With a demand for transparency in social, sustainable, and responsible practices on the rise, the need to find out everything there is to know about ESG reporting is becoming increasingly more important. Companies have identified that one of the biggest challenges to advancing sustainability for the future is incorporating it into its supply chains, strategies, and operations; this is where Environmental, Social, and Governance (ESG) Reporting comes to life.
Currently, many businesses have pivoted towards business models that are sustainable, equitable, and even regenerative. To achieve this monumental shift, these companies had to consider ESG Reporting as the key to unlocking a net positive approach.
The Importance of ESG Reporting
Our ability to live on this planet comfortably is experiencing a state of fragility. A brief skim over any news platform, and one will examine a never-ending onslaught of the continuing social and environmental crisis we face. The global economy is, without a doubt, a massive contributing factor to the existing environmental and social inequalities.
While it is a cause for concern for everyone, there is a newly heightened awareness among businesses and its connected stakeholders. It is becoming more and more vital for companies that people work for, buy from, and invest in to attend to climate change, social responsibility, and environmental sustainability through ESG Reporting.
What Is ESG Reporting?
Sustainability reporting is defined by the Global Reporting Initiative (GRI) as the exercise of companies, revealing in the form of disclosures, the most significant environmental, social, and economic impacts that exist as a result of their business activities, and therefore accepting accountability for these impacts and taking upon the responsibility of managing them.
In other words, the goal of ESG Reporting is said to be the capturing of all the non-financial risks, as well as non-financial opportunities, that exist in a company’s daily activities.
ESG remains a challenging and complex concept to understand, regardless of its critical importance and sudden burst in popularity. Many different entities have provided direction concerning ESG reporting. As a collective, all these frameworks explain the following about the role of ESG Reporting:
- It guides the what and hows of reporting
- Compares and evaluates companies against one another
- Aggregates and audits ESG records for stakeholders
Over the next few years, you can expect more ESG reporting to be present in a company’s financial reports.
Why Is ESG Staying?
These multi-faceted, global challenges are not going anywhere; anytime soon. Stakeholders are therefore demanding that companies should be a good representative of all capital. Meaning they are required to be a representative of financial capital, natural capital, and social capital.
Companies should have the mandatory governance framework in place to support such a global phenomenon. As a result, investors are starting to incorporate ESG elements into investment decisions, making their perspective of obtaining capital of ESG importance, in both the debt and equity aspects.
What Constitutes to the Environmental Pillar?
From a reporting perspective, the environmental pillar is the most complex of the three pillars, and its criteria considers how a company performs in nature. Under this environmental pillar, the focus is on the environment and what affects it, such as emissions like greenhouse gases. Water, air, and ground pollution also affect the environment.
Another effect on the environment can be seen in a company’s production process, and whether it uses recycled or virgin materials to produce products and services, that will either end up in a landfill or get cycled back into the economy. Similarly, a company is supposed to be a good ambassador in protecting its water resources. More so, biodiversity and deforestation disclosures also fall under this pillar as a result of land use.
Aside from all the negative impacts mentioned in the paragraph above, companies should comment on the positive impacts of sustainability that it provides under this environmental pillar.
What Constitutes to the Social Pillar?
Under the social pillar, companies tend to report on employee matters and the management of labor progress and practices. Product liabilities concerning product quality and safety are also a point of communication.
Companies tend to report on their health and safety standards and existing contentious issues with regard to sourcing. Overall, the social criteria of this pillar examines how a company manages its relationships with customers, employees, suppliers, and the communities it operates in.
What Constitutes to the Governance Pillar?
The dominant challenges that fall under the governance pillar involve broad diversity, shareholder rights, compensation for executives, and its alignment through sustainability performance. Furthermore, it includes corruption and anti-competitive practices of corporate behavior.
Governance deals with a particular company’s executive pay, leadership, internal controls, audits, and shareholders’ rights.
How Is This Relevant to Your Company?
Not all segments of the economy will be burdened by identical ESG issues. From an ESG perspective, materiality is the difference in what matters to each sector. Businesses should only account for issues that are material to them and their relevant stakeholders. A new concept called double materiality has recently been established, where financially material issues in a given industry are now being paired among socially and environmentally material issues.
How to Do ESG Reporting?
Reporting is synonymous with the ESG framework. There is currently no standard ESG framework, and only a broad consensus on the issues covered by it exists. As a result, businesses trust the standards of sustainable reporting to determine what they are required to report.
Reporting is usually the application of two or more frameworks. The two most frequently used frameworks are the Sustainable Accounting Standards Board’s standards (SASB) and the Global Reporting Initiative (GRI). Thus, ESG reporting is essentially completed through the publication of a sustainability report.
More and more organizations are starting to disclose its ESG performance, over and above its standard report through web pages.
ESG Reporting is all about being able to invest money into valued places. As ESG-minded companies gain more traction, investment firms are tracking their performance. In the future, organizations will most likely be required to publish annual reports that extensively deal with ESG approaches and their overall results. As of now, some might call ESG an investment philosophy, while others consider it as a core value.