Introduction to ESG

What is ESG?  

ESG broadly refers to environmental, social, and governance concerns in businesses and was coined in 2004 by the United Nations (UN), the International Finance Corporation (IFC), and the government of Switzerland as the Who Cares Wins initiative. Disclosing ESG data is meant to influence investment decisions; in other words, integrate non-financial considerations into the investment process. Companies frequently disclose their ESG results in annual reports, sometimes within their financial reporting.  

ESG versus impact measurement 

ESG disclosure is not necessarily impact measurement. ESG assesses non-financial factors that should be considered by investors in terms of risks and opportunities that these factors present to the business.  ESG does not factor in all negative or positive externalities produced by a business. Impact measurement seeks to capture all outcomes and impacts, whether positive or negative. 

For example: a company may produce a lot of industrial waste and dumps that waste into a natural ecological zone, but is given permission to do so by the government or has acquired a special permit. This would not be counted as an ESG reporting factor because the company is not in danger of being fined or punished for the dumping and won't be in the future; however as a negative externality, it would be counted under impact measurement.  

 

 

Blog Series - ESG

Key ESG frameworks and templates

This collection of leading ESG standards is no meant to be a comprehensive catalogue of all standards available -- rather, these standards are the most commonly used or inform other leading standards.  

  • GRI Standards

    The Global Reporting Intiative (GRI) is one of the most widely used ESG standards and is modular, so it can be utilized based on the size and type of organization.  Universal standards are provided, in addition to sector-specific standards and topic standards. The GRI standards also inform other universal standards such as ISSB.  

  • International Sustainability Standards Board (ISSB)

    The International Financial Reporting Standards (IFRS) formed the International Sustainability Standards Board (ISSB) in 2021 at COP26. As an international financial standards setter, IFRS is able to develop common reporting standards for sustainability and social impact with buy-in from major governments and other reporting initiatives. The ISSB specifically oversees IFRS S1 and S2, which are mandated reporting standards for the European Union (EU).  

  • IFRS S1

    IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information are reporting standards aimed at general disclosures around sustainability risks and opportunties.  Note that this standard does not prescribe metrics, but rather overall guidelines and quality standards for reporting sustainability. This standard also does not involve overall impact reporting, but can be understood as an impact risk standard. 

  • IFRS S2

    The IFRS S2 is another directive that took hold in 2024 for large corporations and specifically mandates and outlines reporting requirements for climate-related risks.  As with IFRS S1, IFRS S2 is a risk-related standard and requires disclosure of risks and opportunities around climate change that are expected to impact a company's financial performance.  

  • Voluntary Sustainable Reporting Standard (VSME)

    Developed by the European Union (EU), the voluntary sustainability reporting standard for non-listed micro, small and medium enterprises (VSME) is targeted toward small businesses who may receive ESG data requests from large corporations who are ther suppliers or business partners. While the standard is voluntary and smaller businesses do not need to comply with sustainability reporting requirements, the EU encourages its use as a way to standardize and coordinate ESG data reporting.  

Detailed explainer - Voluntary Sustainability Reporting Standard for non-listed SMEs (VSME)

The Voluntary Sustainablity Reporting Standard for non-listed SMEs (VSME) is the European Union's effort to offer a consolidated reporting standard for small businesses who fall outside of the mandatory reporting framework. Led by EFRAG, the VSME offers a method to reduce the amount of redundant ESG data requests, specifically for small businesses who may be corporate supply chain vendors or other business partners. 

As more corporations are required to disclose ESG-related impact, small businesses who are in business-to-business (B2B) supply chains will continue to receive requests for ESG data, which already consumes significant time and monetary resources. Understanding the VSME, which was developed under the guidance of the European Commission and aligns with the EU's mandatory reporting, is essential for businesses to streamline and comply with ESG reporting.  

While many resources are available from EFRS on implementing the VSME, including videos and templates, the existing templates may be difficult to understand, especially for small and growing businesses (SGBs) in emerging economies and business development service (BDS) providers. We encourage all users to review the video explanations produced by EFRS. This section will break down the key metrics required in the existing VSME digital templates. 

Basic information (Basic Module) 

The VSME has two levels of disclosure -- basic (called the Basic Module) and comprehensive (called the Comprehensive Module). Under the Basic Module, businesses are expected to disclose general information and environmental policies, specific environmental disclosures such as greenhouse gas emissions, social disclosures related to their workforce, and governance disclosures around corruption.  Under the VSME digital templates, some metrics are automatically calculated; the following table lists explanations for metrics that must be inputed by the business itself.  

Metric Explanation Measurement Guidance
Environmental
Total Energy Consumption (in MWh, megawatts per hour) Total energy consumption as measured by megawatts per hour in a specific time period This metric can easily be obtained from electricity bills; however, it may need to be converted from kilowatts per hour (KWh).  Online conversion tools are available here.
Gross Scope 1 GHG Emissions Scope 1 emissions refer to all emissions generated by a company's own property, such as boilers or furnaces. Refer to this helpful guide on different emissions scopes.  Useful calculators for scope 1 emissions are available at the GHG Protocol. This metric should be expressed in tons of CO 2 equivalent (tCO 2 eq). 
Gross Scope 2 GHG Emissions (location-based) Scope 2 emissions are emissions produced indirectly through the purchase and consumption of electricity. Refer to this helpful guide on different emissions scopes.  Scope 2 emissions are typically converted from an organization's electricity bill. If a business has a mix of renewable and non-renewable energy, use a calculator from the GHG Protocol to accurately capture and convert the emissions. This metric should be expressed in tons of CO 2 equivalent (tCO 2 eq). 
Total amount of water withdrawn from all sites (cubic meters) This can typically be obtained from existing utility bills. However, it also applies to any water used by wells on a property or collected rainwater. The metric should be expressed in cubic meters and can be obtained from a utility bill. If the utility bill does not express water consumption in cubic meters, use a calculator to convert the fgure.
Amount of water withdrawn at all sites located in high water-stress areas  This metric helps determine water usage and effectiveness in water-stressed areas, such as in parts of the Western United States or the Sahel region. To determine if a business is located in a water-stressed region, use the WRI Aqueduct Water Risk map and filter for water stress.
Application of circular economy principles and explanation These two metrics refer to if a business is applying circular economy principles (a simple YES/NO indicator) and describe how. This is a qualitative indicator that allows a business to discuss how they have embedded circularity in their operations. For more information on circularity, see the circular economy principles.  
Amount and types of waste generated (in kilograms, cubic meters, or metric tonnes) The template has multiple rows to capture each type of waste generated, such as mining waste, hazardous water containing heavy metals, and simple wastes such as recycleables. If applicable, waste should be disaggregated by amount diverted to recycle/reuse and disposal.  Additionally, the template will automatically calculate performance using different units of measure. The reporting template allows one to select a unit of measurement that works best (either kilograms, cubic meters, or metric tonnes). Users should also select the type of waste (available in a dropdown) and add additional rows as necessary. Reporting this metric may necessitate a business to set up more comprehensive waste management tracking.
Social
Number of employees on a permanent and temporary contract This calculates the number of temporary and permanent employees. Some of the metrics under workforce will be calculated automatically
Gender breakdown of employees For both temporary and permanent employees, disclose the gender breakdown of the workforce.  Some businesses may need to put additional workforce tracking protocols to report on their workforce.
Number of recordable work-related accidents in the reporting period Note that this metric can also include mental health issues, if they have been reported and found to be related to employment The template will automatically calculate the rate of work-related accidents, assuming a fixed number of standardized work hours per year. 
Number of fatalities as a result of work-related injuries and work-related ill health Note that this metric can also include mental health issues, if they have been reported and found to be related to employment If not applicable, put 0 as the value.  
Employees receive pay that is equal or above applicable minimum wage determined directly by the national minimum wage law or through a collective bargaining agreement (number) This metric is the number of employees that receive pay that is either at or above minimum wage. Alternatively, a collective bargaining agreement may set the minimum wage. Minimum wage at the national level will vary by country. The World Population Review has updated lists of minimum wage by country.
Number of employees covered by collective bargaining agreements Collective bargaining agreements may refer to unionization, work council, or trade union The template will automatically calculate the percentage of employees covered by bargaining agreements.
Number of annual training hours per employee This metric should be disaggregated by gender of employee. A small business may need to set up additional tracking for recording training hours. Training hours can include professional development and onsite job training.
Human rights policies and processes These are basic human rights disclosures, starting with if a business has a code of conduct or human rights policy (tick YES/NO).  A business should also disclose any other types of efforts around human rights, as well as if a complaint procedure has been established.
Severe negative human rights incidences These are basic incidents of human rights violations, such as discrimination and forced labor, to be reported and addressed (tick YES/NO).  There are spaces to detail actions related to address the confirmed incidences. Additionally, incidences in the business's value chain should be disclosed.  
Governance
Revenue derivation from Paris-aligned benchmarks (tick YES/NO) These metrics are related to fossil fuel extraction, and should always be reported. All metrics in this section are related to coal, oil, gaseous fuels, or electricity sale of fossil fuels. 
Fines and convictions  Note - these metrics are to be reported as applicable; leave blank if not relevant or if nothing to report.
Revenues from controversial weapons, tobacco, harmful chemical production, etc
Composition of governance body