More investors take the time to consider a company’s impact on the environment and the company approach to relevant social issues before committing their money. There is also pressure on companies from employees, customers, and other interested parties to deliver more transparency regarding these issues. The response for many companies is better articulation through Environmental, Social, and Governance reporting.
ESG Reporting Explained
Companies use ESG reports to disclose their approach to social, environmental, and corporate governance issues. These reports are produced by companies the same way they produce their financial reports and provide a summary of the company performance for the following ESG factors:
- Social – This section of an ESG report analyzes the companies performance regarding several issues. These issues include customer satisfaction, diversity, data protection, labor standards, employee protection, and human rights.
- Environmental – This section of the report observes the impact company practices have on carbon emissions, climate change, waste management, energy efficiency, and biodiversity.
- Governance – The final section of the ESG reports examines how the company deals with issues of self-governance like the composition of governance boards, bribery and corruption prevention, political contributions, lobbying, executive compensation, and support for whistleblowers.
- Some companies provide ESG reports along with annual financial statements. This commitment demonstrates to investors that sustainability efforts are just as relevant to the company as their efforts to make money. But many companies are still not delivering the quality or quantity of information regarding these subjects desired by interested parties.
- Companies and others in the industry identify several reasons the esired information may not become available. These reasons include:
- Lack of reporting requirements
- Inconsistent reporting standards
- The cost to record and accumulate ESG data
Importance of ESG Reports
The regulations for reporting ESG data are becoming stricter with time. Every country does not make it a requirement for companies to report this data. But many companies are taking a proactive approach and voluntarily sharing this information with the public. These companies understand that providing the public with access to ESG data is a relevant part of communicating their company purpose and business strategy to concerned parties.
The Science-Based Targets Initiatives, Climate-Related Financial Disclosures task force, and Carbon Disclosure project all report increased ESG reporting compliance from companies. The same is true for more traditional reporting outlets like the Global Reporting Initiative.
There are also a host of third-party databases controlled by government entities, non-government organizations, academic institutions, and research groups that use scoring and rating systems to keep track of the ESG data gleaned from companies. A July 2020 report showed that nine out of ten companies listed on the S&P 500 publish regular information about their sustainability efforts.
Sixty-five percent of investors that answered a PwC poll say they use information regarding ESG to mitigate investment risk. Investors feel that companies who report ESG data are better able to deliver long-term financial returns.
Many investors may overlook companies that do not self-report ESG data. Companies who fail to release this data should also be aware that third-parties are not always accurate when they produce reports. It is better for a company concerned with presenting information to investors to provide it themselves.
Reporting ESG Data
Companies that provide investors with an ESG report in line with their business practices will enjoy an advantage over other industry participants.
Company ESG reporting strategies should include:
- Identification of stakeholders impacting and impacted by business activities
- Match sustainability efforts to issues relevant to company and stakeholders
- Prioritize issues by importance and provide stakeholders with progress reports
- Formulate a complete framework for reporting ESG issues
- Acquire and mobilize resources to facilitate reporting efforts
- Continue to improve reporting standards and delivery
Action plans should be specific, transparent, and represent a practical approach to the relevant sustainability issues. Companies benefit from providing proof that they integrate sustainability with financial performance and business operations. Your sustainability team should also work in the aftermath of a report to evaluate the company’s ESG performance and develop ways to address any deficiencies in the process.