Why ESG Frameworks Matter?

As sustainability expectations evolve, companies are navigating an increasingly complex landscape of reporting requirements. Investors, regulators and stakeholders now demand ESG disclosures that are comparable, decision-useful and transparent. In this environment, ESG frameworks play a critical role in guiding companies on what to measure, how to measure and how to communicate their performance.

Beyond corporate reporting, ESG disclosures are used by capital market intermediaries to assess risk, resilience, and long-term value creation. Capital Market Intermediaries such as ESG rating providers rely on ESG frameworks as an analytical anchor to interpret reported information in a structured and comparable manner. Frameworks enable objective evaluation of disclosure quality, risk management maturity and performance outcomes, ensuring that ESG assessments are grounded in recognised standards rather than subjective judgement. 

What Are ESG Frameworks?

ESG frameworks are structured set of guidelines, standards and principles that help companies:

i. Identify their material ESG issues

ii. Measure and track performance metrics

iii. Communicate risks, impacts and progress

iv. Provide transparency to investors and regulators

They create a common language across industries and geographies, enabling responsible capital allocation and facilitating reliable ESG ratings.

How ESG Frameworks differs from ESG Standards?

ESG reporting frameworks provides guidance and best practices for the companies on how to prepare and structure the information. However, the ESG reporting standards provides specific insights about the topics to be covered and also defines the content to be included and metrics for measurement criteria including rules and metrics to follow up. ESG Framework acts as a reporting structure and ESG Standards tells what content is to be included therein.

a) Regulatory Frameworks

Regulatory frameworks are government-driven frameworks that are mandatory for businesses to report on. These include the ones introduced by governments, regulators or stock exchanges. These frameworks are non-negotiable.

 Examples:

1. Business Responsibility and Sustainability Report (BRSR)

BRSR is India’s mandatory ESG disclosure framework for listed companies, aligned with national sustainability priorities and global standards. Introduced by the Securities and Exchange Board of India (SEBI), the BRSR framework is designed for Indian companies to disclose their ESG performance. BRSR is mandatory for the top 1000 listed companies in India. It aims to standardise ESG disclosures, enhance transparency and enable better decision-making for investors, regulators, and other stakeholders.

How it works?

- Disclosures across environmental, social, and governance indicators

- BRSR Core introduces assured and comparable metrics

BRSR provides a standardised baseline ESG dataset for Indian companies, strengthening domestic comparability and regulatory alignment.

2. Corporate Sustainability Reporting Directive (CSRD)

The CSRD is the European Union’s mandatory sustainability reporting regulation that significantly strengthens how companies disclose ESG information. It replaces the earlier Non-Financial Reporting Directive (NFRD) and is designed to make sustainability disclosures comparable, reliable, decision-useful, and assured, similar to financial reporting.

CSRD applies to:

i. Large EU companies

ii. EU-listed SMEs (with phased timelines)

iii. Non-EU companies with significant business in the EU (through subsidiaries or branches)

As a result, CSRD has global relevance, including for Indian and other non-EU companies with EU operations, customers, or listings.

How does CSRD work?

CSRD operates through a structured and regulated reporting architecture:

1. Reporting under ESRS

Companies must disclose ESG information in line with the European Sustainability Reporting Standards (ESRS), which provide detailed, topic-wise requirements across environmental, social, and governance themes (e.g., climate, pollution, workforce, business conduct).

2. Double Materiality Assessment

CSRD is built on double materiality, requiring companies to identify and report:

- Impact materiality: How the company impacts the environment and society?

- Financial materiality: How ESG risks and opportunities affect the company’s financial performance and enterprise value?

3. Coverage of Strategy, Governance, and Performance

Disclosures must cover:

- Governance structures and board oversight

- Strategy and business model resilience

- Policies, action plans, and targets

- Metrics, KPIs, and progress tracking

This ensures ESG reporting goes beyond narratives and reflects systems and outcomes.

4. Integration with Financial Reporting

CSRD disclosures are included within the management report, not as a standalone sustainability report, reinforcing the link between sustainability and financial decision-making.

5.  Digital Tagging

Reported ESG data must be digitally tagged, enabling regulators, investors, and data users to easily access and compare information.

6. Mandatory External Assurance

Sustainability disclosures are subject to limited external assurance initially, with a transition toward reasonable assurance over time significantly improving data credibility.

b) Voluntary Frameworks

These frameworks offer companies the flexibility to choose and implement ESG practices that align with their objectives and values. They are optional but are widely adopted by companies to serve three main goals in their sustainability reporting: 

a. Build credibility

b. Maintain transparency

c. Ensure compatibility 

These frameworks provide guidelines rather than strict regulations. They allow for customisation based on unique circumstances and stakeholders. 

The voluntary frameworks are for investors, financial analysts and shareholders. These frameworks focus on financial materiality and building investor trust. Subsequently, it helps companies attract capital and strengthen investor confidence. 

Examples:

1.  GRI (Global Reporting Initiative)

GRI is a globally recognised, impact-focused sustainability reporting framework. It is designed to help organisations disclose their significant environmental, social and economic impacts on society and the environment.

GRI follows a stakeholder-oriented materiality approach, focusing on how a company impacts the world, rather than only how ESG issues affect financial performance. GRI-aligned disclosures enhance the breadth and depth of ESG data, particularly for environmental and social indicators, improving impact assessment quality.

How it works?

1. Companies identify material ESG topics through stakeholder engagement and impact assessment

2. Disclosures are structured using:

- Universal Standards (GRI 1, 2, 3)

- Topic-specific Standards (e.g., emissions, water, labour, human rights)

3. Companies disclose governance, management approach, and performance indicators

2. SASB Standards

SASB is a financial materiality-based framework that identifies ESG issues most likely to impact enterprise value, on an industry-specific basis. SASB disclosures help assess financial risk exposure, consistency, and relevance particularly useful for governance and risk scoring.

It is primarily designed for investors and financial decision-makers.

How it works?

a. Companies identify their relevant industry standard (e.g., banks, metals & mining, chemicals)

b. Disclose sector-specific ESG metrics that are financially material

c. Metrics are quantitative, comparable, and decision-useful

3. Task Force for Climate Related Disclosures (TCFD)

TCFD is a climate-risk disclosure framework that focuses on how climate change affects a company’s strategy, financial performance, and resilience.

How it works?

Disclosures are organised around four pillars:

1. Governance

2. Strategy

3. Risk Management

4. Metrics and Targets

Scenario analysis is encouraged to assess climate resilience under different transition pathways. TCFD alignment enhances assessment of climate governance, transition readiness, and risk integration.

4. International Sustainability Standards Board (IFRS)

The IFRS Sustainability Disclosure Standards, issued by the ISSB, establish a global baseline for sustainability-related financial disclosures. They are designed to be used alongside financial statements and are increasingly referenced by regulators and stock exchanges worldwide.

i. IFRS S1: General sustainability-related risks and opportunities that could reasonably be expected to affect enterprise value.
ii. IFRS S2: Climate-related disclosures, fully aligned with and building upon TCFD. It requires the companies to report on the governance risk strategy, management and performance.

How it works?

a. Focuses strictly on financial materiality i.e., ESG factors that affect cash flows, access to capital, or cost of capital

b. Emphasises forward-looking information, scenario analysis (for climate), and integration with financial planning

c) Benchmark/ Management Frameworks

These frameworks act as guidelines and benchmarks that companies use internally to: 

a. Design strategies

b. Manage performance 

c. Measure sustainability progress

It allows systematic analysis of the company, which can be further reflected upon to identify the strengths and weaknesses. Accordingly, the businesses can plan the improvement methods. 

The benchmark or management frameworks are designed for employees, internal management and broader stakeholders. They help businesses enhance their overall corporate strategy and serve as tools for business transformation rather than compliance. 

Examples:

1. Science-Based Targets initiative (SBTi)

SBTi is a target-setting and validation framework that ensures corporate GHG reduction targets are aligned with climate science and the Paris Agreement. SBTi validation demonstrates credibility, ambition, and accountability in climate transition planning.

How it works?

- Companies calculate Scope 1, 2 and 3 emissions

- Set near- and long-term targets aligned with 1.5°C or well-below-2°C pathways

- Targets are independently validated by SBTi

2.  EU Taxonomy

The EU Taxonomy is a classification system that defines which economic activities can be considered environmentally sustainable. It is a core pillar of the EU’s sustainable finance framework.

How it works?

For an activity to qualify as taxonomy-aligned, it must:

i. Make a substantial contribution to at least one of six environmental objectives

ii. Do No Significant Harm (DNSH) to other objectives

iii. Meet minimum social safeguards (e.g., OECD, UNGP)

iv. Comply with detailed technical screening criteria

EU Taxonomy alignment allows assessors to evaluate the credibility of green revenues and investments, particularly relevant for green bonds, sustainability-linked finance, and transition finance assessments.

The EU Taxonomy focuses on six environmental objectives:

1. Climate Change Mitigation

2. Climate Change Adaptation

3. Sustainable Use and Protection of Water and Marine Resources

4. Transition to a Circular Economy

5. Pollution Prevention and Control

6. Protection and Restoration of Biodiversity and Ecosystems

3. Carbon Disclosure Project (CDP)

CDP is a framework for companies to provide environmental information to their stakeholders including investors, employees and customers, covering environmental governance and policy, risks and opportunity management, environmental targets and strategy and scenario analysis.

How CDP works?

CDP offers three questionnaires on the topics of climate change, water and forests, each of which is scored using different methodologies. Each questionnaire includes general questions alongside sector-specific questions that are aimed at high-impact sectors. 

How ESG Rating Providers Use ESG Frameworks?

For rating agencies, frameworks are essential reference points that support:

a) Assessment of disclosure quality

Evaluating whether the company reports data that is complete, consistent, comparable, and aligned with accepted standards.

b) Benchmarking ESG maturity

Framework adherence indicates the strength of governance, risk management, and internal controls.

c) Identification of material issues

Frameworks help assess whether a company’s disclosures cover sector-relevant environmental, social, and governance topics.

d) Evaluation of forward-looking commitments

Climate targets, transition plans, social programmes, and governance enhancements are assessed against global best practices like TCFD or SBTi.

e) Enhancing comparability

Frameworks create common baselines, enabling rating providers to compare companies fairly across sectors and geographies.

Why Aligning with Frameworks Improves a Company’s ESG Rating?

Companies aligned with established frameworks tend to demonstrate:

- Stronger governance oversight

- Clearer articulation of ESG risks and opportunities

- Better-defined KPIs and targets

- Higher transparency in performance and data quality

- Lower ambiguity and estimation risk

This leads to more robust assessments and, naturally, stronger ESG performance evaluations.

How Companies Should Choose the Right Frameworks?

With the proliferation of ESG frameworks globally, selecting the right one can appear overwhelming for companies. However, an informed and structured approach can ensure that ESG reporting is aligned with business objectives, stakeholder expectations and regulatory requirements. The following points should be considered before selecting the right frameworks:

i. Understand the purpose of your ESG reporting framework to choose a well-aligned solution 

ii. Assess which ESG frameworks are better suited to specific industries and company types  

iii. Consider credibility in the ESG reporting framework based on recognition and acceptance by industry stakeholders

iv. Assess the scope and coverage of ESG factors in the framework  

v.  Consider the current regulatory environment in your jurisdiction and industry 

vi. Evaluate if using multiple ESG frameworks simultaneously will create a more accurate ESG report 

Conclusion:

ESG frameworks bring structure, discipline, and credibility to sustainability reporting. For rating providers, they are essential tools for assessing performance, identifying meaningful risks and impacts, and ensuring comparability across companies.

As the ESG ecosystem matures, companies that align early with credible frameworks will be better positioned both in terms of regulatory preparedness and ESG ratings. Ultimately, a thoughtful, framework-aligned approach leads to stronger governance, clearer disclosures, and a more resilient sustainability strategy.