In the 1960s, investors started excluding companies based on ethical concerns, such as tobacco and apartheid. This gave birth to socially responsible investing (SRI).
30 years and tonnes of environmental, ethical and social violations later, SRI expanded beyond ethical investing to include environmental, social, and governance (ESG) factors.
In 1997, The Global Reporting Initiative (GRI) was launched, providing the first standardised framework for sustainability reporting. Over the next two decades, ESG reporting gained momentum driven by investment demand, consumer uprising and the general awareness due to the emerging climate crises.
What is ESG Reporting?
ESG (Environmental, Social, and Governance) reporting refers to the disclosure of data covering a company’s operations in three key areas: environmental responsibility, social responsibility, and corporate governance.
While traditional financial reports focus on profitability and shareholder returns, ESG reports focus on sustainability, ethical conduct, and social impact of the company. Companies that publish ESG reports voluntarily share information on carbon emissions, resource use, diversity in the workforce, labour practices, and governance structures, among others.
This reporting helps stakeholders, including investors, consumers, employees, and regulators, understand how a company is performing in non-financial areas, especially in preparation for long-term challenges such as climate change, evolving labour markets, and governance issues.
In a nutshell, ESG Reports serve as a transparency tool for investors, customers, and other stakeholders.
7 Reasons Why ESG Reporting is Important for Organizations
ESG reporting has grown in importance as stakeholders seek greater transparency and accountability from organisations. Here's why it is essential:
Access to Capital and Investor Confidence:
ESG factors have become integral to investment decisions. Today, many institutional investors, such as BlackRock and Vanguard, have incorporated ESG criteria into their investment strategies to identify risks and opportunities that may not be evident in financial statements alone. Having high ESG scores is a green signal from investors and showcases the company's ability to manage potential risks.
Risk Management and Compliance:
ESG and Sustainability Reports help companies identify and mitigate potential risks. For instance, a comprehensive understanding of environmental risks, such as extreme weather events or resource scarcity, allows companies to navigate business strategies for continuity.
Regulatory Compliance:
Transparent ESG reporting aids compliance with regulatory requirements, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD) and Global Reporting Initiative (GRI). Governments are not only regulating but also mandating ESG regulatory compliances.
Brand Reputation and Trust:
In the modern business landscape, reputation is a critical asset. Companies with strong, earnest and transparent ESG performance are seen as responsible, ethical, and forward-thinking, appealing to all stakeholders and likely to earn greater support and loyalty. These reports are effective tools to communicate the company’s values and initiatives, helping to build credibility.
Operational Efficiency and Long Term Value Creation:
When companies integrate ESG frameworks into their business they often end up optimising operations, reducing waste, and improving resource efficiency. These improvements can lead to cost savings and better overall performance.
Innovation:
ESG reporting also helps drive and improve ESG strategies, as a driver that pushes an organisation to enhance efficiency and identify areas that need improvement.
Goal tracking:
An ESG report is an excellent way to track progress on goals, as many targets are multiyear, long-term strategies that play out over time and be accountable.
What’s the Difference Between ESG and CSR?
ESG and CSR (Corporate Social Responsibility) are often used interchangeably, but they differ in focus and approach.
CSR is primarily focused on how companies contribute to society. It includes initiatives like philanthropy, volunteer programs, and sustainability projects that reflect a company's values. CSR is often seen as a voluntary initiative, with flexible structure.
ESG, on the other hand, is a more structured and measurable approach. It evaluates a company's overall sustainability performance in a data-driven manner, focusing on corporate practices that can directly influence financial performance.
While CSR initiatives are often self-contained, ESG factors are integrated into business strategy and risk management, in a way that is tied to financial outcomes.
What is the Current State of ESG Reporting?
ESG reporting is becoming increasingly widespread across industries, driven by investor demand, regulatory requirements, and public interest. Many companies, especially large publicly listed ones, voluntarily publish annual ESG reports or include ESG information in their financial reports. However, the quality and depth of these reports vary significantly between companies, industries, and regions.
There is still no universal standard for ESG reporting, though regulatory organisations are bringing consistency and comparability. In some regions, ESG reporting is mandatory, while in others, it remains voluntary but highly encouraged by investors and stakeholders.
What Do ESG Reports Include?
ESG reports are an amalgamation of Environmental, Social, and Governance components.
Environmental:
This section focuses on how a company manages its impact on the natural environment.
Carbon Emissions reports with direct and indirect greenhouse gas emissions.
Just Transition and Energy Efficiency measures taken to improve energy usage and reliance on renewable energy.
Waste Management and pollution control, including recycling programs.
Water Usage transparency and conservation efforts.
Biodiversity impact on natural habitats and efforts to preserve biodiversity.
Climate Change Initiatives
Social:
This section deals with the company's interactions with its employees, customers, and the broader community.
Labour Practices - employee rights, working conditions, fair wages, and the treatment of workers.
Diversity and Inclusion initiatives
Health and Safety policies to ensure the health and safety of employees and customers.
Community Engagement and contributions to social causes and community development such as volunteering, charity etc.
Human Rights policies to respect human rights within the company’s operations and supply chain.
Governance:
The governance pillar evaluates a company’s leadership and management practices.
Board Structure: The composition of the board, including diversity, independence, and leadership.
Executive Compensation: How top executives are paid and its alignment with long-term performance.
Shareholder Rights policies regarding the rights of shareholders and their interest.
Ethics and Compliance: Policies on corruption, bribery, data privacy, whistleblower protection and compliance with laws and regulations.
Let’s Understand ESG Scores a bit more..
What is an ESG Score or Rating?
You may have seen companies publish ESG scores from organisations such as Bloomberg, S&P Dow Jones Indices (S&P DJI), or others. An ESG score is a numerical representation of a company's ESG performance, usually ranging from 0 to 100. The higher the score, the better the company’s performance in terms of managing environmental, social, and governance risks. These scores help investors and stakeholders evaluate companies in a standardised manner.
Companies that are willing to more thoroughly report ESG performance than others tend to score higher. A lack of ESG reporting can hurt an organisation's ESG score.
Who Assigns ESG Scores?
Several organisations assign ESG scores based on publicly available data, self-reported information, and third-party assessments. Some of the leading ESG rating agencies include:
MSCI: One of the largest providers of ESG scores, MSCI rates companies on a scale from CCC to AAA.
Sustainalytics: Focuses on measuring ESG risk and gives companies an overall risk rating.
FTSE Russell: Offers ESG ratings based on a company’s overall ESG performance.
ISS ESG: Provides ESG ratings and scores across various sectors and regions.
What are ESG regulations?
While ESG regulations vary by region and industry, but some common overlaps are:
Mandatory Disclosure Requirements: Some regions require companies to disclose ESG information, especially around climate-related risks.
Carbon Emissions Targets: Many countries are setting regulations around carbon emissions, requiring companies to reduce their environmental impact.
Supply Chain Transparency: Regulations increasingly focus on the social and ethical practices within global supply chains.
What are Other Notable ESG Frameworks?
Since there is no one single watchdog, companies often adhere to more than one established ESG framework to ensure consistency and comparability, such as:
Benchmark Frameworks:
These frameworks set benchmarks for comparing ESG performance across companies and industries.
CDP (formerly Carbon Disclosure Project): A global disclosure system for environmental data.
FTSE4Good Index Series: Administered by Financial Times Stock Exchange-Russell Group, it measures the performance of companies with strong ESG practices.
Voluntary Frameworks:
Some frameworks are voluntary and offer guidance for companies to improve ESG transparency, such as:
Global Reporting Initiative (GRI)
Sustainability Accounting Standards Board (SASB)
United Nations Sustainable Development Goals (UN SDGs)
Regulatory Frameworks:
Certain regions mandate ESG reporting, such as:
EU Taxonomy Regulation: A classification system to identify environmentally sustainable economic activities.
Task Force on Climate-related Financial Disclosures (TCFD): Provides guidance on climate-related financial risk disclosures.
Integrated Reporting (IR): Combines financial and non-financial information to provide a holistic view of a company’s strategy and performance.
Region Specific ESG Reporting across the Globe
Europe:
Europe is at the forefront of ESG reporting, driven by strict regulations such as the EU Taxonomy and the CSRD. These regulations mandate that large companies disclose detailed ESG information, particularly related to their environmental impact and carbon emissions. Many European companies are also part of the EU’s Green Deal, which aims to make the continent carbon-neutral by 2050.
Asia:
ESG reporting is growing in importance across Asia, particularly in Japan, China, and South Korea. While the region is still catching up with Europe and the U.S., countries like Singapore and Hong Kong have introduced frameworks to encourage ESG disclosures. In Japan, the Tokyo Stock Exchange requires listed companies to provide ESG information.
United States:
In the U.S., ESG reporting remains largely voluntary, although investor pressure is pushing more companies to adopt ESG practices. The Securities and Exchange Commission (SEC) has also signalled its intention to introduce mandatory climate-related disclosures in the near future.
What major companies are doing in ESG
Many global and large companies use multiple frameworks.
Microsoft supports the United Nations’ Sustainable Development Goals (SDGs), informs its CSR reporting using Global Reporting Initiatives (GRI), and adapted frameworks of the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).
The Coca-Cola Company aligns its ESG reports with the United Nations Guiding Principles Reporting Framework (UNGRPF).
Are Companies Required to Do ESG Reporting?
Coming to the main question - Is it mandatory for companies to do ESG Reporting? The answer depends on which country or countries the company is registered.
In some regions, ESG reporting is mandatory, particularly for large, publicly traded companies. In other regions, it remains voluntary but is increasingly expected by stakeholders. But many companies opt to report ESG data to maintain competitiveness, improve stakeholder relations, and prepare for future regulatory changes.
Conclusion
In this 21st century globalised world, companies ought to view ESG as a tool to put its best foot forward in front of the stakeholders rather than a mere compliance measure. The rise of consumer awareness and independent investments have found their way directly into the company’s balance sheets, such that adding ESG reporting strategically to the business is a launch to success.
FAQs
Q: What is ESG Reporting?
ESG Reporting refers to the disclosure of data covering a company’s operations in three key areas: environmental responsibility, social responsibility, and corporate governance.
Q: Why is ESG reporting important for companies?
Q: How does ESG reporting benefit companies?
Q: What does ESG stand for?
Q: Is ESG reporting only relevant for large companies?
Do ESG reports have to be verified by a third party?