n the realm of sustainable investing, ESG (Environmental, Social, and Governance) reporting frameworks provide a standardized approach to disclose information, enhancing transparency and comparability.
ESG reporting frameworks promote transparency and accountability. They also align investors with industry best practices and stakeholder expectations. Savvy investors must remember, however, to go beyond reporting. That’s only the first step. What you do with the information matters more than just reporting it. Truly integrating purpose and profit means embracing a comprehensive approach that addresses the complexities of sustainability challenges.
In this article, we will:
ESG reporting frameworks provide a structure for companies to disclose their sustainability performance. They’re a fantastic tool for assessing and comparing companies horizontally which contributes to an apples-to-apples investment analysis. These frameworks play a crucial role in standardized reporting while enhancing transparency for PE firms, LPs and other stakeholders—particularly at a time where many companies struggle with meaningful ESG data analysis and benchmarking.
The GRI is one of the most widely used ESG reporting frameworks worldwide. The GRI’s sustainability reporting standards cover topics that range from biodiversity to tax, waste to emissions, diversity and equality to health and safety. GRI's standardized reporting framework allows investors to compare ESG performance across different companies and industries.
Best suited for: Multinational organizations, governments, small and medium enterprises (SMEs), NGOs, and industry groups focused on sustainability compliance.
The SASB framework focuses on industry-specific ESG standards. By identifying financially material ESG factors for each individual industry, SASB provides investors with sector-specific metrics and disclosure. Meaning more informed investment decisions based on relevant ESG information.
Best suited for: Companies that operate in sectors where ESG issues are considered financially material (e.g., energy, healthcare, retail and consumer goods, manufacturing and industrials).
The TCFD provides recommendations for disclosing climate-related financial risks and opportunities. TCFD's framework helps investors understand how companies are managing climate risks, allowing them to more accurately assess potential impacts on investment portfolios.
Best suited for: Organizations that wish to better understand and communicate the financial implications of climate change on their operations, strategies, and overall performance (e.g., companies in carbon intensive industries, financial institutions, institutional investors, companies with global operations / supply chains, infrastructure developers and operators).
It’s in the name. The EDCI framework attempts to attract the most universal of metrics across all sectors and industries to succinctly define a limited (or converged) set of metrics that can be tracked as a kind of foundation of ESG. Their mission is to create a critical mass of meaningful, performance-based, and comparable ESG data from private companies.
Best suited for: GPs and LPs in the private equity industry seeking standardized, decision-useful data for industry benchmarking around ESG performance.
ESG reporting frameworks provide a structured format for disclosing a firm's sustainability performance and risk profile. By collecting, tracking and analyzing the data needed to report into an ESG framework, private equity investors demonstrate their commitment to responsible and sustainable investment practices. Fund managers need to get serious about ESG reporting for several compelling reasons:
Despite private markets’ slower adoption of reporting requirements compared to their public market peers, the global shift towards sustainability shows no signs of stopping. Voluntary disclosure is a way for private equity investors to stay ahead of the inevitable regulatory tsunami. Because that wave is coming. And when it does, the winners will be the ones who acted early to establish the data infrastructure, reporting processes, and subject matter expertise needed to successfully navigate the ESG landscape.
While reporting frameworks play a vital role in ESG investing, it is important to recognize their limitations. Some criticisms include the potential for greenwashing, metric inconsistencies and a lack of comparability across different frameworks, and the inability to capture the full complexity of social and environmental challenges.
Reporting frameworks should be complemented with reporting standards to paint a clearer picture of a company’s sustainability practices. Frameworks provide the overarching principles that inform how data should be structured, prepared, and what topics to cover. Standards provide detailed and replicable guidelines for reporting that data, in addition to other relevant metrics. As the SASB puts it, “standards make frameworks actionable, ensuring comparable, consistent, and reliable disclosure. Frameworks and standards are complementary and are designed to be used together.” After all, the initial framework is only one part of a multivariable equation.
ESG reporting frameworks are undeniably valuable for assessing past performance about a fund's sustainability practices. Key word: “past.” It’s crucial not to lose sight of the future by getting caught up in the demands of the reporting cycle.
While reporting frameworks can help track progress and measure the outcomes of past investments, they should be complemented with a forward-thinking approach that considers future risks, opportunities, and impact potential. Sustainable and impactful investing is inherently forward-looking.
What’s being done with the data insights gleaned from the report? How are those insights informing future operations? Private equity investors should focus not only on reporting historical achievements but also on actively shaping future outcomes through strategic investments, engagement with portfolio companies, and collaborative efforts with stakeholders. You might emphasize different aspects of a framework one year, achieve meaningful improvements, and then switch to another area of focus the next year. ESG metrics aren’t so much moving targets, but aids in deciding which targets to truly hone in on.
Private equity investors must recognize the importance of using appropriate frameworks and adopting a comprehensive approach. While reporting frameworks offer benefits such as standardization and transparency, they are not a panacea. Investors need to supplement reporting with holistic strategies that integrate ESG considerations into their investment decisions. Ultimately, looking beyond ESG reporting is a way to humanize the investment process, emphasizing the purpose-driven initiatives and the positive contributions made towards a more sustainable and equitable world.
P.S. Learn how our subject matter experts at Tablecloth can help accelerate your ESG strategy: