What is ESG Reporting, and Why is It Important?
How ESG Initiatives help build business resilience and long-term value.
The demand for transparency on sustainable and socially responsible practices is on the rise. Companies are accountable to their various stakeholders like investors, customers, employees, and nongovernmental organizations (NGOs) that want to evaluate a company’s impact on the world. Environmental, Social and Governance (ESG) analysis and reporting can provide valuable insights and help create long-term value for stakeholders. It can significantly impact the financial metrics of a company and better inform investment decisions.
What Is ESG Reporting?
ESG reporting refers to the disclosure of data covering the company’s operations in three areas: environmental, social and corporate governance. It provides a snapshot of the business’s impact in these three areas for investors.
The analysis of performance across these ESG factors summarizes quantitative and qualitative disclosures and helps screen investments. ESG reporting helps investors avoid companies that might pose a greater financial risk due to their environmental performance or other social or governmental practices.
- Environmental: The environmental criterion considers how companies use energy and manage their environmental impact as stewards of the planet. The “E” considers how a company uses resources across the board – Scope 1 to Scope 3. Factors considered are energy efficiency, climate change, carbon emissions, biodiversity, air and water quality, deforestation, and waste management. Companies that do not consider these environmental risks may face unforeseen financial risks and investor scrutiny.
- Social: The social criterion examines how a company fosters its people and culture, and how that has ripple effects on the broader community. Factors considered are inclusivity, gender and diversity, employee engagement, customer satisfaction, data protection, privacy, community relations, human rights, labor standards.
- Governance: Governance considers a company’s internal system of controls, practices, and procedures, how an organization stays ahead of violations. It ensures transparency and industry best practices and includes dialogue with regulators. Factors considered are the company’s leadership, board composition, executive compensation, audit committee structure, internal controls, and shareholder rights, bribery and corruption, lobbying, political contributions, and whistleblower programs.
There has been a massive surge in ESG reporting in the past few years. Many companies now integrate their ESG reporting in their annual reporting to demonstrate how sustainability is embedded in their business.
Why Is ESG Reporting Important?
While it’s still voluntarily for most countries, there are increasing global regulations regarding corporate ESG data reporting.
Proactive and future-focused companies understand the importance of communicating ESG criteria in their business strategy and purpose. They are voluntarily providing their ESG data in their annual reporting.
- Companies with strong ESG performance have demonstrated higher returns on their investments, lower risks and better resiliency during a crisis.
- As of July 2020, 90% of companies in the S&P 500 have already published their annual corporate sustainability/ESG reports.
ESG transparency will be a key focus for companies in 2021 and beyond. Investors are increasingly considering ESG issues to help manage investment risks. The Deloitte Center for Financial Services expects ESG-mandated assets in the United States to comprise 50% of all professionally managed investments by 2025. ESG performance improvements and reports show investors how a company mitigates risks and generates sustainable long-term financial returns.. ESG performance improvements and reports show investors how a company mitigates risks and generates sustainable long-term financial returns.
On the other hand, companies that do not provide these reports show a lack of transparency and concerned investors may overlook them as potential investments.
While the demand and practice of ESG reporting have increased, there still lies a considerable knowledge gap between ESG information and supply. This gap is driven by several factors like varying ESG reporting standards and frameworks, nonmandatory reporting regimes, and steep costs to collect and report data. These can hamper the efforts to offer higher-quality data to investors to inform their decisions. Fortunately, companies can work with experts to develop and incorporate ESG balanced strategies into their overall performance.
Checklist for ESG reporting:
- Build an internal team to create a reporting framework that includes ESG issues, targets and initiatives, performance metrics, internal and external reporting standards.
- Conduct materiality assessment and gauge the relative importance of sustainability issues for various stakeholders.
- Work with ESG solutions experts who can provide real-time data to map your ESG needs and provide the resources and insights to meet reporting needs that comply with stakeholders, industry and even non-profit standards.
- Create an effective communication strategy to showcase your ESG management framework and reporting for external and internal stakeholders.
- Report your ESG performance and show how it aligns with your business strategy.
- Continually work on and improve upon your ESG performance by engaging with stakeholders and understanding emerging sustainability issues affecting your business.
ESG and Sustainability
The terms “ESG” and “sustainability” are used interchangeably, especially when it comes to benchmarking and disclosing data.
Sustainability is an umbrella term for many green concepts and corporate responsibility, while ESG has become the preferred term for investors and the capital markets. The industry may have started with sustainability efforts, but it has evolved to include ESG practices, performance, reporting and relevance to capital opportunities. ESG data helps identify risk-adjusted returns. Emphasis on all three pillars has aided the shift in how companies measure and disclose their performance.
ESG reporting and disclosures help companies get access to capital markets and secure their license to operate.
Strong ESG performance leads to preferential treatment from investors compared to companies whose environmental or other practices may pose a greater financial risk. Robust sustainability and ESG strategies increase business resilience and help improve overall company performance.
With expert help, like Sphera’s ESG solutions, businesses can efficiently navigate through the ESG world. Integrated data and software services include ESG analysis and ESG ratings into overall organizational performance.