphasizes the complexity of ESG reporting and suggests a systematic approach, including *selecting appropriate frameworks, considering materiality, understanding stakeholder expectations, recognizing geographic relevance, distinguishing sector preferences, and ensuring a solid data foundation*. Accuracy, automation, and auditability are crucial. ##### Notes on ESG Frameworks The appendix provides detailed overviews of voluntary scored frameworks (CDP, GRESB), voluntary frameworks (GRI, TCFD, VRF), regulatory frameworks (SFDR, NGER, SECR, CSRD, BRSR), and rating agencies (ENERGY STAR, DJSI, NABERS). **Sustainable Finance Disclosure Regulation (SFDR)** SFDR standardizes ESG reporting in the EU, requiring a Principal Adverse Impact (PAI) statement with quantitative indicators. It aligns with the EU taxonomy and proposed EU Corporate Sustainability Reporting Directive (CSRD). - SFDR mandates PAI statements for ESG metrics in the EU. - PAI includes weighted averages of ESG metrics and emissions reporting. - SFDR, EU taxonomy, and CSRD form the basis for the EU sustainable finance agenda. **Corporate Sustainability Reporting Directive (CSRD)** CSRD is an EU law for sustainability reporting, emphasizing double materiality. It covers environmental and social issues, applying to organizations meeting specific criteria, impacting over 50,000 companies, including non-EU entities. - CSRD requires disclosure on environmental and social matters. - Applies to organizations meeting criteria like EUR 20 million in assets. - Includes EU and non-EU companies; non-EU compliance starts in 2028. **Business Responsibility and Sustainability Report (BRSR) - India** India's BRSR replaces BRR, mandating reports from the top 1,000 listed Indian companies. It covers general, management, and principle-wise performance disclosures. - BRSR covers operational, financial, and employee details. - Requires disclosures on organizational policies and management processes. - Mandates reporting against KPIs based on India's National Guidelines. **National Greenhouse and Energy Reporting (NGER) - Australia** NGER is Australia's framework for reporting GHG emissions, energy production, and consumption, aiming for compliance with the NGER Act. - NGER collects data on GHG emissions, energy production, and consumption. - Records must enable verification of compliance with the NGER Act. - Ensures transparency and accuracy during external audits. **Streamlined Energy and Carbon Reporting (SECR) - UK** SECR is the UK's framework for reporting energy use, GHG emissions, and related information, impacting around 11,900 companies. - Quoted companies report energy use, GHG emissions, and intensity metrics. - Unquoted companies report UK energy use, GHG emissions, and one intensity metric. - Enhances energy efficiency and reduces CO2 emissions, aligning with the Climate Change Act 2008. **Securities and Exchange Commission (SEC) Climate Disclosure Rule - USA** The SEC proposes a rule requiring US publicly traded companies to disclose climate-related risks annually in 10-K reports, aiming for standardized disclosures. - Mandates disclosure of how companies assess, measure, and manage climate-related risks. - Includes greenhouse gas emissions disclosure. - Aims to provide investors clarity on exposure to climate-related risks. **IFRS Sustainability Disclosure Standards** IFRS established the ISSB, issuing Sustainability Disclosure Standards in 2023 for global baseline sustainability disclosures, focusing on quality and auditability. - ISSB issues General Requirements and Climate-related Disclosures standards. - Expects companies to match sustainability disclosure quality and auditability with financial information. ##### Rating Agencies Frameworks with scoring elements often involve non-public questionnaires, helping investors assess financial and ESG aspects. - Rating frameworks provide scores and percentile rankings. - Investors use frameworks to avoid ESG-related risks and focus on sustainable companies. **ENERGY STAR - North America** ENERGY STAR is a US EPA program for energy efficiency, comparing building performance against peer groups on a 1 to 100 scale. - Voluntary program promoting energy efficiency. - Scores buildings based on national surveys and normalized factors. - Aims to help businesses and individuals save money and protect the climate. **Dow Jones Sustainability Indices (DJSI) and Corporate Sustainability Assessment (CSA)** DJSI tracks companies globally based on economic, environmental, and social criteria, utilizing CSA questionnaires for scoring. - DJSI selects top-ranked companies based on Total Sustainability Scores. - CSA assesses companies with industry-specific questionnaires. - Investors gain exposure to sustainable companies and avoid ESG-related risks. **National Built Environment Ratings Scheme (NABERS) - Australia** NABERS uses a six-star scale to rate building performance, comparing against benchmarks in various sectors. - NABERS compares building performance to benchmarks. - Ratings cover commercial office buildings, tenancies, hotels, shopping centers, and data centers. - Mandatory ratings for buildings for sale or lease over 10,000 sq ft under Australia's Building Energy Efficiency Disclosure Act. --- #### Sources * [What is ESG? | BDC.ca](https://www.bdc.ca/en/articles-tools/sustainability/environment/what-esg-and-what-does-mean-business#:~:text=ESG%20stands%20for%20environmental%2C%20social,company%20beyond%20its%20financial%20performance.) * [What are scope 1, 2 and 3 carbon emissions? | National Grid Group](https://www.nationalgrid.com/stories/energy-explained/what-are-scope-1-2-3-carbon-emissions) * [[A guide to ESG reporting frameworks.pdf|IBM - A Guide to ESG Reporting Frameworks]] * [[Green Quadrant_ Enterprise Carbon Management Software 2023.pdf|Green Quadrant - Enterprise Carbon Management Report]] *