ESG (Environmental, Social, and Governance) reporting is far from a new concept. Lately, it has picked up steam, given how crucial factors such as climate change, social justice and equality have begun to gain a standing among people.
Around the globe, corporations are adopting sustainable business practices and embracing sustainability. Reports by Mckinsey & Company states that over 90% of S&P companies provide ESG reporting in some form. As evidence of this transformation, there is a need to focus on a new era of accountability.
Why is ESG reporting turning out to be so important? That’s what we’ll explore in this article.
What Is ESG reporting?
ESG reporting is all about publicly sharing performance metrics related to an organization's environment, social, and governance. These metrics help companies measure their sustainability and ethical impacts on the environment, society, and economy. When presenting these reports, it also helps investors ascertain how ethical and compliant companies are.
As part of ESG reporting, firms disclose metrics such as carbon emissions, employee turnover, employee inclusion initiatives, and board diversity.
An ESG report focuses on these pillars:
- Environmental performance: It includes carbon emissions, energy consumption, waste management, and water consumption, among other things. ,
- Social performance: ESG reports can also include information about labor standards, including policies that promote diversity and inclusion.
- Governance performance: This section provides information about internal controls, such as board members and compensation policies.
Besides financial performance, ESG reporting lets consumers see how a company impacts society and the environment.
Evolution of ESG reporting
- Early awareness (Pre-2000s): Few companies recognized the importance of revealing information about social responsibility and environmental impact in the early 2000s. Initial discussions around corporate social responsibility (CSR) emerged, laying the foundation for future ESG considerations.
- Birth of ESG (Early 2000s): As social and environmental activism grew in the late 1990s and early 2000s, people became aware of issues like climate change. Socially Responsible Investing (SRI) gained traction as investors sought to align their portfolios with ethical values.
- Regulation and standardization (Late 2000s - Early 2010s): In the 2010s, ESG reporting changed significantly due to increased awareness, investor demands, and new regulations. For companies, the UN's Sustainable Development Goals (SDGs) set the base for a universal framework.
- 2020s: In the past decade, ESG has become deeply integrated with core business strategies. The TCFD (Task Force on Climate-related Financial Disclosures) urged companies to disclose climate-related risks and opportunities as climate-related risks gained prominence.
- Beyond reporting (Future): ESG reporting has the scope to evolve into comprehensive sustainability storytelling, engaging stakeholders with a company's purpose, values, and impact.
Why is there a need for ESG reporting in 2023?
Firstly, we're living in a time where businesses aren't just judged by their profit anymore. We know for a fact that saving our planet for future generations is more important than simply making tons of money. Think of Greta Thunberg and the hosts of other young eco activists demanding accountability. People, especially younger generations, want to know all about the products they buy and the services they use that aren't harming the planet or treating workers unfairly.
That's where ESG comes in. ESG reporting provides an important element of transparency that allows people from the outside to see how businesses function. It lets investors put their money where their values are and helps consumers make informed choices.
Information disclosure promotes accountability, which is critical to collaborating and solving problems. Additionally, organizations can keep track of progress, set benchmarks, and declare when they've hit their ESG targets. As a result, stakeholders will have more trust in you.
How to integrate ESG into business strategies?
Integrating ESG into business practices may assist companies in assessing and controlling their social, economic, and environmental impact. The following steps will help you implement ESG in your organization:
Analyze relevant ESG issues
An essential step in identifying ESG concerns is identifying the factors affecting your company's environmental, social, and governance performance
The evaluation will consider many things, like carbon emissions, water use, diversity on the board, human rights, ethical supply chains, data protection, and board composition. It's important to identify your business's and stakeholders' ESG challenges before you can create an ESG strategy.
Evaluate your performance
Depending on what you have specified as relevant, the performance of your ESG activities will be evaluated. Your company's performance can be compared to industry standards during this process.
Your ESG performance may also be discussed with stakeholders during the evaluation process.
Identify your targets and goals
Defining targets and goals involves creating quantifiable, precise objectives to boost your environmental, social, and governance performance. By reducing carbon emissions, increasing employee diversity, improving supply chain sustainability, or enhancing data privacy, a certain percentage of emissions can be reduced.
You should base your goals and targets on your assessment of current ESG performance and stakeholder expectations.
Making decisions based on ESG
When making decisions, ESG factors are crucial to consider. Integrate ESG factors into your decision-making processes and business strategy.
When conducting investments, mergers, and acquisitions, ESG risks and opportunities can be assessed when creating an ESG-centered business strategy.
ESG goals and targets can be aligned with company strategies. Making all important decisions incorporates ESG factors into sustainability considerations.
Engaging stakeholders makes it possible to understand better what investors, customers, employees, and suppliers think. Conduct polls, meetings, or focus groups and create sustainability reports.
The information you obtain from stakeholders about your ESG performance can help you identify areas for improvement.
Progress measurement and reporting
Measuring and reporting your ESG progress over time involves monitoring and communicating with stakeholders. You can measure your progress by looking at carbon emissions, employee turnover, and supplier diversity. Also, you might have to give investors an update on your ESG performance in your annual and sustainability reports.
So you need to keep track of your progress and let stakeholders know how the company is doing.
Benefits and challenges of ESG
Benefits of ESG transcend just appeasing consumers. There’s business sense in adopting ESG reporting. Here are some of the benefits:
- Brand value and reputation: Companies can boost their reputation by being environmentally friendly, ethical, and community-minded. An image that's socially and environmentally responsible can attract consumers and investors.
- Mitigating risks: Environmental disasters, labor disputes, regulation non-compliance, and other risks are better identified and mitigated by companies that incorporate ESG factors into their strategies.
- Access to Capital: ESG and values-aligned companies are increasingly attracting investors. Did you know that 49% of investors are willing to divest from companies that do not meet ESG standards? ESG practices are often more attractive to socially responsible investment funds and institutions, so these companies often have an easier time attracting capital.
However, there are some challenges to ESG reporting as well.
- Standardization and quality of data: No standardized metrics and reporting practices exist for ESG performance, making it difficult to collect reliable and consistent data.
- Long-term vs. short-term priorities: With investors focusing on short-term gains, ESG initiatives can lead to tension between long-term sustainability management and short-term returns.
Future of ESG reporting - what to expect?
It is likely that ESG (Environmental, Social, and Governance) reporting will become more standardized over time. This could also attract some complexity. How will the ESG reporting affect small businesses and accountants? Let us have a look.
- Corporate strategies will likely integrate ESG factors, and investors will demand more transparency. The growth of technology and data-driven processes might play a crucial role in the analysis of ESG data and reporting.
- The growth in demand for ESG reporting will create an indispensable role for auditors to ensure the accuracy and reliability of this information
- Although ESG reporting creates a huge demand for auditors it also comes with the cost. Auditors must navigate complex data sets, assess the reliability of ESG data, and establish appropriate audit procedures.
- The emergence of ESG reporting requires auditors to be up-to-date with their understanding of ESG reporting and its standards.
- Traditional audit procedures will undergo huge transformations to accommodate adjustments to address ESG-related risks and materiality considerations
The future of ESG reporting hugely depends on the Auditor's ability to adapt their procedures to effectively evaluate the quality and appropriateness of ESG data, ensuring compliance with reporting standards and regulatory requirements.
So it is safe to say that the emergence of ESG reporting provides auditors with wide opportunities for the growth and expansion of their business.
Reporting and disclosing ESG factors aid companies in gaining access to capital markets. Investors prefer companies that exhibit strong ESG performance over those whose practices might pose a greater financial risk. If you want to rank high among investors and be seen as a trustworthy brand, then this is a wave that you should definitely get behind!