As companies increasingly recognize the importance of responsible business practices, mastering sustainability and climate reporting has become a key driver of success. In this blog we’ll explore the essential guide to ESG success, providing actionable insights and expert strategies for navigating this vital terrain.
What does Sustainability & ESG mean?
Today‘s world is facing a variety of pressing, interlinked problems, reaching far beyond climate change. To account for this depth of issues, sustainability is further broken down in the dimensions of environment, social and governance (ESG). Organisations, effecting and being effected by those challenges, possess the power to act as change agents. Yet, businesses cannot solve each of these issues at once. To make an impact that matters, it is essential to identify the most relevant sustainability topics for your organisation.
The Role of ESG Reporting
The need for reporting on the ESG impacts of a business is not solely driven by regulatory requirements. On the contrary, several businesses chose to disclose their ESG reports voluntarily because the demand up until now has been driven by the investors and the capital market.
The global investment toward low-carbon growth across 21 emerging markets amounts to nearly 10.2 trillion U.S. dollars.
The next generation of investors is inclined toward green investment that will make a positive impact on the people and environment and is aligned with their individual sustainability goals.
The sustainable development goals or SDGs adopted by the UN in 2015 have become a blueprint for businesses and investors to understand how they can contribute to those 17 goals and work toward the betterment of the people and the planet.
It is also a good platform for businesses to identify and establish sustainability goals for their organization and align their ESG initiatives and impact toward them in two ways:
- Reducing the negative impact
- Enhancing the positive impact
ESG reporting is a substantial step toward responsibly managing business impact and therefore preferred by both regulators and investors for their purposes. The subsequent argument in favor of ESG comes from its effect on the long-term success of the business which is another reason motivating investors to incorporate ESG factors into their decision-making, as found in an NYU study.
Let’s stop for a moment and account for what constitutes ESG factors:
and it encompasses various aspects related to a company’s impact on the environment.
The S of ESG is the business’s impact on social aspect , that is -stakeholders, such as employees, customers, suppliers, and local communities within which it operates. It involves aspects like working conditions, human rights, involvement in the community, and product safety.
The G of ESG is the governance aspects, such as board composition, CEO compensation, shareholder rights, and transparency, and is related to a company’s management and monitoring procedures.
In the absence of global baseline standards, with ESG standards still in the developmental stage by bodies like ISSB and EFRAG in the EU, there is still a lot of speculation around what to measure, how to measure, and how much to measure. Consequently, ESG reports cannot be compared across companies and geographies.
And that brings us to the point of trust and transparency in ESG reporting disclosed by the businesses in absence of any regulatory standards. As we explore more on the aspect of challenges and criticism of ESG reporting later in the blog, it makes sense to bring the angle of “greenwashing” to the fore of this discussion. Greenwashing involves businesses making false or misguiding claims about their ESG initiatives.
Investors rely on the ESG information businesses choose to disclose. Therefore, when businesses break the chain of trust it impacts the entire capital market casting doubt and suspicion over the entire industry.
Businesses need to be responsible for the ESG communication they have with their investors whether it is through documents like ESG reports or other communication channels like annual or quarterly meetings.
We assert that trust and transparency will remain pertinent even after the implementation of standards and mandates.
In the next section, we gather an overview of the bodies helping businesses with frameworks and parameters in absence of a standard global baseline.
Overview of ESG Reporting Frameworks and Standards
GRI – Global Reporting Initiative. One of the most widely used frameworks for ESG reporting is the GRI framework for sustainability reporting in a standardized and transparent manner. It covers a wide range of ESG issues including climate change, biodiversity, human rights, labor practices, and governance, and enables companies to report on their ESG performance and impacts. With universal and industry-specific guidelines, the GRI framework offers a lot of flexibility in terms of usage.
Both SASB and TCFD now fall under the umbrella of the International Sustainability Standards Board (ISSB). ISSB oversees the development and dissemination of sector-specific sustainability accounting guidelines, previously managed by SASB, for publicly traded companies in the United States. Additionally, ISSB manages the climate-related financial disclosure framework established by TCFD. The primary objective remains to identify, manage, and report on ESG issues that are most material for investors. ISSB ensures that standards are comparable across firms within an industry, fostering transparency and clarity in sustainability reporting. According to the Task Force on Climate-related Financial Disclosures report 2022, there is a growing momentum towards climate-related disclosures, with 80% of companies aligning with at least one of the 11 recommended disclosures, as ISSB continues to play a pivotal role in advancing global sustainability standards.
While these frameworks help businesses in identifying their ESG impacts and developing their goals aligned with these recommendations, they also need to consider an important element of trust and openness in their ESG-related disclosures because the success of ESG reporting and investor interactions depends on it.
Investors must have faith that the data companies provide is reliable and comprehensive. Building confidence with investors and stakeholders can be facilitated by businesses that are open about their ESG performance and reporting procedures.
Companies that place a high priority on ESG reporting and openness can also gain better stakeholder engagement, increased reputation, and decreased risk by providing transparent and reliable information on their ESG.
Benefits of ESG Reporting for Companies and Investors
The recent Covid crisis and the numerous climate-related events like floods and hurricanes and the labor protests across Europe, Latin America, and Russia during the pandemic have been a reminder that businesses are impacted by environmental and social factors.
Investors understand this too and so are looking at the associated risks with the ESG impacts of an organization. The proposed double materiality in the ESRS elaborates on looking at how the outside factors impact the business (financial materiality) in addition to how the business, impacts the outside world (impact materiality).
As we discussed earlier, businesses that consider ESG factors are better positioned to achieve long-term sustainability and deliver improved financial performance.
ESG reporting also becomes a platform for the investors to share their sustainability goals and concerns with the organization and investors are in a position to influence corporate behavior and encourage companies to adopt more sustainable practices.
ESG reporting is on the path to becoming a mandate in several jurisdictions, investors can ensure that businesses remain compliant by adopting ESG disclosures to and avoid fines. A robust ESG strategy improves the brand image of an organization and also adds to the personal branding of the investors.
As ESG reporting is steadily moving toward becoming mandatory, businesses need to view it as an integral part of their investor relations management. Investors are concerning themselves with the impact they want to create with their investment, and that will continue to propel the ESG momentum. Businesses can view this as an opportunity and leverage the benefits of integrating ESG strategy into their business operation for better risk management and accessing capital at a lower cost.
ESG reporting will help businesses identify opportunities and expand into new products or markets. ESG disclosures that are authentic and transparent will ensure a better reputation in the capital market and improved relationships with stakeholders while contributing toward business success and continuity.
If you’re looking to implement an effective ESG reporting system that meets industry standards such as SASB or GRI while streamlining your data collection process with ease, visit IRIS Carbon®.