January 26, 2024
What Is the Difference Between ESG Ratings and ESG Reporting?

This article clarifies the differences between ESG ratings and ESG reporting, as well as how both are affecting the future of sustainable business practices.

What exactly is ESG reporting?

ESG is an acronym that stands for Environmental, Social, and Governance. These are the three topics on which companies will report in order to provide a glimpse of how sustainable and responsible their business is. This information is used by investors to make well-informed judgments regarding companies in which they want to invest.

The practice of measuring, aggregating and reporting data relating to environmental, social, and governance principles is known as ESG reporting.

ESG reporting enables businesses, investment funds, governments, and other organisations to demonstrate and track their sustainability performance over time.

Organizations frequently rely on ESG frameworks to help them decide what to report on, how to calculate quantitative data, and how to disclose the corresponding ESG metrics.

There are several ESG frameworks that provide requirements for ESG reporting. These frameworks, which are often developed by organisations, NGOs, and corporate groups, may be voluntary or required by investors or authorities.

Global Reporting Initiative (GRI): 

One of the most common ESG frameworks, GRI is used to report on ESG performance by over three-quarters of the world's 250 largest firms.

Task Force on Climate-related Financial Disclosures (TCFD):

The Task Force on Climate-related Financial Disclosures (TCFD) focuses on climate-related disclosures. In 2019, about 60% of the world's top 100 publicly traded firms backed TCFD or acknowledged implementing its suggestions.

Carbon Disclosure Project (CDP):

CDP is one of the oldest and largest ESG reporting organisations, focusing on climate change, water security, and deforestation. Its framework is utilised by over 10,000 businesses.

It is critical to recognise that ESG reporting is a broad phrase that incorporates a wide range of actions, including measurement and disclosure.

To learn more about ESG standards, please read our previous blogs.

What are ESG ratings?

An ESG rating assesses a company's long-term exposure to environmental, social, and governance risks. These risks, which include concerns like energy efficiency, worker safety, and board independence, have monetary consequences.

ESG ratings are numerical scores, percentages, or letter grades that seek to offer a picture of an entity's exposure to environmental, social, and governance risks, as well as the effectiveness with which those risks are managed.

ESG ratings are provided by third-party ESG rating providers and are largely used by investors to investigate and compare the ESG performance of firms in their portfolios or those in which they are considering investing.

There are several sources providing ESG ratings.

Six of the major are as follows:

  1. Morgan Stanley Capital International (MSCI)
  2. Sustainalytics
  3. Refinitiv
  4. S&P Global Ratings
  5. FTSE Russell 
  6. Institutional Shareholder Services (ISS)

What is the difference between ESG ratings and ESG reporting?

ESG ratings and ESG reporting are linked but serve different functions. Typically, ESG reporting focuses on first-party data. An ESG framework is used by an organisation to report on certain metrics such as greenhouse gas emissions, human rights policies, and risk management techniques.

ESG rating providers then analyse these reports, either with human analysts or AI, and give values using scoring methods, allowing various companies to be compared. To arrive at a score, an ESG rating agency may additionally check an entity's self-reported data and use other proprietary data sources.

Customers, workers, investors, rating providers, academics, and regulators are among those who consume ESG reporting. ESG ratings, on the other hand, are almost solely employed by investors.

ESG ratings and ESG reporting both play a role in creating a more sustainable future. While ESG reporting gives transparency into an organization's sustainability performance, ESG ratings make that data more available to investors. an important driver of the transition toward improved sustainability.

Oren is here to guide you and your company in developing and implementing an ESG strategy, gathering and processing data, developing a plan and business case to help your company become more sustainable, as well as setting targets and communicating outcomes that define ESG rating, also to help your company with sustainability reporting and generating it in accordance with international standards such as BRSR, GRI, TCFD, and CDP.

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