With the financial enterprises in the surge to offer sustainability reporting in investments and finances, the concept of ESG reporting has been in vogue for industries and businesses since 2001. Signifying and expanded as Environment, Social, and Governance, the term points to the behavior of an entity towards environmental issues, its engagement with society, and how strong the governance practiced within the organization is. The term has attracted investors and financiers due to its impact on every business. In this article, we will look at what the future holds with ESG reporting and the current ESG trends.
What do Statistics Say?
The concept of ESG introduced over the past few years has gained popularity for its potential to reduce costs, enhance stock performance, and increase customer loyalty. With more and more organizations embracing ESG, the new statistic is always observed every day. A few of these are mentioned below:
1. ESG assets will sum to $35 trillion by 2025 and will make up half of the professionally managed investments
2. Sustainability bonds for ESG projects have hit $700 billion globally.
3. In 2020, 88% of public companies, 79% of venture companies, and 67% of private companies took ESG initiatives.
4. Strategic implementation of ESG affects the company profits by 60%
5. The United Nations Sustainable Development Goals (SDGs) keep the ESG framework at the center of the world’s economy and are anticipated to create $12 trillion in opportunities in a year.
6. About 88% of consumers stay loyal to a company supporting social and environmental issues
7. 63% of the time ESG has impacted equity returns positively.
Current ESG Reporting Trends
Recently ESG (or sustainability) reporting has been practiced by companies to foster their credibility. As per the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, ESG reporting exists as varying reporting frameworks, standards, and legislation. Organizations include ESG reporting in their annual reports to illustrate their sustainability. ESG, or environmental, social, and governance, is the non-financial reporting about a company that serves as a tool for investors and stakeholders. Here is how it is opted currently by the companies:
i. ESG Data
Corporates, investors, human resources, and sustainability teams offer qualitative and quantitative ESG data for sustainable growth and metrics to understand the risks when issues are adequately addressed.
ii. Evolution of ESG
ESG has evolved from niche to mainstream as investors use ESG data for understanding a company’s long-term value, strategy, purpose, and quality of management across the supply chain.
30% of investors find the company’s ESG information sufficient to assess a company’s materiality.
iv. Data Consistency
ESG frameworks, such as CDP, SASB, and TCFD, ensure data consistency for offering a better roadmap for the organizations.
v. Risk and Opportunities
ESG Reporting and Sustainability Heads carve the niche of the ESG strategy that identifies the short- and long-term risks and opportunities. Using ESG data will help in combating those risks. You can also use ESG data to reduce credit risks with matching scenarios that affect your company’s ESG rating. To mitigate the risk, ESG is incorporated into a risk management framework.
vi. Budget and Cost Analysis
ESG data integrated as a part of comprehensive planning and analysis strategy affects the financial information to create budget and variance reports. The data is critical for making sustainable and profitable ESG initiatives.
vii. Transforming Business Model
ESG data gives business insights such as the impact of energy and renewable sources on costs and sales. These insights can help transform business models and operations into sustainable development goals. Organizations use ESG data for acquisitions or investments to reinforce their ESG efforts.
Future with ESG Reporting
ESG reporting is helpful for investors and is going to shape the business world as per the following future trends:
i. Sustainable Investment
Recent studies have found that 86 percent of millennials are interested in sustainable investing compared to the general population.
ii. Universal Disclosure
The universal disclosure requires the ESG regulators to report them. It has recently gotten a push from the International Business Coalition. It states that climate change is the topmost issue. Thus, it will be mandatory to report your organization’s carbon footprint. The world’s largest investor, BlackRock, will have said that it will not make a pact with any company that doesn’t comply with carbon reporting.
iii. Sustainability Reporting Standards
Sustainability reporting standards will be impacted substantially. The company executives will transform the sustainability issues into strategic decisions which will ensure the corporate financial sustainability over the long term. These companies will attract investors essentially. The sustainability performance indicates the company’s financial performance, making the investors want consistency in a company’s sustainability reporting for its financial reporting. Investors need this information to discuss the company’s overall performance.
iv. Sector Disclosures
If ever the universal disclosure fails, the sector disclosures compensate for it. Since its commencement, the Sustainability Accounting Standards Board (SASB) has kept sector standard in its core philosophy, making it a popular term among investors.
v. Convergence of ESG Standards
Lack of consistency and overlapping reporting standards are some of the threats resulting in inconsistent disclosures. The IFRS has been driving convergence to a single reporting standard. The existing standard organizations are working towards making a converged future.
vi. Data Usage
Data will help improve real-time ESG rating analysis for investors to make informed decisions. Investors will access and choose funds supporting the values practiced in the company. More than half of the investors are willing to sacrifice their investment performance to fulfill ESG goals. Using the data and related technology, investors will be able to compare their choices in real-time and update allocations in no time.
ESG reporting or environment, social, and governance data put forth by investors helps improve the transparency, credibility, and materiality of a company. It is the pathway that helps companies access the capital markets in securing their license. Sustainability and ESG strategy helps in enhancing overall company performance.