Understanding ESG Reporting and Why It Matters
These days, one of the biggest trends for companies throughout the world is the strategic implementation of initiatives surrounding Environmental, Social, and Governance (ESG), for investors, shareholders, stakeholders of privately-owned businesses, and increasingly, for consumers as well. ESG is an elevated topic of corporate sustainability that attracts investors. In case you are not fully aware of what ESG is, let’s review the definition and descriptions of its three core components:
Environmental
As the effects of climate change continue, companies are demonstrating a consciousness about their ecological footprint as much as the average consumer. There are five areas where a company’s environmental performance typically affects its ESG score or ESG rating:
Whether or not your company deals directly with the environment, ESG holds the promise that all business entities, however big or small, can do their part to prioritize sustainable business practices.
Social
The “social” component of ESG seeks to determine how much a company either promotes or impedes human interest within and beyond the organization. Three key areas include:
Every organization should be composed of the people who keep these gears turning, which means the leadership of each company bears the weight of social responsibility.
(Corporate) Governance
The corporate governance metric of EGS refers to all aspects related to the leadership culture of a given company, including (but not limited to):
In evaluating corporate governance, ESG ranking agencies rely heavily on accounting transparency and fair (or unfair) financial practices… with good reason: For publicly traded companies, for example, investors are less inclined to entrust companies that lavish top-tier executives with bonuses while simultaneously stiffing their employees; not only is it imprudent, but it’s an unsustainable business model unlikely to grow and achieve returns in the long term.
There are other reasons for different types of organizations, including non-profits, to adapt to ESG accountability. Transparent reporting, in short, can make the difference between why a company is chosen, regardless of the audience considering engagement.
What is ESG Reporting?
While ESG is concerned with the environmental, social, and governance initiatives, an ESG report is the disclosure of the data surrounding them. A non-financial disclosure of these three concerns measures sustainability performance and allows investors to evaluate if a company poses a financial risk or not.
The Importance of ESG Reporting: Why ESG Matters to Investors
So, why is ESG important? ESG performance is important to investors for ethical reasons, as well as practical ones:
Yes, ESG plays a big role in reshaping the economy for an uncertain future, but thanks to overwhelming study results, there’s no uncertainty around the material value of backing best-practicing businesses.
Why ESG Matters to Companies
For a long time, the ethos common to most businesses across and between industries was to maximize profits now and worry about future losses later.
ESG, on the other hand, is geared toward the future — environmental stewardship, human welfare, and sustainable corporate practices — and there are ways that emphasizing ESG efforts can concretely benefit companies themselves, such as:
Lastly, social media accounts, such as LinkedIn, Twitter, and Facebook, have made it easier than ever to share ESG information and sustainability performance.
How Is ESG Rated, and by What Agencies?
It is not advisable for companies to audit their own activity and determine their own ESG scores (although some do), and the majority of trustworthy ESG ratings reports are conducted by third-party agencies. The following providers are among the reputable players in this space to consider, including (but not limited to):
There are variations between the methodologies used by ESG ranking agencies, which makes it a challenge to certify they’re getting involved with best-practicing businesses. The private sector has registered the meteoric value of ESG and moved towards standardizing rankings, with the World Economic Forum’s International Business Council proposing a five-fold system of measurement for ESG.
Building Your Company’s ESG Reporting
There are tried-and-true best practices in the planning and deployment of ESG reporting that may help you make the most of your reporting goals:
An ESG strategy for any company is important beyond financial reporting. From explaining and combating the great resignation reasons provided by many to making way for sustainable investing, an ESG disclosure serves many reasons.
ESG efforts by a business appeal to many, from investors to employees and consumers. But while efforts are important, accurate and trustworthy ESG data reporting by a reputable third-party agency is essential.
And When You Have Completed These Tasks…
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