ESG reporting refers to the disclosure of a company’s environmental, social and governance data. An analysis of the performance of these ESG criteria summarizes the quantitative and qualitative information and is useful for investment reviews. ESG reports help investors to avoid companies that may pose a greater financial risk due to their environmental and social impacts.
While ESG reporting is still voluntary in most countries, more and more global regulations are being enacted around the world. Positive-minded companies understand the importance of communicating ESG data as part of their business strategy and corporate objectives.
What is ESG?
ESG stands for environmental, social and governance. Today’s issues and concerns are categorized under these three pillars. Issues such as climate risks and change, natural resources, pollution and waste, and environmental opportunities fall under the environmental pillar. The social pillar addresses issues of human capital, product liability, stakeholder resistance, and social opportunity. Corporate governance and corporate behaviour are two of the most important topics under the governance pillar. Other governance topics include board diversity, accounting, business ethics and tax transparency.
What is ESG reporting?
ESG reporting requires a comprehensive analysis of a company’s performance in terms of identified ESG risks, opportunities and other factors that may impact customers, investors, stakeholders and employees. An ESG report is a compilation of sustainability reports that demonstrate the company’s ability to meet requirements or achieve goals related to the three pillars: Environmental, Social and Governance.
Due to the benefits of disclosure, the demand for ESG reports is expected to increase in the coming years. In ESG reporting, a company discloses both quantitative and qualitative data on its operations and practices. This detailed report on the company’s action plan on various issues that may be of concern to stakeholders demonstrates the company’s resilience in the face of adversity. Companies also use ESG reporting to demonstrate their excellence in strategic planning.
This strategy of transparency of ESG information is proving to be a communication tool that helps investors make informed decisions about calculated risks and convince customers of a company’s opportunities and potential. ESG reporting provides potential investors with the answers to their questions and even a forecast of outcomes.
Why is ESG reporting important?
ESG reporting is not mandatory documentation, but rather a global reporting initiative by companies seeking to burnish their image through transparency and honesty in numbers and performance analysis. However, a proposal has been made for ESG reporting standards in 2021. With this foresight, ESG reporting is a long-term compliance tool. A company’s willingness to provide sustainability reports to its customers gives the impression that the company values being proactive.
A company’s stability and resilience attract customers, stakeholders and investors. According to recent surveys, companies that disclose ESG data are preferred by their employees over companies that refuse to provide such reports.
A company can demonstrate its growth through ESG reporting. In essence, ESG reporting can be used as a tool to effectively communicate corporate strategies to investors. As a result, companies that provide performance reports with organized evidence are more likely to be selected by investors.
The efficiency of ESG reporting in terms of disclosure justifies its growing importance as investors prefer to engage with companies that demonstrate stronger ESG performance. While ESG reporting keeps the company in check on the various aspects of each pillar, it also gives stakeholders and investors a sense of how the company is performing. Other benefits of ESG reporting include higher investment returns, crisis resilience, and lower risk rates.
Done right, ESG reporting can be used to promote a company’s business strategy, financial performance and sustainability story. Those that can provide such data will be favoured by investors.
How do you get started with ESG reporting?
ESG reporting includes report writing, data collection, and performance analysis, among other things. The challenge in writing an ESG report is that there is no set template. Therefore, one company’s report may not contain as much detail as another company’s. Nevertheless, there are commonly accepted steps throughout this process that could satisfy the presentation of ESG data once the templates are finalized. The following are common steps in preparing an ESG report.
Identify the potential customers, investors, employees or stakeholders. Every business, company or organization has its niche and target market.
Identify the issues according to the three criteria that would impact stakeholders. Stakeholders are those who are affected by a company’s activities. Issues that impact stakeholders can be as simple as not using paper, which impacts a company’s carbon footprint. On the other hand, it can be something as complex as employee insurance, which embodies a company’s attitude toward the social factor, access to healthcare.
Determine the urgency of the problems, the ESG factors affected, and the delivery of the solution. Often, problems or concerns have a corresponding due date. An example would be a crisis of financial instability that should be addressed as soon as possible. A well-developed action plan for such incidents demonstrates to investors the company’s ability to get back on its feet.
Establish a strategy or ESG management framework that includes ESG metrics, targets for ESG issues, and variables to better communicate strong performance. The Sustainability Accounting Standards Board has published a set of standards, the SASB Standards, that you can refer to when evaluating financial performance.
Conduct an internal ESG data collection. Most of the information needed for the presentation may already be in the company’s archives or files. If necessary, there are outside consultants such as the Reporting Foundation, a nonprofit organization that can assist both companies and investors with the assessment, and the Climate Disclosure Standards Board (CDSB), with its signature framework for assessing environmental information and performance.
Conduct ESG reporting to investors and stakeholders. Note the items that need improvement and plan a revised ESG framework.
What does this mean for you?
You need to track and manage ESG data. You must also publish your annual ESG report in accordance with leading disclosure frameworks and sustainability standards (UN SDGs, TCFD, SASB, DJSI, GRI, CDP).
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