November 1, 2022Resources
As public scrutiny of companies intensifies in the age of the 24-hour news cycle and constant social media coverage, boards are under increasing pressure to justify and defend their corporate decisions. It’s also important to be ethical and accountable—alongside turning a profit. In parallel, there is increasing recognition that managing material sustainability risks and opportunities is, at the end of the day, just good business.
That’s where Environment, Social, and Governance (ESG) criteria come in. By embedding ESG management and reporting into their core operations, companies are responding to the interests of the public, customers, investors, and employees. Documenting ESG performance in reports is one way companies monitor their progress in meeting impact-related objectives.
ESG reporting is an effective way for companies to demonstrate their commitment to sustainability. It’s an organization’s opportunity to showcase the drive and legitimacy of its ESG agenda. It’s how they prove to the world they are not making empty promises or simply paying lip service.
This article provides an introduction to ESG reporting, but before we get into defining the processes involved in ESG compliance, let’s cover some basic ground about ESG: what is ESG? Why does it matter? How do you get started with ESG reporting?
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The ‘E’ in ESG relates to everything environmental: climate change, pollution, waste, natural resources, environmental trends, and opportunities.
Climate change’s impacts on resources and entire ecosystems are regarded as serious threats to global businesses, and companies are now actively seeking to respond to and transform their operational supply chain to meet the myriad of challenges at hand.
Investors, customers, and employees are increasingly interested in understanding what kind of impact a company has on its environment. This can include a company’s total carbon footprint which includes Scope 1, 2, and 3 emissions, its sustainability efforts, and ecological liabilities that make up its existing supply chain.
The social element in ESG addresses everything from inclusion programs, hiring practices, LGBTQ+ equality, and racial diversity in both the executive suite and staff overall. It also accounts for how a company advocates for social and civic good in the wider world, beyond its business operations.
The central question behind the ‘S’ in ESG investing is: how does the company improve its social contract, both within the company and in the broader community? How can a company manage its relationships with its workforce, the societies in which it operates, and the political environment?
Governance includes issues surrounding how the company is governed, including executive pay, diversity in leadership, policies on bribery and corruption, and how well that leadership responds to and interacts with shareholders. Governance speaks to the framework of authority and accountability. It’s about how the company’s board and management display effective leadership and drive positive change.
How transparent is a company? How much decision-making power do shareholders have? This facet of company culture is being prioritised because institutional and private investors, focused on good corporate governance, are attracted to companies that include a balanced number of board members.
Ultimately, for many people, ESG goes beyond the three-letter acronym to address how a company serves all its stakeholders: employees, communities, customers, investors, and the environment. Identifying the impact—positive or negative—that a company’s operations have on its stakeholders allows companies to stay accountable to them. Companies also realise how vital ESG performance is to investors, who increasingly see ESG performance as a measuring stick to a company’s overall performance.
ESG criteria are regularly used as a way to reassure investors and to see if a company is aligned with similar values before they invest. For example, investors may use data from ESG reports to screen investments and avoid companies that damage the environment or pose a risk to their reputation on any level.
ESG reporting is fast becoming a necessary segment of a company’s regulatory responsibilities. Since July 2020, about 90% of the companies in the S&P 500 have already created annual ESG reports and made them standard practice.
ESG reporting allows investors, customers and employees to identify the strengths and sustainability profile of the company itself. ESG reports contain summaries of quantitative and qualitative information and are complemented by a performance analysis in the E, S, and G areas to provide stakeholders with an insight into the goals, achievements, and impact of the business.
Simply put: ESG reporting is the disclosure of ESG data. Companies taking a leadership position on climate and social issues stand to strengthen their credibility and status amongst their customers, employees, policymakers, and campaign groups by improving transparency. With half of the global consumers believing climate change will negatively impact their lives, a proactive approach helps increase brand integrity, profitability, and competitiveness.
The framework surrounding ESG reporting is fast becoming more sophisticated, more legitimate, and more thoughtful. As such, ESG disclosure processes are evolving to meet the significant shift in awareness and priorities. With companies facing increased and explicit public demands and regulations, rapidly-evolving standards and expectations are emerging. ESG reporting can help your business drive transparency and clarify corporate positions.
Increasingly, companies look to improve and communicate on their Environmental, Social, and Governance performance because doing so is simply good business. The transition to carbon neutrality is long and requires the participation of businesses at every level in every sector. Together, we can make great strides toward sustainability.
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