The SECs ESG Integration Framework is a voluntary framework that allows companies to voluntarily disclose their ESG practices, policies, and performance with respect to the global standards set by the International Integrated Reporting Council (IIRC).
The Focused Framework is a voluntary framework that provides a concise overview of an organization’s ESG performance, including risk management and sustainability related disclosures.
Both frameworks have been developed to help investors better understand the impact of ESG on business performance. The Focused Framework is superior for three reasons:
The SEC’s ESG Integration Framework does not set forth specific factors or metrics for assessing ESG risks or opportunities for investors. Instead, it requires that companies provide information about ESG issues in their 10-Ks and 10-Qs (their annual reports). Investors are then required to analyze that data and make investment decisions based on their own individualized assessment of company risk and return characteristics.
This approach may be suitable for those investors who have sufficient time and resources to conduct in-depth analysis of ESG risks, but it is not suitable for most investors who lack such expertise or resources.
In addition, because no specific measures are prescribed by the SEC’s ESG Integration Framework, there will be no uniformity among companies regarding how they report their ESG information or how they disclose material risks.
While both frameworks are designed to be used at different levels of granularity, the Focused Framework can be adapted for any level of detail needed for a particular investor or audience.
This means that investors can use the framework in whatever way best fits their needs. For example, an investor who wants detailed information about a specific topic could easily customize their report using the Focused Framework while another investor might prefer an overview report with just broad categories.
The ESG Integration Framework asks about all the risks associated with an investment decision, even if they are unlikely to occur or would have no material impact on a company’s performance.
The framework identifies those risks that are most likely to impact the performance of an investment decision and asks about them only. This means investors spend less time evaluating irrelevant risks and more time evaluating those that matter most — maximizing the efficiency of their analysis process and minimizing their costs.
The framework also gives investors access to more information than ever before about companies’ ESG practices, which may provide opportunities for competitive advantage as well as greater transparency into how companies operate and make decisions.
The SEC recognizes that many investors are interested in companies that make responsible decisions in these areas. So, when they invest in a company, they want to know that they can trust its management team to act responsibly and ethically.
The Focused Framework is superior because it provides a much more comprehensive view of how ESG issues affect a business. In contrast, the SEC’s framework is limited by its narrow focus on certain factors that may not be relevant or important for every company.