You know that gross feeling when it’s painfully obvious a brand is pushing an environmental or social message solely to rack up more sales?
Environmental, social, and governance (ESG) reporting is becoming more important as businesses make false ESG claims to increase their bottom lines. For example, the investment management arm of Bank of New York Mellon Corp was recently fined $1.5m by the US Securities and Exchange Commission (SEC) over its funds’ deceptive claims about using environmental and social criteria to pick stocks.
The SEC also charged Vale SA, a Brazilian mining company, with using its ESG disclosures to mislead governments, communities, and investors about the safety of the Brumadinho dam, which collapsed in 2019, killing 270 people.
For businesses around the world, ESG performance is becoming increasingly important for winning over customers, securing investments, and remaining compliant with governing bodies.
In this day and age, supporting important climate, social justice, and governance issues is quickly turning from a nice-to-have to a nonnegotiable.
What Is ESG Reporting?
An ESG report deals with the disclosure of data about your company’s environmental, social, and corporate governance initiatives. The report is meant to provide a snapshot of how sustainable and responsible the company is.
ESG reports include qualitative and quantitative data about its three key topics, which are:
1. Environmental: What is your business doing to be a steward of the planet?
Your company’s overall environmental impact and responsibility can include any aspect of your business that has an effect on the climate, including:
- How your company is combating climate change
- What your business is doing to reduce carbon emissions
- How your company is preserving biodiversity, improving air and water quality, combating deforestation, or responsibly managing its waste
- How your company is responsibly using natural resources and its supply chain
- Whether your company mistreats animals through product testing, torture, neglect, etc.
“The ‘E’ in ESG is where you get the most bang for your buck and is the most critical metric,” says Mark Stout, CEO of energy efficiency consultancy Apollo Energies.
There are many aspects of ESG reporting that can benefit a company, including having policies that prevent human trafficking, making charitable donations to nonprofit organizations, and having a transparent board. “But none of these efforts affect revenue generation as directly as reducing carbon emissions.”
Stout offers two reasons:
- Consumers can’t do much to stop climate change by themselves, but they can indirectly contribute by shopping at companies that make an effort to stop climate change.
- Look around, and you’ll see wildfires, droughts, mini-ice ages, and floodings across the world. These extreme weather events disrupt business and put investors’ money at risk. Not investing in environmentally sustainable practices can cause potential backers to bail.
Your ESG report and rankings are how consumers and investors are able to verify your company’s commitment to the environment and sustainability
2. Social: What is your company doing to improve lives?
The social aspect of ESG reporting is about how companies manage and interact with people, other businesses, and cultures.
Some things that this criterion covers are:
- How your company treat its employees and workplace
- Your business’s gender, BIPOC, and LGBTQ+ inclusivity initiatives
- Your company’s employee engagement
- Your data protection and privacy policies
- Your organization’s involvement within its community
- Your company’s human rights and labor standards
Regarding your social impact, your business needs to show it’s a responsible employer that cares deeply about its local community and engages in furthering positive social causes.
3. Governance: What is your organization doing to stay ahead of corruption and ensure its investments remain sustainable in the future?
The governance criterion is all about how your company works internally. Investors want to see that your company uses accurate and transparent accounting methods and that there is a good deal of democracy in making significant decisions.
Investors will also want to know the company is following industry best practices, and is staying on top of any potential violations of local regulations or its own internal rules.
In summary, this criterion covers your company’s:
- Internal controls
- Policies, principles, and procedures governing:
- Leadership
- Board composition
- Executive compensation
- Audit committee structure
- Shareholder rights
- Bribery
- Lobbying
- Political contributions
- Whistleblower programs
Why Is ESG Reporting Important?
In most countries, ESG reporting is a voluntary endeavor aimed at helping businesses prove that they care about people and the community. However, the ESG reporting landscape is quickly evolving, with increasing demands for global regulations.
The SEC recently proposed new rules to standardize disclosures companies make about climate-related risks. Registrants would be required to quantify the effects of some climate-related events and initiatives in their audited financial statements.
Forward-looking organizations are offering up ESG data voluntarily as a part of their annual report. According to the Governance & Accountability Institute, 92% of the S&P 500 companies published sustainability reports in 2020.
(The proportion of S&P 500 companies that published sustainability reports or disclosures since 2011. Source: The Governance & Accountability Institute.)
Here are the three main benefits of ESG reporting:
Greater transparency
ESG reporting shows investors the company’s environmental, social, and corporate governance goals, and how it’s handling potential issues in these areas.
Take diversity and inclusion hiring, for example. Setting up consistent metrics to track and report on your D&I initiatives lets investors and customers see that the company is committed to having a fair and equitable workplace.
Since having a diverse workforce can drive better outcomes and enhance business growth, reporting on it gives investors a chance to make an informed decision on whether they want to invest in your company.
Increased accountability
ESG reporting is also critical for many businesses because it holds board members and stakeholders accountable for their behaviors. It’s become in vogue for businesses to say they care about environmental issues or social justice causes because they think that’s what the public wants to hear.
However, ESG reporting ensures that your company is backing up its words with real action.
Cultivates confidence
Publishing your ESG reports gives customers confidence that they’re supporting the right brand. A recent study by Shopify revealed that consumers are 4x more likely to purchase from a company with strong brand values. And 77% are concerned about the environmental impact of the products they buy.
“Consumers and employees are increasingly interested in working with companies firmly committed to sustainability in today's business environment. ESG reporting can communicate your company’s dedication to this issue,” noted Kate Zhang, founder of photo backdrop business Kate Backdrop.
The Pros and Cons of ESG Reporting
ESG reporting encourages companies to become more environmentally and socially conscious, and doing it consistently provides a way for the business to measure their progress over time.
“By tracking your company's ESG performance, you can see where there are opportunities for improvement. This information can be used to inform your company’s strategic decisions in the future,” says Zhang.
However, there are also some challenges associated with ESG reporting.
“It can be time-consuming and expensive to collect the data needed for an ESG report,” says Alan Duncan, CEO of solar installer Solar Panels network. “Additionally, there is not yet a standardized way to measure and report on ESG performance, which can make comparisons between businesses difficult.”
How To Get Started With ESG Reporting
When it comes to implementing ESG reporting in your business, there are five things Zhang recommends you keep in mind, which are:
- Define what you want to measure: There are several different aspects of social and environmental performance that you can measure, such as your company’s carbon footprint, water usage, and number of new hires across diverse demographics.
To determine which disclosures are material to your business, consider what metrics you’re currently monitoring and what additional information could be helpful to include. Ask yourself why your chosen metrics are important for advancing your company’s strategic objectives and how they could help you mitigate risks. - Choose a reporting standard: There are a few different reporting standards, so choose the one that makes the most sense for your company (more on that below).
- Collect the data: Once you’ve decided what you want to measure and which reporting standard you’ll use, you’ll need to collect the data. This can be done internally or through a third-party service provider.
- Report the data: This usually involves creating a report that details your company’s performance on various ESG indicators. This work can be done internally or through a third-party provider that specializes in ESG reporting.
You can also take the extra step of putting your ESG data through independent verification, but it is not currently mandatory. - Communicate the results: After you’ve prepared the report, it’s essential to communicate the results to your stakeholders. This can be done through various channels, such as your website, annual report, or social media.
ESG Reporting Standards and Frameworks
There are a number of ESG reporting frameworks and standards to choose from; many organizations combine a few frameworks to create their own comprehensive ESG report.
By GRI’s definition, “A standard can be thought of as containing specific and detailed criteria or metrics of ‘what’ should be reported on each topic. Frameworks, on the other hand, provide the ‘frame’ to contextualize information. A framework can be thought of as a set of principles providing guidance and shaping people’s thoughts on how to think about a certain topic, but miss a defined reporting obligation.”
Each of these frameworks has its own strengths and weaknesses, so it’s important to choose the one that makes the most sense for your business based on your industry, audience, and ESG reporting goals.
Calloway Cook, president of dietary supplement maker Illuminate Labs, recommends that “Small businesses interested in ESG initiatives partner with certification programs like B Lab [the nonprofit behind Certified B Corp], because they have all of the standards and frameworks already built.”
The ESG frameworks and standards that B Lab recommends depend on the company size and industry, and can cover standards that include testing and purity of products, charitable donations, making a financial impact on the local community, and providing product discounts to low-income consumers.
Creating shared value — addressing societal issues in ways that could also enrich your business — should lie at the heart of your company’s approach to ESG issues. By making an investment in ESG reporting, your brand can help make the world a better place while also boosting revenue and attracting new investors.
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