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These days the term "ESG" seems to be popping up everywhere. As investor preferences evolve, more information is being demanded from companies beyond financial results and outlook. Investors want to know more about how a company's operations impact the environment and what initiatives they are taking with regard to diversity and inclusion. Further, the SEC has taken notice of this interest and is expected to propose new rules by the end of 2021 that may result in required climate risk and ESG disclosures1. As investors' needs evolve and regulatory pressure increases, companies are quickly having to adapt and determine what related information to share and how they will disseminate that information.

What is ESG?

The term ESG refers to Environmental, Social and Governance information. ESG is also referred to sometimes as sustainability and, in the context of a company's business model, it refers to how a company's products and services contribute to a sustainable business model as well as its ability to manage operations and minimize negative impacts to the environment (e.g., waste, pollution, deforestation, etc.).

Examples of ESG metrics

Each component of ESG has several factors that a company would be expected to report on (as applicable). The examples below, although not an exhaustive list, explain each component of ESG in more detail and offer examples of ESG metrics that may be reported.

  • Environmental: Investors and customers may be interested in how a company's operations and products impact the environment and what actions a company is taking to minimize those impacts. When thinking about the ESG environmental reporting component, environmental examples would include how a company is exposed to and manages risk and opportunities related to climate change, natural resource scarcity, pollution, waste and other environmental factors as well as a company's impact on the environment2.

  • Social: All companies have a responsibility to be good members of their community and society. As a result, customers and investors are asking for more information on the human or social component of their operations. ESG social examples include information regarding the company's values and business relationships. Topics for disclosure could include labor and supply-chain information, product quality and safety, employee health and safety, diversity and inclusion policies, and cyber security and data privacy i

  • Governance: All companies have a responsibility to develop an appropriate corporate governance structure that will serve as a control mechanism against corruption and unethical behavior. The governance component provides an evaluation of a company's corporate governance structure. Example ESG governance disclosure topics could include details on the structure and diversity of the board of directors, executive compensation, ethics and policies on lobbying, political contributions, bribery and corruption4.

Is there an ESG reporting framework?

Over the past ten years, the development of frameworks to report ESG information has been gaining momentum and several recognized frameworks have been developed to facilitate such reporting. The following are some of the most common frameworks:

Global Reporting Initiative (GRI) Standards:

The Global Reporting Initiative (GRI) was first developed in 1997 and is an international independent standards organization whose original objective was to create the first accountability mechanism to ensure companies adhere to responsible environmental conduct principles but has since been broadened to also cover ESG issues5. The GRI Standards are divided between Universal Standards covering what the GRI refers to as the Foundation, General Disclosures and Material Topics; Sector Standards which are topics suggested for reporting based on what is expected to be material factors by sector; and Topic Standards which provide suggested disclosures for specific topics (e.g., waste, occupational health and safety, etc.)6. Content reported under these Standards is defined by what a company identifies as its material economic, environmental and/or social topics.

SASB Standards:

The Sustainability Accounting Standards Board (SASB) was created in 2011 to assist businesses and investors in developing common language about the financial impacts of sustainability. The SASB has published 77 globally-applicable industry standards covering sustainability topics aimed at identifying the minimum set of financially material sustainability topics and their associated metrics for the typical company in a particular industry7.


The Financial Stability Board created the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015 to improve and increase reporting of climate-related financial information. The TCFD developed four recommendations on financial-related disclosures that are applicable to organizations across sectors and jurisdictions. The core elements of recommended climate-related financial disclosures include Governance, Strategy, Risk Management and Metrics and Targets8.

What are the potential benefits of disclosing ESG information?

Companies have already begun to realize the value investors place on ESG information when making investment decisions. A study published by Morgan Stanley indicated that 85% of the general population of individual investors and 95% of millennials expressed interest in sustainable ESG investing9. Furthermore, based on a study performed by the Center for Audit Quality (CAQ) published in August of 2021, 95% of S&P 500 companies had detailed ESG information publicly available10. If these trends continue, companies choosing not to disclose ESG information or lack plans to report and disclose ESG information may quickly find themselves lagging behind their industry peers.

Furthermore, investors are increasingly interested in ESG information to help them drive investment decisions and to understand a company's potential enterprise value. For instance, asset managers have been a main driver of companies reporting ESG information, as they are looking for companies to provide substantive information on managing ESG risks. Per a report published by Morningstar, investments in sustainable funds in the United States have continued to occur at a record pace with $39 billion in investments through the second quarter of 2021, which is approximately $18 billion more than investments into sustainable funds for the same period in 202011.

Where / When should ESG information be reported?

Although this is a hot topic on the SEC's regulatory agenda, to date there are no formal ESG reporting requirements issued in the United States requiring ESG information disclosure by companies. As a result, the reporting of ESG information can take on various forms, including a standalone ESG sustainability, corporate responsibility or a similar report, included in the Annual Report on Form 10-K either in Item 1 (Business) or the MD&A, a Form 8-K or in a proxy statement.

Despite the lack of formal ESG regulatory requirements, investors and stakeholders are expecting companies to report accurate and reliable information regarding ESG. To meet these expectations, companies will likely need to obtain some form of third-party assurance over the ESG information being reported. To date, third-party assurance has taken on many different forms and come from a variety of providers including accounting firms, engineering firms and consulting firms. Accounting firms can provide third-party assurance in the form of a review or examination level attestation report. Engineering firms and consulting firms can provide a certification or verification based on the data being reported.

The determination of what type of assurance is needed will likely depend on the expectations of the users of the information, as well as what information the company is planning to disclose and whether that information is consistent with industry standards and recognized reporting frameworks. Companies will also need to ensure that they have appropriate levels of controls over the systems used to derive the information, as well as the ability to pull and report the same information in a consistent manner year after year12. To date, the AICPA has offered some guidance on reporting through their publication of a Guide, "Attestation Engagements on Sustainability Information (Including Greenhouse Gas Emissions)" (AICPA Sustainability Guide), which provides further details on how to report what they describe as "Sustainability Information" which includes economic, environmental, social and governance performance.

Download the PDF to see where the SEC stands on ESG, including Disclosure Comparison, Risk Factor Disclosure and Management Discussions and Analysis (MD&A).

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[1] E. Powers, R. Glaze Jr. August 3, 2021. How will the SEC Drive ESG Progress? First, We Measure. The National Law Review.

[2] Center for Audit Quality (CAQ). February 2021. ESG Reporting and Attestation: A Roadmap for Audit Practitioners.

[3] Ibid

[4] Ibid

[5] GRI. (n.d.). Our Mission and History.

[6] GRI. (n.d.). A Short Introduction to the GRI Standards.

[7] SASB. (n.d.). About Us.

[8] Task Force on Climate-related Financial Disclosures. June 2017. Recommendations of the Task Force on Climate-related Financial Disclosures.

[9] Morgan Stanley Institute for Sustainable Investing. September 11, 2019. Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice.

[10] Center for Audit Quality (CAQ). August 9, 2021. S&P 500 and ESG Reporting.

[11] Morningstar. July 2021. Global Sustainable Funds Flows: Q2 201 in Review.

[12] Nordea. March 31, 2021. What is ESG.

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