The demand for ESG Reporting (Environment, Social, Governance) is on the rise. Not only are investors demanding these reports for their decision making, but the SEC has recommended that every publicly traded company should provide ESG Reports beginning the collection of data by December 2022. ESG Reporting is important for any organization to show investors and stakeholders that they are socially responsible stewards of our planet. Currently, 70% of organizations provide voluntary ESG Reports to investors.
The collection of qualitative and quantitative disclosures allows for investors to make informed decisions to screen investments. Investors are able to avoid financial risks that ESG Reports provide regarding a organization’s environmental risk or other social and government performances.
Environmental: The environmental criterion considers how organizations use energy and manage their environmental impacts in the planet. The “E” uses Scopes 1-3 to consider a company’s environmental impact across the board. 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.
The importance of ESG Reporting has resulted in an upsurge of demand by companies to add ESG to their annual reports to show their business practices prove their commitment to Sustainability.
Why Is ESG Reporting Important?
Even though ESG reporting is voluntary in some countries, and increasing number of governments are requiring ESG Reports as part of an organization’s Annual Report.
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.
The experts at PSCG can help your business efficiently navigate through the ESG world. Our integrated data and software include ESG analysis and ESG ratings into overall organizational performance. We will develop a GHG Reduction plan and a software unique to your organization.