There has been a major increase in Environmental, Social, and Governance (ESG) reporting over the past few years as investors, customers, employees, non-governmental organizations, and numerous other stakeholders have applied pressure onto companies to articulate their operational standards and values.
What is ESG Reporting?
ESG reporting refers to the disclosure of a company’s environmental, social, and governance data. A clearly communicated ESG report should provide a snapshot of a business’ impact in these three key areas.
Importance of ESG Reporting
Investors are increasingly utilizing ESG reporting to guide their investment decisions. Companies that lack clear and meaningful ESG reports could be deterring major funding from capital markets.
It was reported in 2020 that 90% of S&P 500 companies were publishing sustainability and responsibility reports as early as 2019.
Criteria for Measuring ESG
Environmental: Measures energy use as well as overall environmental impact on the planet
Indicators Include: Energy efficiency, biodiversity, deforestation, waste management, etc.
Social: Measures how a company fosters its culture and people, and the ripple effect it has on the broader community
Indicators Include: Customer satisfaction, data protection, human rights, labor standards, etc.
Governance: Measures a company’s internal control system
Indicators Include: Board compensation, political contributions, audit committee structure, etc.
One S&P Global report on governance displays how companies ranking well below the average score are more prone to mismanagement and jeopardize their ability to capitalize on business opportunities over time.
Implications
Today, companies that do not provide ESG reports are seen as lacking transparency. Those that do showcase strong ESG reporting have shown lower risk, higher ROI, and better resilience during a crisis.
In extreme cases, failure to comply with ESG reporting standards can eventually lead to the public’s distrust in a company and, eventually, feed into a business’ downfall.
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