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CFA Level II Exam · Environmental, Social, and Governance (ESG) Considerations in Investment Analysis

ESG Market Overview, Frameworks and Standards

Updated 7 October 2026 · Fact-checked

This topic covers how the ESG market works: who supplies ESG data and ratings, which disclosure frameworks companies use, how stewardship codes and regulation shape behaviour, and what investors and companies must do. You solve questions by matching the vignette's situation to the right framework, actor or limitation.

Understand ESG Market Overview, Frameworks and Standards

ESG analysis looks at environmental, social and governance factors that can affect a company's risks, costs and value. To use ESG well, you need to know where the information comes from and how far you can trust it.

Most company ESG information comes from sustainability reports, annual reports and regulatory filings. ESG data providers collect this information, often add data from news, NGOs and satellite or other alternative sources, and sell it. ESG rating providers turn the data into scores or rankings. Index providers then use the scores to build ESG indexes.

Ratings are not standardised. Providers choose different indicators, weights, materiality views and methods for filling missing data. Because of this, ratings from different providers for the same company can differ a lot. Ratings are also often relative to peers, so a score reflects position within a sector, not absolute impact. Many ratings are backward looking and depend on what the company chooses to disclose.

Disclosure standards try to make company reporting consistent. SASB standards are industry-specific and focus on financially material issues for investors. GRI standards focus on a company's impact on the economy, environment and people, and serve a wide group of stakeholders. TCFD recommendations cover climate-related risks and opportunities, organised around governance, strategy, risk management, and metrics and targets. The ISSB builds global baseline sustainability disclosure standards for capital markets, drawing on earlier work such as SASB and TCFD. Other frameworks and national rules also exist, and the exam expects you to know the purpose of each, not every detail.

Stewardship codes set expectations for how institutional investors engage with companies, vote proxies and report on this. Regulation varies by region. Some rules require companies to disclose ESG information, and some require asset managers to disclose how they label and integrate ESG products. The aim is to improve comparability and reduce greenwashing, which is overstating ESG credentials. Investors use ESG information for risk, valuation and mandates. Companies use it to attract capital, manage risk and meet rules.

Key formulas to remember

SASB focus
SASB = industry-specific, financially material to investors
Choose SASB when the vignette stresses investor-relevant, sector-specific metrics.
GRI focus
GRI = company's impacts on economy, environment and people
Broad stakeholder audience, impact materiality.
TCFD structure
Governance, Strategy, Risk management, Metrics and targets
Climate-related only. Includes scenario analysis within strategy.
ESG rating divergence
Different indicators + weights + materiality + missing-data methods → different scores
Ratings from different providers are not directly comparable.
Stewardship
Engagement + proxy voting + reporting
Applies to institutional investors under stewardship codes.

How to solve ESG Market Overview, Frameworks and Standards questions

Use this method on any item-set question about ESG markets, frameworks or standards.

  1. 1Identify what the question asks: a data source, a rating issue, a disclosure framework, a stewardship or regulatory point, or a role.
  2. 2Underline the clue words in the vignette, such as industry-specific, financially material, stakeholder impact, climate, engagement or voting.
  3. 3Match the clue to the tool: industry-specific and investor-focused points to SASB; broad impact to GRI; climate governance, strategy, risk and metrics to TCFD; global baseline to ISSB.
  4. 4For rating questions, look for causes of difference: indicator choice, weighting, materiality, relative versus absolute scoring, and missing data.
  5. 5For investor or company roles, decide who acts: investors engage, vote and integrate; companies disclose and manage risks.
  6. 6Eliminate options that are too absolute, such as claims that ratings are standardised or always comparable.
  7. 7Check your answer against the vignette's facts, not general opinion.

Quickest way: Clue-to-framework matching

When to use it: Use when time is short and the question asks which framework, actor or limitation applies.

  1. Find the key clue word in the vignette.
  2. Industry-specific and financial materiality: SASB. Stakeholder impact: GRI. Climate: TCFD.
  3. Different scores for one company: think methodology differences.
  4. Voting and engagement: stewardship code.
  5. Pick the option that matches without absolute words.

Common mistakes in ESG Market Overview, Frameworks and Standards

  • Assuming ESG ratings from two providers should agree.

    Credit ratings tend to agree more, so students expect the same here.

    Fix: Remember ESG ratings have no standard method. Differences in indicators, weights and materiality cause divergence.

  • Mixing up SASB and GRI.

    Both are disclosure standards and both cover many topics.

    Fix: SASB is industry-specific and investor-focused on financial materiality. GRI covers impacts on stakeholders and society.

  • Treating TCFD as a full ESG standard.

    It is widely mentioned alongside ESG frameworks.

    Fix: TCFD addresses climate-related risks and opportunities only, across four pillars.

  • Reading a rating as an absolute measure of impact.

    A high score sounds like a good company overall.

    Fix: Many ratings are relative to sector peers and based on disclosed data, so they may reflect disclosure quality.

  • Thinking stewardship codes are only about voting.

    Proxy voting is the most visible activity.

    Fix: Stewardship includes engagement, monitoring, voting and reporting on outcomes.

  • Assuming regulation is the same worldwide.

    Students generalise from one region.

    Fix: Rules differ by jurisdiction. Answer from the vignette's stated regime and stress that regulation aims at comparability and reducing greenwashing.

Worked examples

Example 1

Vignette: An analyst compares two providers' ESG scores for Norvik Energy. Provider A gives it 72 out of 100 and Provider B gives it 41. A's methodology weights governance heavily and scores companies relative to sector peers. B weights carbon emissions heavily and scores on an absolute scale. Q1: What best explains the gap? Q2: Which approach should the analyst take?

Show the solution
  1. Q1: Look for methodology differences. The two providers use different weights (governance versus carbon) and different scoring bases (relative versus absolute).
  2. These differences are enough to explain a large gap without either being wrong.
  3. Q2: Because ratings are not standardised, the analyst should review the underlying indicators and weights, and use the ratings as one input, not as a final answer.
  4. The analyst should not average the scores blindly or assume one is an error.

Answer: Q1: Differences in weighting and relative versus absolute scoring. Q2: Examine the underlying indicators and use the scores as one input.

Example 2

Vignette: Delmar Foods, a global packaged food company, wants to report climate-related governance, strategy, risk management and targets. Separately, its investor Halden Asset Management wants sector-specific, financially material metrics for comparing Delmar with peers. Q1: Which framework suits Delmar's climate reporting? Q2: Which standard suits Halden's comparison? Q3: What stewardship activity could Halden do?

Show the solution
  1. Q1: Governance, strategy, risk management, and metrics and targets are the four pillars of TCFD, which is climate-focused.
  2. Q2: Sector-specific and financially material metrics for investors point to SASB.
  3. Q3: Under a stewardship code, an institutional investor engages with the company, votes proxies and reports on its activity. Halden could engage with Delmar about its climate disclosures and vote accordingly.

Answer: Q1: TCFD. Q2: SASB. Q3: Engagement with Delmar and proxy voting, with reporting on the outcomes.

Exam tips

  • Match clue words to frameworks first; this settles many questions in seconds.
  • Expect questions on why ratings differ; the answer is methodology, not error.
  • Watch for absolute words like always and all in answer options on ratings and regulation.
  • Answer from the vignette's facts about the regime or provider, not from what you think applies elsewhere.
  • Know the purpose of each framework, not the fine detail.

ESG Market Overview, Frameworks and Standards in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ESG Market Overview, Frameworks and Standards: frequently asked questions

What is the difference between SASB and GRI?

SASB sets industry-specific standards focused on financially material information for investors. GRI focuses on a company's impacts on the economy, environment and people and serves a wide range of stakeholders.

Why do ESG ratings differ between providers?

Providers choose different indicators, weights, materiality views and methods for missing data, and some score relative to peers. There is no single standard method.

What does TCFD cover?

TCFD covers climate-related risks and opportunities. Its recommendations are organised around governance, strategy, risk management, and metrics and targets.

What is a stewardship code?

It sets expectations for institutional investors on engaging with companies, voting proxies and reporting on their stewardship. It aims to encourage long-term value creation and accountability.