Understanding Sustainability Frameworks
By: Julianna Eng & Mary Kate Henderson (Lookthrough Research)
Sustainable finance can be laterally defined through categories, but how is it measured? The answer is simple: frameworks.
There are several frameworks that have been developed to meet the growing need for universal sustainable investing standards. These frameworks are mostly used by companies to self report their sustainable investment progress or lack thereof. Reports of these frameworks can usually be found in sustainability or corporate social responsibility reports, where they are typically outlined and highlighted as quantitative metrics of their success. These are often complicated and hard to understand organizational structure. Some of the most widely used frameworks are listed below.
Sustainability Accounting Standards Board
SASB is a nonprofit organization that sets standards to guide investors when reporting their sustainability information. These standards are industry specific and prioritize ESG issues by their financial impact. SASB also provides portfolio analysis to help identify the greatest areas of risk exposure for investors. Additionally, SASB includes a materiality matrix, which identifies issues and risks of an organization’s environmental and social impact to inform a buy or sell decision.
IRIS: Impact Reporting and Investment Standards
Created by the Global Impact Investing Network, the IRIS is a free, publicly available system for companies to measure, manage, and optimize their impact, promoting transparency and accountability across the impact investing sector. Following the triple bottom line, some examples of their metrics are anti-discrimination polices, GHG emissions, and accounts payable.
GRI: Global Reporting Initiative
The Global Reporting Initiative provides universal sustainability reporting standards for companies, policymakers, labor groups, and other organizations. The GRI aims to increase transparency about impact and believes that globally used standards will create the best outcome for our planet. Their standards are a free public resource and act as the global common language for sustainability reporting.
TCFD: Task Force on Climate-related Financial Disclosures
The TCFD developed recommendations for climate-related financial disclosures in order to help investors make better decisions. Additionally, the TCFD uses these disclosures to understand the overall climate-related risk in the financial sector. The goal of the recommendations is to incentivize companies to make changes in their strategic planning and risk management to reduce climate-related risk.
CDP: Carbon Disclosure Project
The CDP is a not-for-profit organization that offers a disclosure system for investors, companies, cities, and states to manage their environmental impact. The information disclosed to the CDP is used to score companies and cities on an annual basis. Their areas of focus are the climate, water, and forests.
UN SDGs: United Nations Sustainable Development Goals
A call to action for developed and developing countries, the United Nations Sustainable Development Goals outline environmental and social initiatives countries should spearhead in order to promote peace and prosperity for the people and planet. Companies and institutions look to the UN SDGs as the gold standard across the board from ESG to impact investing and is commonly referenced in a company’s sustainability report.
UN PRI: Principles of Responsible Investing
The United Nations Principles for Responsible Investment (UNPRI) are six principles that were developed to help investment firms better integrate ESG considerations into their operation. These six commitments are completely voluntary and can be applied to many different sectors and asset classes. The goals of the UNPRI are to make ESG integration achievable and to hold firms accountable for their societal impact.
Conclusion:
These frameworks are the building blocks of sustainable reporting, whether that be ESG or impact-oriented initiatives. Companies may use a mix of them to cover a wide variety of measurements, for example using the CDP for environmental metrics and the UN SDGs for human rights activities. With a rising popularity in sustainable investing and increased reporting from companies across various sectors, being familiar with these frameworks is imperative to understanding the sustainable finance landscape.
