ESG reporting is a popular way for investors to assess issues that reflect business value beyond financial performance. This is because ESG performance correlates with business longevity and reduced risk.
Customers, employees, and investors alike are attracted to companies that have a strong ESG profile with a record of commitment to achieving sustainability goals and targets. The main place to learn about business ESG performance is within their annual ESG reports.
❓ What is ESG Reporting?
ESG reports present data on environmental, social, and governance criteria that are material to a company. This data is used by investors and other stakeholders to evaluate how businesses pursue their goals, targets, commitments, and initiatives in these key areas.
ESG reports reflect both the performance for the current reporting year as well as the change over time. They contain both quantitative data, as well as qualitative summaries of the ESG strategy a business pursues.
However, the exact content of an ESG report varies business to business, as they are voluntary reports containing self-selected criteria that businesses deem material to their own operations.
Most businesses report according to the recommendations of well-known ESG standards and frameworks, which aids comparability across business sectors.
ESG reports are usually published annually and shared publicly on business websites. They are a key communication tool for disclosing a broader corporate vision beyond financial performance.
🔍 Why is ESG reporting important?
Over the past few decades, ESG has become a mainstream influence on investment decisions. While it began as a voluntary ethical business practice, it has evolved to a highly valued source of business information. Ninety percent of the companies listed in the S&P 500 produced ESG reports in 2020.
Several trends are driving the rise of ESG. Firstly, climate change risks are more prominent and costly than ever. Investors seek clarity from businesses on their ability to mitigate climate impacts and transition to a low carbon economy.
👉 Younger people are also choosing sustainable brands, products, and even employers. Sixty-two percent of Gen Z customers prefer brands that align with their environmental and social values. Seventy-six percent of millennials care about the sustainability of their employers.
Finally, interest from investors in ESG data has led to steady demand for better data for evaluating companies’ ESG performance. The reason is strong ESG performance correlates to higher financial returns, according to a report by Fidelity Investments.
These trends have led to a more recent shift towards regulations for ESG reporting standards for ESG criteria. Overall investment in stocks that report their ESG performance more than doubled from 2020 to 2021 up from $51 billion to $120 billion. Of course, regulations are driving some of this change.
The EU’s Corporate Sustainability Reporting Directive was approved in April, 2021. It could add 49,000 new companies to the ESG reporting roster by 2023.
ESG reporting is therefore on track to become mainstream practice as companies report under similar standards across different regions. Deloitte estimates that half all globally managed assets could be subject to ESG reporting mandates by 2024.
In other words, mandatory ESG reporting could soon replace voluntary ESG reporting as the norm. What does this mean for businesses? While many large corporations have reported their ESG data for many years, smaller companies face a steep learning curve.
To help with this problem more third-party evaluators and business intelligence software has arisen to support the newcomers to ESG reporting. Greenly offers a service for reporting carbon emissions, which is one of the most standard requirements across most ESG frameworks.
When companies report their ESG information to their stakeholders, they are able to craft a narrative that reflects their values. It reinforces consumer trust in brands, thanks to their transparent presentation of ESG risks and management approaches.
📑 What are the most important ESG Reporting standards?
ESG reporting is often described as an alphabet soup of acronyms for the standards and frameworks used by companies. These frameworks help businesses follow recommendations on the principles, measurement, methodologies, and presentation formats for publicly disclosing their ESG information.
Here are some of the most popular ESG frameworks:
CDP (previously the Carbon Disclosure Project) formed in 2000 and currently has about 10,400 reporting companies. The main goal of this non-profit is to compile data on corporate environmental impacts for climate change, forests, and water security.
ISO 26000 provides a set of standards corporations can use to structure their voluntary sustainability reporting. The standards cover seven core principles: environmental responsibility, human rights, governance, working relations, fair operations, consumer protection, and sustainable development.
The Global Reporting Initiative (GRI) was founded in 1997 and covers environmental, social, and governance issues. GRI created the first global standards for sustainability reporting in 2016. Over 10,000 companies report under GRI.
In collaboration with GRI, the International Financial Reporting Standards (IFRS) foundation announced its goal to develop a new global sustainability reporting standard to increase consistency and comparability for ESG reporting around the world.
In Europe, both the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Financial Disclosure Regulation (SFDR) will impact ESG reporting. The first requires a large number of companies to report on ESG topics, while the second aims at transparency regarding sustainable investments.
📚 How should ESG data be reported?
ESG data is unique because it is collected to demonstrate ethical values. In order to collect the data, the company must first adopt an ESG strategy which presents its values and goals. Therefore, ESG reporting is a vehicle communicating both the existing impact and intentions of a business.
Here are the core steps to take in the process of preparing a report:
1. Develop an ESG strategy 📝
A sustainability strategy helps businesses ground their ESG reporting with an approach that aligns with their overall business goals. When developing a strategy, near- and long-term goals for sustainability. Engage the different teams and company divisions to support the ESG strategy.
2. Gather information 💻
Many details required to measure and track ESG are available from the internal receipts, documents, memorandums, and reports of a company.
When gathering the data, it may help to streamline the process by hiring a service like Greenly which specializes in carbon management for your GHG emissions data.
3. Select an ESG framework 📋
Choosing a framework is easy when your investors request a specific format. If they have not done so, consider choosing a framework that’s most relevant to your business model.
For small and medium-sized businesses, for instance, B-Corps offers a more manageable ESG certification than GRI, which is more complex.
4. Apply transparency principles 💎
Nearly all ESG frameworks have recommendations about best practices for transparency. It is important to apply these principles from the start by establishing internal audit and review structures.
5. Share the business value of your ESG data 📢
Within the ESG report, ensure the data reveals a clear narrative regarding how environmental, social, and governance issues relate to the overall business strategy.
✅ ESG Reporting: our best practices
Communicate with infographics 📊
Using infographics is an excellent way to communicate the most important aspects of your report, so people can quickly interpret its data.
For instance, many companies start with a materiality map where they share the items with strategic value to the organization and its stakeholders. Placing this at the start of a report lays the foundation for the rest of the report.
Highlight the UN Sustainable Development Goals 💡
In 2015, the United Nations (UN) adopted 17 Sustainable Development Goals (SDGs) for enhancing sustainability around the world. These goals cover a wide range of issues from climate action to reducing hunger.
Companies can also include commitments to addressing these goals within their ESG reports. As a best practice, companies should define a baseline for a particular goal, and report towards a goal set for 2030.
Sustainable business benefits from continuous improvement, so setting targets and working steadily towards them can have a more lasting impact than a significant one-time action.
Follow the recommendations of well-known ESG frameworks 🔮
ESG frameworks are used to reduce the lack of consistency and make it easier to draw comparisons between companies in voluntary ESG reporting.
Some of the most popular frameworks include CDP (previously the Carbon Disclosure Project), the Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB).
The frameworks listed offer recommendations on the principles, criteria, and metrics used in reporting. Oftentimes companies will report under a variety of different frameworks and clearly state them in the report.
While there is no universal standard for ESG reporting, there have been more efforts to standardize ESG frameworks recently.
In March 2021, the International Financial Reporting Standards (IFRS) Trustees established an International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB) to develop global sustainability reporting standards.
ISSB will develop standards for investors, while GSSB and GRI will develop standards for multi-stakeholder entities.
In addition, different regions around the world have proposed laws for sustainability reporting, which would present their own standards used for compliance. The most notable example is the EU’s Corporate Sustainability Reporting Directive (CSRD).
Include TCFD climate risk reporting 📌
Another framework that is often included in ESG reporting is the Task Force on Climate-related Financial Disclosures (TCFD). Created by the Financial Stability Board (FSB) in 2015, TCFD is related to other ESG reporting, but differs in some respects.
Most ESG reporting focuses more on the positive impacts and improvements businesses can make on behalf of their stakeholders. TCFD recommends they incorporate future-oriented planning for climate risks and opportunities into their business strategy.
In TCFD reporting, companies assess the financial risk associated with the direct and indirect impacts of the climate change transition. They assess how well their business can respond to these risks in scenario analysis, which explores different warming pathways for the future.
The aim is to help businesses acknowledge and strategically prepare for the long-term impacts of climate change and the transition to a low carbon economy.
The UK became the first country to make TCFD reporting mandatory for 1,300 of the largest UK-incorporated companies. It enacted its law on April 6, 2022. The US SEC has a similar proposed requirement under review as of 2022.
Set future goals and targets 🎯
Forward-looking goals and targets improve the credibility of an ESG report. Investors seek information not only on past performance, but the overarching ESG strategy and how it is implemented within a business.
Especially for climate change, businesses should provide clarity on their long-term outlook for transitioning to a low carbon economy. This helps investors assess the potential for risks such as stranded assets.
Use the financial reporting timeline for ESG 📅
A best practice for ESG reporting is to adopt it as part of your annual financial review. Ideally, the CFO and Board of Directors will review ESG performance alongside the financial performance of a company.
Overtime ESG trends have encouraged more integration between ESG and the underlying business strategy. ESG and financial reporting have become integral to one another, particularly for investors purposes.
Companies can streamline their processes by using the same annual finance reporting timeline for ESG.
Identify ESG links to financial performance 📈
Given that investors are often looking at ESG performance from a financial lens, companies can facilitate easier review by estimating the financial impacts of their ESG activities.
Financial impacts from issues like energy cost reductions, savings from employee retention, route optimization, and product redesign offer concrete evidence of the value of your ESG activities.
Highlight the board’s ESG oversight 👀
The report should include the structure in place for board members’ review of ESG activities and performance.This way, investors have a clearer picture of their level of oversight.
Companies whose boards view ESG an important strategic asset are more likely to persuade investors to take their efforts seriously.
Incorporate ESG in risk management 💣
ESG criteria are increasingly seen as a source of business risk and opportunity. In your ESG report, it’s important to describe how ESG integrates into existing enterprise risk management (ERM) systems.
For more details on how to achieve this, use the guidance of the Committee Sponsoring Organizations of the Treadway Commission (COSO).
Internally audit ESG reporting processes 👌
Similar to corporate financial accounting, ESG reporting should be subject to control measures to ensure its accuracy. Companies can opt to use external audits, or third-party assessments of the data for verification.
The procedures and control processes used to audit the reporting information should be clearly disclosed within the report as well. This improves investor confidence in the quality of the data provided in an ESG report and aids transparency.
Offer downloadable data 📩
Help investors and stakeholders access your data by including it in a downloadable tabular format. This way external reviewers can easily analyze the data.
Tell your ESG story 💚
Capture the broader ESG vision by telling the story of how your organization perceives the value of ESG and why it engages in the activities. This will help ensure your ESG activities resonate with a broader audience.
🌷 What about Greenly?
With Greenly’s platform, calculating your carbon emissions and sharing the data in your annual ESG report is easy. Plus, we help you determine the best ways to reduce your carbon footprint.
Greenly specializes in bringing the latest carbon management strategies to businesses of all sizes. Sign up for a demo today.
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