November 5, 2020
When screening potential investments, investors often consider a company’s impact in these E SG buckets, along with its long-term risks, opportunities and financial performance. Potential customers and employees may also evaluate a company’s impact on the world through a range of company and external sources to decide if they want to work with or buy from you. Some NGOs are working to uncover companies’ performance on a range of ESG factors including Greenhouse Gas (GHG) emissions and human rights in the supply chain. These entities are publicly shaming poor performers, especially those who have public commitments to the contrary.
Clearly communicating how your firm’s purpose is aligned to your ESG reporting is crucial. It demonstrates how your business creates value for a range of stakeholders.
What is ESG reporting?
ESG reporting is the disclosure of data explaining a business’s impact and added value in three areas: environment, social and corporate governance. Just as a company would produce financial reports, ESG or sustainability reports provide a summary of quantitative and qualitative disclosures supported by analysis of performance across these ESG factors.
Examples of these factors:
- Environment: Climate change and carbon emissions, air and water quality, biodiversity, deforestation, energy efficiency, waste management
- Social: Customer satisfaction, data protection and privacy, gender and diversity, employee engagement, community relations, human rights, labor standards
- Governance: Board composition, audit committee structure, bribery and corruption, executive compensation, lobbying, political contributions, whistleblower programs
Many companies chose to integrate their ESG reporting in their annual reporting to demonstrate how sustainability is embedded in their business; however, there is a gap between demand for ESG information and supply. Investors especially, want more financially material and higher quality information to inform their decisions. This gap is driven by several factors including, non-mandatory reporting regimes, a range of ESG reporting standards and frameworks and costs to collect and report data.
Why is ESG reporting necessary?
Countries are steadily increasing regulations regarding corporate ESG data reporting. While not yet mandatory in every country, many companies are already voluntarily providing their ESG data because they understand its importance in communicating their business strategy and purpose. For example, several ESG standards and frameworks, including the Carbon Disclosure Project (CDP), Task Force on Climate-related Financial Disclosures (TCFD), and Science-Based Targets initiative (SBTi), are seeing increased compliance alongside more traditional reporting such as the Global Reporting Initiative. In addition, third-party and specialized ESG databases run by research and rating agencies, governments, NGOs, and academic institutions have created scoring and rating systems to build a better picture of a company’s ESG performance. As of July 2020, 90% of companies in the S&P 500 have already made publishing their annual corporate sustainability/ESG reports the standard.
According to PwC research, 65% of investors said that their motive for taking ESG issues into consideration was to help manage investment risks. By reporting on ESG performance improvements, companies send a signal to investors that they can mitigate risks and generate sustainable long-term financial returns. Companies that don't provide ESG reporting can be overlooked by investors or their ESG profile may be created by a third party research firm providing sustainability reports to investors, without company input or control. By being transparent and producing your own ESG reporting, you can present a comprehensive sustainability and value story.
Alongside investors, millennial and Gen Z consumers are a significant driver for ESG reporting. According to Bank of America, 92% of Gen Z consumers would switch to a brand that supports ESG issues versus one that does not. Not only is an ESG focus beneficial for your customers, it also helps attract new talent with ninety-four percent of Gen Z respondents believe companies should address ESG issues, along with 87% of millennials.
How to report ESG information:
Reporting ESG information with your financial results can benefit your company by presenting a sustainability story that is aligned to business strategy and financial performance.
To start reporting your ESG data you need to:
- Identify the range of stakeholders impacted by and impacting your company;
- Map your material sustainability issues inside and outside your business to relevant; stakeholder groups, e.g., GHG emissions, supply chain human rights, gender diversity;
- Understand the relative importance of issues to your stakeholder groups and how best to report progress to them;
- Formulate your ESG management framework including: focus ESG issues, performance metrics, targets, initiatives and internal and external reporting standards and frameworks;
- Mobilize the internal resources, teams and data required to meet the needs of your intended reporting and bring them on the reporting journey;
- Communicate externally how your ESG management framework and reporting reflects your material issues and aligns with your business strategy;
- Report your ESG performance using your ESG management framework and continually improve it by engaging with stakeholders and understanding emerging sustainability issues affecting your business.
The focus of an ESG report should be the company’s environmental, social and governance-related risks and opportunities which are connected to the risks and opportunities of company-wide value creation. Transparently share your short and long-term plans to improve in your ESG focus issues, whether that be decreasing the company’s carbon footprint, attracting diverse talent, or improving labor practices. The actions in your plan must be specific, practical and transparent. Since these reports will be read by investors, customers, employees, NGOs and prospects, the messaging in your report should mirror your target audience’s focus.
Reporting ESG information with your financial results can benefit your company by presenting a sustainability story that is aligned to business strategy and financial performance.
Post reporting, it is essential that members of your sustainability, risk, and operations teams all have a cohesive understanding of the company’s ESG performance and actions including alignment with wider company strategy.
