ESG Reporting Preparation
Ideological shifts in business demand effective ESG reporting
Climate change, biodiversity, customer relations, supply chains, board management practices, data, and security…these all fall under the ESG heading.
Environmental, Social, and Governance (ESG) have become the language of capital markets, expanding market value by maintaining value for future generations.
As such, today we witness a pivotal moment: The growth in ESG investments has seen an all-time high. For instance, according to a recent survey by the CFA Institute, ESG-linked loans in Europe have more than quadrupled – from ~$28.5 billion in 2017, to $108 billion in 2019.
On top of this, another report by the Global Investment Sustainable Alliance states sustainable investments have risen by 15% from 2018 to 2020 (reaching $35 trillion).
This increase in investor attention comes alongside an ideological shift in business – sustainability and citizenship are no longer seen as philanthropic activities, but rather, vital for business success. As such, they require effective governance to mitigate external business risk.
As such, business leaders must sit up, take note, and effectively respond using ESG reporting.
With this in mind, the Green Business Bureau has created a series of articles to help you get started. This ESG reporting guide will be your hubpage. Follow the steps and refer to the recommended content to understand what ESG reporting is, why it is important, and how to get started. Use the links below to navigate through this article.
What is ESG reporting?
Why ESG reporting is important
How to use ESG reporting to devise an effective ESG strategy
How ESG reporting differs from sustainability reporting
ESG reporting requirements, standards, and frameworks
How to improve your ESG sustainability reporting and score
What is ESG reporting?
ESG reporting is the disclosure of data covering business operations related to the environmental, social, and governance aspects of a business.
By disclosing this information in a report, a company’s progress related to these three fields can be examined against benchmarks and targets. Once more, an ESG report is designed to provide full transparency over an organization’s environmental, social, and governance impact across a multitude of stakeholders, including investors, employees, and customers.
WHAT IS ESG RISK?
Think of ESG reporting as a form of risk management addressing business, sustainability, and social issues. Examples of ESG-related risks include:
Environmental: Climate change, greenhouse gas emissions (GHG), deforestation, biodiversity, waster, waste, and pollution.
Social: Customer relations, employee relations, labor, employee wellbeing, community relations, health and safety, supply chains, human rights, and work-life balance.
Governance: Board management practices, succession planning, equity and inclusion, diversity, compensation, regulatory compliance, fraud, data, security, and corruption.
These ESG risks are stated to cause material, financial and reputational harm to a business. Failing to report and manage ESG-related issues is risky business that could resort to an ESG-related incident or controversy.
Understanding the ESG concept: Why is ESG reporting important?
As mentioned, ESG reporting is a form of risk management to address business risks across three areas: The environment, society, and governance. To fully understand the importance of ESG reporting, you must first understand the importance of ESG in a general sense.
WHY IS ESG IMPORTANT? ESG gained significant world attention following the publication of the report Who Cares Wins: Connecting Financial Markets to a Changing World. This report saw its roots in Socially Responsible Investing (SRI), dating back several decades. Evolving from SRI, in 2004, UN Secretary Kofi Annan asked major financial institutions to partner with the UN and the International Finance Corporation. The aim of this partnership was to identify ways to integrate environmental, social, and governance concerns into capital markets. The resulting Who Cares Wins report was published, outlining the concept of ESG and showcasing how ESG investments made good business sense. Since the publication of the Who Cares Wins report, there’s been a clear pivot in capital markets with the recognition that environmental and social issues directly impact an organization’s bottom line. For instance, research shows that companies experiencing high to severe ESG failings lost, on average, ~6% of their market capitalization. Yet, note that this is an average figure. Losses can be far greater, as we see in the below example.
ESG failings can cause disastrous PR crises To exemplify this point, we turn to a real world example. The multinational specialty pharmaceutical company, Valeant Pharmaceuticals, suffered the severe consequences of improper governance. The business misled investors by improperly accounting for revenue from mail orders. Plus, the company was found guilty of aggressive price hikes for a single diabetes drug. This governance failure caused a 90% loss in the brand’s market value. The company also faced penalties and settlement claims, and was forced to fork out $45 million to clear U.S. charges. Had Valeant Pharmaceuticals followed a proper ESG strategy with clear ESG reporting, they would have avoided such controversy.
WHY IS ESG REPORTING IMPORTANT?
ESG reporting is the documentation side of ESG. In this next section we list the benefits of this documentation to communicate why ESG reporting is important.
ESG reporting creates transparency.
Understanding the importance of ESG reporting requires a mindset shift, one that doesn’t consider ESG regulation as a burden, but perceives reporting as a means of transparency. And transparency is a tool to unlock capital and create solutions for the major global challenges organizations face today (e.g. climate change, equality, and data security). Transparency also encourages accountability, which is essential for collaboration and developing actionable solutions. Plus, organizations can track progress, set benchmarks, and communicate when their ESG goals have been met.
ESG reporting attracts investors and financing. Increasingly, investors and lenders will use the transparency given by an ESG report to assess a firm’s risk exposure and determine its possible future financial performance. To demonstrate this investor shift, we turn to reports published by the Principles for Responsible Investment (PRI). The PRI is a group of investor signatories that began in 2006, supported by the United Nations. The aim was to help investors integrate ESG factors into the investment process. And so the PRI established a set of specific, voluntary, and aspirational principles for investors to follow. As investor interest in ESG rises, the number of signatories within the PRI follows suit. That is, in 2006 PRI had 63 signatories commanding $6.5 trillion in assets under management (AUM). In 2021, this figure increased to 3826 signatures, controlling $121.3 trillion in AUM. In addition, the Deloitte Center for Financial Services expects ESG-mandated assets in the United States to account for 50% of all professionally managed investments by 2025. In summary, investors avoid companies that lack ESG reporting, with reduced transparency being a major concern.
ESG reporting meets stakeholder demand. Yet it’s not just investors that demand greater transparency when it comes to environmental and social concerns in business. Consumers are also demanding responsible brands. For instance, a survey from First Insight found consumers, particularly Gen Z, are more willing to support brands with an effective ESG strategy. 62% of Gen Z would prefer to buy from a sustainable brand, and 73% of them are willing to spend up to 10% more for a more sustainable product/service. And we have a similar scenario when it comes to the employee. Cone Communications found that 76% of millennials consider the sustainability agenda of an employer before making their career choices. As such, reporting ESG will boost an organization’s chances of attracting new talent.
ESG reporting responds to regulation change Regulatory forces are also applying pressure on companies to produce ESG reports. Proactive and future-focused brands will understand the importance of meeting ESG criteria to respond to the changing business landscape. As such, it comes with little surprise to learn that 92% of companies in the S&P 500, and 70% of the Russell 1000 companies have already published their annual ESG reports. Current regulations and policies are leaning toward mandatory reporting on ESG. And the European Green Agreement seems the most ambitious of these new regulations. Between 2000 and 2017, the European Corporate Governance Institution (ECGI) study identified 25 countries that had introduced mandates for firms to disclose ESG information. Countries included are Australia, China, South Africa, and the United Kingdom. Yet, to date, these mandatory regulations only apply to state-owned companies, large corporations, and listed companies. Plus, the obligation for companies to report sustainability information is also on the rise. For instance, in March 2022, the Securities and Exchange Commission disclosed a new climate disclosure proposal. This now represents the broadest federally mandated corporate ESG data disclosure ever required in the US. The aim is to address climate-related risks and improve reporting consistency, quality, and comparability. How to use ESG reporting to devise an effective ESG strategy
Companies need to set clear targets to reduce environmental, social, and governance risks. And to then measure their progress and report in a transparent manner. It’s clear that businesses across the globe have advanced, from simply asking customers to recycle their plastic containers to embedding sustainability into the core of their business. This means creating sustainable practices and processes, developing ethical products, and leading a business strategy developed from a clear ESG strategy. A good example of a business that’s done this right is Patagonia. Patagonia has a strong ESG score because ESG values have been effectively embedded into the core of Patagonia’s business model. For instance, the company urges conscious consumption from its consumers. E.g. Instead of constantly pushing sales, Patagonia offers repair services, and uses marketing communications to campaign against fast fashion and encourage minimalism. As of 2020, the company still generated a gross profit of $6.6 million. To devise an effective ESG strategy, like Patagonia, organizations need to:
Use ESG reporting for transparency and accountability, to set benchmarks and targets, and to communicate ESG-related achievements. This means understanding ESG reporting to devise an ESG report, which this article will guide you on.
Set actionable initiatives that will support ESG compliance and an organization’s ESG strategy. You can use the Green Business Bureau to set actionable initiatives to meet ESG demands, supporting your ESG strategy, as we discuss below.
USE THE GREEN BUSINESS BUREAU TO SUPPORT YOUR ESG STRATEGY
Your ESG strategy is all about meeting the environmental, social, and governance demands of a business.
You can use ESG reporting to track your progress and set targets, but it can be difficult to translate these targets into actionable solutions. And this is where the Green Business Bureau can help.
Think of the Green Business Bureau as an online database of sustainability initiatives. On signing up, organizations can access GBB’s EcoAssessment and EcoPlanner where they can choose sustainable solutions to support their ESG strategy and targets.
As such, the GBB platform keeps track of where a company is at supporting the reporting process while also executing real sustainable change.
Many initiatives focus on creating a green culture, mission, and values to embed sustainability into the core of an organization. From here, it’s easier for businesses to progress toward their ESG-related goals.
Businesses are awarded a Green Seal of Approval once they’ve completed their Eco Assessment. This is a clickable seal that will take key stakeholders to a business’s Eco Profile. Here stakeholders can view what sustainability initiatives have been successfully implemented, along with an organization’s sustainability targets. As such, this Eco Profile will support a given ESG report.
You are here to create sustainable operations and devise an effective ESG strategy.
With that said, next, let’s take a look at how you can complete your ESG report.
ESG reporting guide: How does ESG reporting differ from sustainability reporting?
First things first, to create an effective ESG report, you need to understand how this differs from a sustainability report.
The main difference between ESG and sustainability reporting is the stakeholders each address. ESG is a concept used by investors, giving them a framework to assess a company’s performance and risk. As an investment framework, standards have been set by lawmakers, investors, and ESG reporting organizations.
Sustainability, on the other hand, has a broader stakeholder focus, accounting for employees, customers, and shareholders. In contrast to ESG, sustainability standards incorporate scientific input.
The distinction between ESG and sustainability reporting is subtle but important.
ESG criteria act as a shopping list that companies need to have on hand to attract responsible and ethical investments. These criteria are more specific and data-driven than the criteria used to assess an organization’s sustainability. This specificity might be the reason why ESG is becoming the preferred choice of phrase when thinking about purpose-driven businesses.
To invest effectively and responsibly, investors need ESG reports as these reports allow them to review reliable, accurate, comparable, and timely data.
Governance reporting is generally provided in an organization’s annual report. It’s standard for companies to provide a copy of their governance procedures and codes of ethics.
Environmental data is trickier to report as metrics are much more complex. New regulations are being developed in this field and with that, reporting standards may improve.
Social issues incorporate employee wellbeing, labor relations, and workplace health and safety. Companies have been slow to provide reliable and comparable data on social issues.
ESG reporting guide: ESG reporting requirements, standards, and frameworks
Before deciding what ESG frameworks and standards to use, it’s important you understand the difference between these two terms, which we explain below:
ESG framework: A framework is broad in its scope, giving a set of principles to guide and shape understanding of a certain topic. In this case, we’re referring to ESG. An ESG framework will guide the direction of ESG reporting, but will not provide a methodology for the collection of information, data, or the reporting itself. Frameworks are useful to use alongside ESG standards, or when a well-defined standard does not exist.
ESG standard: Standards are specific in their focus. They contain detailed criteria explaining what needs to be reported. In the context of ESG, this means standards dictate how information and data are collected, and how a report needs to be produced (what topics and business areas to include). Standards make frameworks more actionable by ensuring comparable, consistent, and reliable disclosure.
Voluntary disclosure frameworks
Under these frameworks, a company actively discloses its sustainability-related policies, practices, performance data, and information related to ESG criteria. It’s common for these frameworks to take the form of a questionnaire. Below we’ve identified the most popular voluntary disclosure frameworks.
Carbon Disclosure Project (CDP);
Global Real Estate Industry Benchmark (GRESB);
Dow Jones Sustainability Indices (DJSI).
Guidance frameworks provide recommended methodologies and guidance to help companies identify, manage and report on their ESG performance. Below we’ve identified the most popular guidance frameworks.
Sustainability Accounting Standards Board (SASB);
Global Reporting Initiative (GRI);
Task Force on Climate-Related Financial Disclosures (TCFD);
Carbon Disclosure Standards Board (CDSB);
International Integrated Reporting Council (IIRC).
Third-party aggregators refer to frameworks that assess an organization’s performance based on aggregated, and publicly available data. Data is collected from company-sourced filings, publications, company websites, annual reports, and/or sustainability or CSR reports. Listed below are the main third-party aggregator players.
Bloomberg Terminal ESG Analysis;
Institutional Shareholder Services (ISS E&S) Quality Score (ISS);
ESG REPORTING STANDARDS
European Financial Reporting Advisory Group (EFRAG);
International Sustainability Standards Board (ISSB).
ESG REPORTING FRAMEWORKS, STANDARDS AND CHALLENGES
There are currently over 600 ESG (Environmental, Social, Governance) reporting provisions globally. This is creating a soup of ESG interpretations, muddling what constitutes a sustainable investment vs what does not.
As such, The International Business Council (IBC) and the World Economic Forum published their report: Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.
This 2020 report attempts to standardize ESG metrics and disclosures for interoperable ESG reporting. Provisional metrics and disclosures were set and put forward at the IBCs 2020 Winter Meeting in Davos. The consultation saw more than 200 companies, investors and other stakeholders provide feedback. This feedback was used to refine ESG indicators.
The chosen ESG metrics were selected for their universality across industries and business models. It must be noted, however, that the metrics chosen do not replace relevant sector-specific and company-specific ESG reporting standards.
Given below is a snapshot of some of the core metrics and disclosures chosen:
Principles of Governance
Setting purpose: This is the company’s stated purpose, as an expression of how a business proposes solutions to economic, environmental, and social issues. A corporate purpose is to create value for all stakeholders.
Anti-corruption: The total percentage of governance body members, employees, and business partners who have received training on anti-corruption policies and procedures, broken down by region.
Principles of Planet
Greenhouse gas (GHG) emissions: Greenhouse gases are reported in metric tonnes of carbon dioxide equivalent (tCO2e) GHG Protocol Scope 1 and Scope 2 emissions. Scope 3 emission estimations are also given as appropriate.
Land use and ecological sensitivity: This is reported by the number and area (in hectares) of sites owned, leased, or managed in or adjacent to protected areas and/or key biodiversity areas (KBA).
Principles of People
Diversity and inclusions (%): Percenta