What Is ESG Reporting and What Can It Do For Your Company?
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Summary:
ESG reporting is a measure of how sustainably responsible a company is and stands for “environmental, social, and governance.” ESG reporting is a tool that your company can use to demonstrate your values and goals and build trust with your client base and investors.
In recent decades, it has become increasingly popular for brands to promote their products through new and different lenses: environmental impact, social responsibility, and internal governance practices. These three areas can be reported on and shown off to potential customers through ESG reporting.
Keep reading to learn the details of a comprehensive ESG report, the pros and cons of reporting, ESG reporting standards, and how to get started.
What does “ESG” stand for?
“ESG” stands for environmental, social, and governance. An ESG report, also sometimes called a “sustainability report,” is used to show how responsible a company is in those three areas and includes qualitative and quantitative data about all three topics. Depending on what industry you work in, you may want to focus on some ESG data points over others.
Pro Tip
Different countries use different reporting frameworks for ESG metrics. For instance, in Europe companies use the Corporate Sustainability Reporting Directive (CSRD), which is a revised version of the Non-Financial Reporting Directive (NFRD). This requires European companies to report how sustainability issues affect their companies’ performance.
What does your ESG score mean?
Your ESG score shows off how good of an investment you are to customers and investors. It’s a measure of how environmentally conscious you are, how you support people and communities, and how your company operates to keep its practices up to the highest industry standards.
To a consumer, your ESG performance indicates that they can confidently spend their dollars on your product and rest assured that your company’s values and morals align with their own. Though it’s an extra step, producing annual ESG reports can give you a competitive advantage in the long run.
1. Environmental: How is your company impacting the planet?
This portion of the report may seem simple, but there are a number of ways you can keep track of and report your company’s environmental impact. This part may be more important for certain industries, like those in the energy sector, for which climate change is a looming concern. Some common subtopics from this part of the report are:
- Climate change
- Pollution/waste
- Opportunities for renewable energy
- Natural resources
- Electronic waste
- Carbon emissions
- Raw material sourcing
- Packaging/materials waste
- Biodiversity and land use
- Water stress
- Opportunities in clean production/manufacturing
In order to effectively report on how your company affects the environment, you have to understand what is going on at every level of the supply chain. You also have to know what to look for when measuring this factor and what metric you should use to show how clean your company is.
One of the more common ways to measure environmental impact is a report on your product’s life cycle. In other words, from the time you source your raw materials to the time a consumer is done using your product, how does it affect the environment? Other common report data include carbon emissions and water consumption in the manufacturing and distributing processes.
2. Social: How is your company impacting people?
In addition to reporting on how green your company is, an ESG report needs a showing of your corporate social responsibility as well. Businesses that could benefit from a thorough social analysis in their report are those in the consumer services industry. This portion of the report can encompass quite a few subcategories and is meant to show that your company is both aware of the impact it has on your community and focused on socially responsible investing.
Some examples of what to include in this section are:
- Human capital
- Labor management
- Diversity and inclusion
- Supply chain labor standards
- Responsible investment
- Financial product safety
- Product liability
- Health and safety
- Stakeholder opposition
- Access to communication
- Ethical sourcing
- Access to healthcare
- Privacy and data security
- Responsible investing
Proving that your company pays attention to its employees and its impact on the communities your product touches is a highly effective way to earn consumers’ trust and respect. By building a name as a people-focused organization, you eliminate the need for potential customers to worry about whether they’re supporting an ethical brand.
In addition, by keeping track of the health and safety of your employees through ESG reporting, you can ensure that your people remain happy and productive.
3. Governance: How is your company defending against potential internal corruption?
The last element of an ESG report, governance, is all about how your business operates. This portion of the report is how you show investors that you are trustworthy and transparent and are therefore a safe investment. Investors value democratic decision-making, so showing that you keep collaboration and cooperation at the core of your organization is key.
This portion of the report is particularly important to companies in the finance field. This element of your report is also your chance to show off how your company uses the best industry practices available, as well as how up-to-date you are on regulations and rules.
Some considerations when drafting the governance portion of your ESG report:
- Corporate governance
- Best practices/ethics
- Executive pay
- Ownership
- Tax transparency
- Board diversity
- Accounting
- Corporate behavior
- Defenses against corruption/instability
Similar to the... FDA..., ESG reporting can help companies gain more trust from their consumers by following third-party science-based frameworks. — Emily Rainey from Longevity Partners Inc.Click to Tweet
Why is ESG reporting important?
ESG data shows consumers that your company’s values align with theirs. By showing that your company has a moral compass, you can draw in more business and build a trustworthy reputation with your client base and potential investors.
“Similar to the way consumers trust the FDA to regulate food and drugs, ESG reporting can help companies gain more trust from their consumers by following third-party science-based frameworks,” says Emily Rainey, part of the marketing and communications department of Longevity Partners Inc.
“You can see this at work any time you enter a building that has a plaque showing off a LEED Platinum or BREEAM Outstanding certification,” she says. “Subconsciously you feel that the building you just walked into has somewhat of a lesser impact on the environment and you start noticing little details that make it so. A simple plaque has made me perceive this building as better performing just like an FDA-approved medicine assures me it is safe to consume.”
Transparency
Customers want to do business with companies whose values align with their own. Investors want to do business with companies that have crystal-clear track records. For those reasons, it’s to the benefit of your organization to be forthright with your consumer base and your financial backers.
Showing that you can be trusted with your customers’ and investors’ dollars goes a long way in securing success down the line, and comprehensive ESG scores are an effective way to do so.
Accountability
Once you’ve earned the confidence of your consumer base and financers, you have to show them that you hold your company accountable and can actually keep the promises you make. This is where the corporate governance reporting aspect of the report comes into play: You need to clearly demonstrate the systems that keep your organization accountable and honest.
For example, you might use a board of trustees to allocate funds, or you might hold monthly town halls with employee stakeholders to decide on important internal matters. Whatever system you use to keep your company’s practices accountable, make sure you emphasize it in your ESG disclosures.
Trustworthiness
Earning the trust of consumers and investors and demonstrating the internal mechanisms for following through with your promises matter a great deal, and they come together to create a trustworthy name for your organization. Financiers need to know that if they back you, it’s assured that their investments remain sustainable.
Proving that time and time again you have made promises and kept them makes you a trustworthy investment in the eyes of customers and financial backers. This keeps your sources of capital happy knowing that they’re the key to scaling your company.
What are the pros and cons?
Starting an ESG reporting program is a great way to keep track of your company’s progress over time as you work toward your environmental, social, and governance goals. An annual report and review of your data each year give you a clear direction and show what areas you need to work on to reach your goals faster.
However, this kind of reporting is expensive and time-consuming. Collecting all the data to meet each of the three ESG factors could require a dedicated task force to get the job done effectively. In addition, there is no standardization in ESG frameworks (since it’s a voluntary practice in most countries). With no official guidelines, it can be difficult for companies to know how in-depth and thorough they need to be with their reports.
How do you start reporting?
There are a few major elements to keep in mind when you decide to start ESG reporting:
Choose your metrics
As mentioned above, there are no standards for what exactly to include in an ESG performance report. Thus, it’s up to individual companies to choose which pieces of each element to report on.
Earlier we listed some common topics for each of the ESG factors. It may be impossible or impractical for a company to report on every single one of those, so it’s your job as the head of your organization to choose which metrics are the most relevant.
It might help to start with which things you already keep a record of and how you use them. This could include your company’s performance, its environmental performance, political contributions, and any noteworthy sustainable practices by the company.
Collect data
You can either collect the data you want to report on with an internal team or you can use a third-party group to do it for you. Keep in mind that hiring a third party could be expensive, so make sure to consider the potential benefits and drawbacks of ESG reporting through a third party before you pull the trigger.
Report and publish the data
Your report can take the form of any annual report since there are no regulations in place calling for a specific format. If your company puts out an annual financial report, you could roll your ESG disclosures into that.
Finally, you have to publish your report and make sure it gets into the right hands. Communicating the results to your investors and consumers makes the ESG reporting process worthwhile. You can do this in any number of ways: social media, promotional emails, public annual reports, your website, and so on. Finding the right reporting framework for your company is an important part of writing an effective report.
Pro Tip
You also have the option of having your ESG performance report verified through an independent verification process. However, keep in mind that this (like a third-party data collection team) could be expensive, and may not be worth the extra cost.
ESG frameworks and guidelines
As mentioned above, there are no legal regulations addressing these reports. However, there are some standards and common ESG reporting frameworks that can help you get started.
It’s also important to keep in mind the size of your company, what your focus is, who your market is, and any other qualities that make your organization unique. Since there are only standards and guidelines to follow, you can easily tailor your report to your specific needs.
Sustainable development goals (SDGs)
This is a report aimed at key stakeholders and customers and is specific to certain topics. It can be used by companies in a variety of industries, not limited to just one.
SDGs create a roadmap for other organizations to look to. Essentially, it helps build a global reporting initiative so that industries can work together to follow the best eco-friendly practices.
Integrated reporting
This framework is best for climate-related financial disclosures. It links financial statements to a company’s sustainability initiatives. In other words, it shows the financial impact that environmentally-friendly endeavors have on the company.
It’s aimed at investors, can be used in any industry, and can address financial and non-financial issues.
Dow Jones sustainability index (DJSI)
This is a standard practice in ESG reporting. These reports show sustainability initiatives in your company so investors can easily compare them alongside those of other companies. This report is helpful because it also allows disclosure of social and economic factors that investors care about as well.
Related reading: If you’re not sure what category your company falls into, check out these articles so you choose the best framework for your report.
Is ESG reporting mandatory?
ESG reporting is voluntary. The practice is strongly suggested to companies because it’s an efficient way to garner a consumer base and keep plenty of financial backing lined up.
However, there have been increasing demands for ESG reporting to become mandatory. Rules and standards have recently been proposed by the U.S. Securities and Exchange Commission (SEC) to compel companies to report on climate-related issues or potential climate risks. These reports would require companies to present data on the impact their operations have on the environment.
More often, companies take the initiative of ESG reporting before they’re required by law to do so. They include their ESG data in annual reports to keep a running record of their organization’s impact.
Key Takeaways
- ESG stands for “environmental, social, governance.”
- ESG reports are a way for companies to show consumers and investors their goals and dedication to eco-friendly, socially aware, and honest business practices.
- There are pros and cons to publishing ESG reports, where the main con is the expense of the process. Business owners should weigh the potential benefits of publishing their ESG data before spending a fortune.
- ESG performance reports are not required by law, but there are some common practices and frameworks that industries abide by when reporting their data.
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