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What is ESG reporting, and should you be doing it?

In this article we’ll delve into what ESG reporting requires, why it’s important in today’s society, and what benefits it can bring to companies.
Business
2023-04-21T00:00:00.000Z
en-us
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These days, it seems like everyone’s talking about ESG reporting. But what does ESG actually mean, and why are companies reporting on ESG metrics? 

ESG goes beyond being just another passing business acronym. It represents a comprehensive strategy aimed at minimizing negative impacts and maximizing positive contributions to the environment, society, and governance structures.

In today's world, ESG has taken on even greater significance. Our planet is grappling with numerous environmental challenges, including the pressing issue of climate change. Additionally, there is a growing recognition of the significance of social issues such as inequality and human rights.

In light of these factors, companies with robust ESG credentials find themselves in a prime position to thrive in the future. This trend is expected to persist as sustainability continues to gain traction and the awareness of its importance spreads.

👉 In this article we’ll delve into what ESG reporting requires, why it’s important in today’s society, and what benefits it can bring to companies.

What is ESG?

ESG, which stands for Environmental, Social, and Governance, encompasses the measurement of your company's internal culture and its impact on the environment and society.

When you release an ESG report, you provide transparent data regarding your company's environmental footprint, social commitments, and governance practices. These reports serve as valuable tools for investors and consumers, enabling them to make well-informed decisions.

By embracing ESG reporting, you demonstrate your company's dedication to accountability and sustainability, which not only fosters trust and credibility but also attracts conscientious stakeholders who prioritize responsible business practices. 

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ESG vs. CSR - what’s the difference?

Let's delve into the distinction between CSR and ESG. CSR, which stands for Corporate Social Responsibility, shares similarities with ESG, but they are not exactly the same.

Centuries ago, affluent businessmen like Andrew Carnegie and John D. Rockefeller generously donated millions of dollars to support those in need. In more recent decades, the responsibility for promoting social good shifted from shareholders to the companies themselves. Esteemed brands such as TOMS, Salesforce, and Starbucks have been pioneers in ethical sourcing, philanthropic investing, and environmental conservation.

ESG can be seen as a progression from CSR. According to Lexology, while CSR focuses on holding businesses accountable, ESG criteria enable the measurement of such efforts. CSR allows companies to establish environmental and ethical objectives, whereas ESG provides a universal standard to quantify and disclose CSR initiatives. This transparency helps customers and investors make well-informed purchasing decisions, and allows both current employees and potential candidates to assess a company as an employer.

In essence, CSR helps set intentions and ensure accountability, while ESG offers a comprehensive framework for assessing and quantifying success.

Here's an example to illustrate the relationship between CSR and ESG. Suppose you're a tech company aiming to implement CSR practices. You might publicly declare your commitment to reducing your carbon footprint and supporting local communities. Through your ESG reports, you would outline the specific details of your CSR policies. For instance, you might state a goal of reducing your carbon footprint by 30% and pledging to donate $250,000 to various local charities.

ESG reporting criteria: what’s included?

As its name implies, there are three key pillars to ESG reporting: environmental, social, and governance performance. Within each of these categories are a multitude of different factors that a company may select to report on.

👉 To find out more about ESG criteria, why not read our article on the topic.

Environmental

The environmental element of ESG refers to how a company’s business activities impact the planet. Each industry has different environmental criteria that depend on how a company operates and produces goods, as well as the regulations that apply to it. 

Examples of metrics that a company might use to measure their environmental impact include: 

  • Company carbon emissions
  • Product carbon footprint
  • The environmental impact of financing 
  • Climate change vulnerability
  • Use of natural resources
  • Use of water resources
  • Biodiversity and land use
  • Raw material sourcing
  • Pollution and waste
  • Toxic emissions and waste
  • Packaging material and waste
  • Electronic waste
  • Opportunities in clean tech
  • Opportunities in green building
  • Opportunities in renewable energy

Social

The social part of ESG analyzes the internal culture of an organization, and its external impact on communities. At its core, ESG social is about human rights and equity – an organization's relationships with people, as well as its policies and actions that impact individuals, groups, and society.

Examples of metrics that a company might use to measure their social impact include: 

  • Human capital
  • Labor management
  • Health and safety
  • Human capital development
  • Climate change vulnerability
  • Product liability
  • Product safety and quality
  • Chemical safety
  • Financial product safety
  • Privacy and data security
  • Responsible investment
  • Health and demo risk
  • Stakeholder opposition
  • Controversial sourcing
  • Social opportunity
  • Access to communication
  • Access to finance
  • Access to healthcare
  • Opportunities in nutrition and health

Governance

The governance aspect of ESG refers to how a business is managed internally. Good governance is vital for an organization's long-term success and includes risk management, decision-making, transparency, compliance, and ethical behavior. 

Examples of metrics that a company might use to measure their governance impact include: 

  • Corporate governance
  • Board diversity
  • Executive pay
  • Ownership
  • Accounting
  • Corporate behavior
  • Business ethics
  • Anti-competitive practices
  • Corruption and instability
  • Financial system instability
  • Tax transparency

👉 Read our article to learn more about ESG reporting criteria.

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ESG reporting standards

There are more than 600 different ESG frameworks in existence around the world that aim to  facilitate ESG reporting, tracking, and progress monitoring. This can be incredibly overwhelming for companies and makes it difficult to know which frameworks to follow and implement - the situation is further muddied by the fact that different stakeholders may ask for completely different information. 

Another issue with the current ESG landscape is that since there’s no standard reporting format, some companies highlight certain flattering metrics and downplay others. For example, automotive company Volkswagen and fashion retailer Boohoo scored highly on their ESG reports, right before their respective scandals (Volkswagen’s diesel car emissions controversy and Boohoo’s factory worker exploitation revelations).

The complex ESG reporting landscape is a real problem both for companies who want to start reporting, and for consumers and investors who want to be able to reliably compare data from different companies. This had led to calls for global standardization of ESG reporting.

Some sectors have heeded these criticisms and created standardized ESG reporting frameworks. Take the private equity sector for example, the ESG Data Convergence Initiative aims “to drive convergence around a standardized set of ESG metrics and a mechanism for comparative reporting to benefit all stakeholders in the private markets”. However, the framework is voluntary and PEs are still subject to a multitude of different ESG reporting demands outside the scope of the framework. 

👉 To read more about the ESG Data Convergence Initiative, check out our article on the topic.

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Is ESG reporting mandatory?

ESG reporting has become increasingly popular in the last few years, as corporate sustainability becomes a key selling point for companies around the world. But it’s only mandatory in certain places, and for certain companies.

EU

ESG reporting is now mandatory for certain companies in the EU, thanks to the Sustainable Finance Disclosure Regulation (SFDR). To learn more about this regulation and the reporting requirements why not read our article on the topic. 

UK

ESG reporting is now required for major UK companies (ie. companies that are publicly 'quoted' or 'listed', whose annual turnover exceeds £500 million, or who have more than 500 employees). They must publish an annual strategic report. The report includes information on ESG-related items, such as the business's environmental impact, employee disclosures, social, community, and human rights issues, and the company's policies on each.

US

In the US, there is no federal ESG reporting requirement. However, the SEC requires that public companies disclose environmental compliance costs and ESG-related risks and opportunities to investors. These companies are also required to integrate and publish a code of corporate behavior and ethics.

What are the benefits of ESG reporting?

Even if you’re not required by law to report on your company’s ESG metrics, there are plenty of benefits to disclosing your company’s environmental, social and governance impact.

👉 Many businesses include ESG reports in their annual reporting processes. In fact, 96% of S&P 500 companies published sustainability reports in 2021.

Other than building a better company culture and contributing to a healthier planet, there are plenty of reasons to publish ESG data. Let’s take a look at some of these benefits below: 

✅ Future regulation

Reporting on ESG takes time and resources. Since it’s very likely that we’ll see it become mandatory for most companies in the near future, now is the perfect time to start building a team and a company strategy for making ESG a reality.

✅ Customers

Now more than ever, consumers are choosing products and services based on their ethics and environmental impact. In fact, 78% of Americans are more likely to buy from an eco-friendly brand. So, reporting on ESG (and working towards environmental targets) can be a smart move for sales and brand reputation.

✅ Investors

ESG investing has never been more popular. It’s estimated that by 2025, 50% of all professionally managed investments in the US will be ESG-mandated assets. 

Investors are looking for ways to generate returns from socially and environmentally responsible companies, and publicly disclosing data around your company’s impact is a sure way to attract interest from conscientious investors. On the other hand, companies that don’t disclose this data can be seen as higher-risk and less trustworthy.

✅ Team

The Great Resignation has made attracting and retaining top talent a challenge for almost every company. Young workers are more driven than previous generations to find workplaces that align with their values, and with 76% of millennials considering a company’s social and environmental impact before accepting an offer, voluntarily committing to staying accountable with ESG reporting is a great way to attract new talent. 

Even better, purpose-driven companies reportedly achieve 40% higher retention rates, which means ESG can become a powerful strategy for engaging and motivating your existing workforce.

✅ Financially

Although committing to ESG might seem like a big investment without financial return, companies that score higher on ESG reports actually show higher ROI, lower risk, and better crisis resilience. The changes you make along the way can also help cut operational costs (and boost profits up to 60%), expand and enter new markets, avoid government intervention, and improve productivity.

✅ Risk and operations

Conducting ESG audits and roadmaps reveals a lot about your company’s operations and potential risks — often, these are insights that wouldn’t have been uncovered otherwise. This can help you find ways to make your activities more efficient and streamlined, and minimise risk.

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5 keys to successful ESG reporting

Deciding to report on ESG is an important step, but the hard part is making it a reality.

Build a team

Set up a team inside the company who will be responsible for building a reporting structure that encompasses your goals, metrics, areas of focus, and a long-term roadmap.

Conduct with a stakeholder materiality assessment

A materiality assessment gives you a clear picture of where you are now, what’s happening in your industry, what matters to your stakeholders, and which areas of your business activities should be prioritized.

Set goals

Figure out what you’re already doing well, and what you could be doing better. Set clear, measurable and realistic goals that will clearly demonstrate whether or not you’ve achieved them.

Make a plan

Some call this a roadmap or a framework, but all that really matters is that you outline the steps you’ll need to take, the milestones you’ll mark, and the metrics you’ll measure along the way to your big picture goals.

Communicate, report and continue

Work out how you’ll track and review data, update your goals, and make your ESG commitments an integral part of your company culture. You’ll also need to plan out how you’ll communicate your goals and plans both inside your company and externally, and decide how often you’ll report on your progress.

Ultimately, ESG is a long-term game, so set realistic goals with regular check-ins, and focus on continual and gradual improvement. Don’t expect to get it perfect straight away!

What about Greenly? 

At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required. 

If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.

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