Environmental, social and governance policy

Environmental, social and governance (ESG) policy

What it is and why it’s important.

Measuring ESG

ESG is a framework that helps businesses understand and measure their impact on society, the environment and how transparent and accountable it is. Measurement of ESG criteria could differ widely from business to business however.¹

The right reporting data provided through ESG criteria may give investors insights into management, exposure to risk and the opportunities created through ESG activity.²

On occasions, ESG could be a focus when companies communicate with investors on a range of issues, from resources to health and safety, human rights and business transparency. Providing detailed performance metrics against each of its three pillars is potentially something that could be attributed to ESG.³

The importance of ESG

The London Stock Exchange (LSE) has issued detailed guidance on ESG reporting, identifying eight priorities

Strategic relevance

Identifying the significance of ESG issues to business strategies and models.

Investor materiality

Explaining the ESG issues that are most relevant or material to business and how these may affect strategy and performance.

Investment grade data

ESG information needs to be complete, consistent, reliable, comparable and clear.

Global frameworks

Identifying the indicators and standards which are most relevant to stakeholders/investors.

Reporting formats

Companies can report ESG information in annual reports, standalone sustainability reports or in integrated reports.

Regulation and investor communication

Companies should use regulatory requirements as a base to develop an investor/stakeholder-focused approach to reporting.

Green Revenue reporting

Effectively communicate exposure to green products and services which enable transition to the low carbon economy.

Debt finance

The growth of the green bond market has amplified investor interest in financing linked to specific activities and projects delivering environmental benefits.⁴

Given the complexity of company reporting, these points might help to frame data needs in a given business in a more effective way. The LSE guidance could complement the range of global ESG frameworks and standards available. The aim of these is to improve the reliability and consistency of ESG reporting.⁵ There is potential for investors and companies to embrace the frameworks and standards.

The Principles for Responsible Investment (PRI)

The PRI network of investors promotes sustainable investment through the incorporation of environmental, social and governance into investment practice and as of December 2023 had 5,372 signatories.⁶

Possible actions identified by PRI include:

Addressing ESG issues in investment policy statements.
Supporting development of ESG-related tools, metrics, and analyses.
Asking investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis.

Assessing the capabilities of internal and external investment managers to incorporate ESG issues.
Encouraging academic and other research on this theme.
Advocating ESG training for investment professionals.⁷

Government regulations require UK pension schemes to consider matters which are financially material to their investment decision-making. They should consider where climate change, and action to address climate change, might contribute positively to anticipated returns or to reduced risk.⁸

ESG reporting frameworks

Some Global ESG reporting frameworks for companies to consider are⁹:

IFRS Sustainability Disclosure Standards
CDP (formerly the Carbon Disclosure Project)
Climate Disclosure Standards Board (CDSB)
Global Reporting Initiative (GRI).

Sustainability Accounting Standards Board (SASB)
Task Force on Climate-related Financial Disclosures (TCFD)
UN Global Compact (UNGC)
Workforce Disclosure Initiative.

In 2023, the EU introduced the Corporate Sustainability Reporting Directive (CSRD), which will apply to around 50,000 companies¹⁰ The rules will start applying between 2024 and 2028.

This article has been written by SaveMoneyCutCarbon and is correct at 27 June 2024. This content does not constitute advice and is for general guidance only. Always undertake your own research before taking any action.