These days, it seems like everyone’s talking about ESG reporting. But what does ESG really mean? It isn’t just another trendy business acronym. In fact, it’s the beginning of an important movement towards better accountability for the impact that the business sector makes on our world.
🤔 What is ESG?
ESG stands for Environmental, Social and Governance. It’s a measurement of your company’s internal culture, as well as its impact on and contribution to the environment and society.
When you publish an ESG report, you disclose data about your company’s environmental impact, social commitments, and the way your company is governed. These reports help your investors and your consumers make more informed decisions.
👩💻ESG vs. CSR
Here’s where the confusion begins. CSR stands for Corporate Social Responsibility, which is similar to—but not quite the same as—ESG.
Way back in the 1800s, wealthy businessmen like Andrew Carnegie and John D. Rockefeller began donating millions of dollars to pillars in need. In more recent decades, the responsibility for doing good moved away from shareholders and back onto the company. Brands like TOMS, Salesforce and Starbucks have paved the way for ethical sourcing, philanthropic investing, and environmental impact.
So in some ways, ESG is an evolution of CSR. Lexology explains that “While CSR aims to make a business accountable, ESG criteria make such business’ efforts measurable.” CSR is a way for companies to set environmental and ethical goals, whereas ESG offers a universal standard to make CSR efforts measurable and transparent, helping your customers and your investors make more informed purchase decisions, and allowing your existing team and potential hires to evaluate you as an employer.
So while CSR helps you set intentions and stay accountable, ESG gives you a clear framework for measuring your success.
Here’s an example. If you’re a tech company, you might undertake CSR by announcing your intention to lower your carbon footprint and help local communities. Your ESG reports will disclose the specifics within your CSR policies — for example, you might commit to reducing your carbon footprint by 30% and donating $250,000 to a selection of 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 several factors you can report on.
The environmental element of ESG refers to how a company’s business activities impact the planet. From GHG Scope 1 to Scope 3, this category involves data on carbon emissions, waste management, water usage, and more.
Here’s a list from PwC:
- Climate change
- Carbon emissions
- Product carbon footprint
- Financing environmental impact
- Climate change vulnerability
- Natural resources
- Water stress
- Biodiversity and land use
- Raw material sourcing
- Pollution and waste
- Toxic emissions and waste
- Packaging material and waste
- Electronic waste
- Environment opportunity
- Opportunities in clean tech
- Opportunities in green building
- Opportunities in renewable energy
The social part of ESG analyses the internal culture of an organization, and its external impact on communities. It takes into account measurements like diversity and inclusivity, product safety, privacy, equal access, and human rights.
Here’s a list from PwC:
- 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
The governance aspect of ESG refers to how a business is managed internally. This involves data around the diversity of a company’s board, the salaries of executives, business ethics, and political contributions.
Here’s a list from PwC:
- Corporate governance
- Board diversity
- Executive pay
- Corporate behavior
- Business ethics
- Anti-competitive practices
- Corruption and instability
- Financial system instability
- Tax transparency
🔎 ESG reporting standards
As of now, there are more than 600 different standards around the world for reporting on ESG. Different countries and regions have their own ESG requirements, and 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 and boohoo’s factory worker exploitation).
This is a 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.
For now, some people are pushing for global standardization — but this could be a long way off.
☝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.
It’s now mandatory for certain companies in the EU, thanks to the Sustainable Finance Disclosure Regulation (SFDR). In the UK, some companies are required to report data around their emissions, anti-corruption practices, and human rights.
In the US, there are no federal ESG requirements. 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, 92% of S&P 500 companies published sustainability reports in 2020. Other than building a better company culture and contributing to a healthier planet, there are plenty of reasons to publish ESG data.
✅ Future regulation
Reporting on ESG takes time and resources to get underway. 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 framework for making ESG a reality.
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.
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.
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.
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 minimize risk.
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.
- Start 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.
- Then 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’re achieved them.
- Then, 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, and 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!
🎬 A final word
Whether you’re required to report on your company’s ESG metrics or not, it’s a good idea to start thinking about what it would take to do so. In the near future, it’s highly likely to become mandatory reporting for most organizations. And even if it doesn’t, staying on top of it is good for your customers, your investors, and — let’s face it — the world we live in.
Need help getting started? Talk to the team at Greenly. We’ve helped companies of all shapes and sizes measure, reduce and offset their emissions for better ESG reporting and a greener future.
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