ESG reporting — or environmental, social, and governance reporting — has emerged as a crucial aspect of corporate responsibility and sustainability. ESG reporting is the disclosure of non-financial information related to a company's performance and impact on environmental, social, and governance factors.
What is ESG Reporting?
ESG reporting is a comprehensive framework that enables companies to communicate their efforts and progress toward sustainable practices and responsible business operations. It encompasses three main pillars:
Environmental
Environmental factors in ESG reporting deal with a company's effects on the natural world. This covers things like their carbon emissions, how much energy they use, how they manage waste, what resources they consume, and any programs they have to tackle climate change or safeguard plant and animal species.
The goal for enterprises is to optimize supply chains to achieve net zero emissions, drive circularity, minimize GHG emissions and resource depletion and partner with suppliers who follow the same practices internally.
Social
The social part of ESG looks at how a company treats its employees, customers, suppliers, and the communities where it does business. It examines things like whether the company respects human rights, has good labor practices, makes safe products, promotes diversity and inclusion, and gives back to local communities.
Under this aspect, the goal for enterprises is to partner with suppliers that contribute to improving social equality, irrespective of the size of the business — small, minority owned or other socially relevant criteria.
Governance
The governance piece of ESG is all about how a company is run behind the scenes. It covers stuff like the makeup of the board of directors, how much the executives get paid, whether they have good risk management practices, if they operate ethically and avoid shady business dealings, how open and honest they are, and if they take their responsibilities to employees, customers, and investors seriously.
Origins of ESG
From the environmental movement of the 1960s and the rise of social and governance concerns during the 1970s to the 2020s when ESG reporting witnessed a significant momentum as investors, regulators, and stakeholders increasingly recognize its value in assessing a company's long-term sustainability and resilience — the concept of environmental, social, and governance or ESG reporting has continued to evolve, driven by increasing awareness of sustainability issues and the need for corporate transparency.
ESG reporting aims to provide stakeholders, including investors, customers, regulators, and the general public, with a comprehensive understanding of a company's non-financial performance and its commitment to sustainability and responsible business practices. By disclosing ESG-related information, companies demonstrate transparency and accountability, enabling stakeholders to make informed decisions and assessments.
With supply chain and procurement as key drivers to execute sustainable strategies, enterprises need to implement policies across the board and drive innovation with external ecosystems, including measuring progress and maintaining transparency.
ESG Reporting and Its Frameworks
There are different guidelines and rules for ESG reporting put together by big international groups and industry organizations. As more and more people want companies to be open and take responsibility, the expectation is that ESG reporting is going to become a core part of how companies report their performance and make big decisions moving forward.
The guidelines and methodologies from the diverse ESG frameworks enable enterprises to measure, report, and communicate their ESG performance consistently. Some of the prominent ESG reporting frameworks include:
Global Reporting Initiative (GRI) Standards
The GRI Standards are basically the gold standard when it comes to sustainability reporting guidelines used by companies all over the world. They provide a comprehensive set of rules and instructions that allow businesses to clearly report on how their operations impact the economy, the environment, and society as a whole.
Sustainability Accounting Standards Board (SASB) Standards
The SASB Standards are tailored guidelines for different industries when it comes to ESG reporting. They pinpoint the key environmental, social, and governance issues that really matter financially for each specific sector. This helps companies share relevant and useful ESG info with investors to factor into their decisions, instead of just generic sustainability data.
Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD provides recommendations for companies to disclose climate-related risks and opportunities, helping stakeholders assess the potential financial implications of climate change on organizations.
United Nations Global Compact (UNGC)
The UNGC is a voluntary initiative that encourages businesses to adopt sustainable and socially responsible policies and report on their implementation and progress.
International Integrated Reporting Council (IIRC) Framework
The IIRC Framework encourages companies to do integrated reporting, which means combining their financial numbers and performance data with non-financial parameters such as sustainability metrics and governance details into one comprehensive report. The idea is to show how all the different pieces — strategy, management, results, future outlook — are interconnected and impact each other, rather than keeping them separated.
Summing Up the ESG Frameworks
All the aforementioned frameworks offer enterprises the necessary guidance on reporting principles, performance indicators, and best practices, enabling companies to align their ESG reporting practices with industry standards and stakeholder expectations.
ESG reporting is valuable not only because it enables enterprises to identify risks and opportunities that may impact their long-term performance, but also because it can help improve transparency and enhance brand image of enterprises. By reporting on enterprise ESG efforts, companies can mitigate impacts from potential ESG risks, reduce waste and increase cost savings, and also ensure they are in compliance with regulatory requirements — enabling more effective strategic decision-making.
What is an ESG Score or Rating?
An ESG score or rating is basically a grade that companies get for how well they're doing on environmental, social, and governance issues. It's a number or category, like an A-F grade, that independent rating agencies and research firms give out after they've looked closely at a company's policies, practices, and reports related to ESG topics. Think of it as a report card evaluating their sustainability efforts and ethical operations.
ESG scores and ratings are calculated based on a variety of factors, including a company's ESG disclosures, policies, initiatives, and performance metrics. The specific methodologies and weightings used to calculate these scores may vary between different rating agencies, but they generally assess a company's ESG risks, opportunities, and overall management of ESG issues.
Some of the well-known ESG scores and ratings vendors are Bloomberg ESG Data, Fitch Ratings, MSCI, Refinitiv, and S&P Global Corporate Sustainability Assessment.
Typically, the scores range from 0 to 100, where a score of less than 50 is considered poor and a score of more than 70 is considered good. Alternatively, there are many ESG ratings vendors that provide letter scores that may denote leader, average or laggard.
ESG scores and ratings are designed to provide investors, asset managers, and other stakeholders with a standardized and comparable measure of a company's ESG performance. They help investors integrate ESG considerations into their investment decisions and portfolio construction.
Best Practices & Tips for ESG Reporting
ESG reporting helps enterprises align their efforts to develop better ESG practices and to fully use the opportunities that arise from the understanding. And to ensure effective and credible ESG reporting, companies should consider the following ESG best practices and tips:
Engage With Stakeholders
Identify and engage with key stakeholders — such as investors, customers, employees, and communities — in order to understand their ESG priorities and expectations better.
Align With Recognized Frameworks
Utilize widely accepted ESG reporting frameworks — such as GRI Standards, SASB Standards, or TCFD recommendations — to ensure consistency and comparability.
Prioritize Material Issues
Enterprises need to thoroughly conduct materiality assessments to identify their most significant ESG issues relevant to their business and stakeholders, and accordingly focus their reporting efforts on those areas.
Implement Robust Data Collection and Management Systems
Develop processes and systems to collect, manage, and analyze ESG data accurately and consistently across the organization.
Set Measurable Targets and Track Progress
Enterprises must clearly define their ESG targets and key performance indicators (KPIs) to all stakeholders, and regularly monitor and report on progress toward achieving those targets.
Ensure Data Quality and Transparency
Implement internal controls and external assurance processes to ensure the accuracy, completeness, and transparency of ESG data and disclosures.
Integrate ESG Into Business Strategy
It is essential that enterprises embed ESG considerations into their overall business strategy, decision-making processes, and risk management frameworks.
Focus on Effective Communication
Present ESG information in a clear, concise, and accessible manner, using appropriate visualization tools and storytelling techniques.
Focus on Continuous Improvement
Regularly review and enhance your ESG reporting practices, incorporating feedback from stakeholders and aligning with evolving best practices.
Importance of ESG Reporting
ESG reporting is increasingly becoming a critical component of corporate responsibility. Organizations — whether global or local in any geography — as a result of such reporting, have been able to demonstrate their commitment to sustainability, ethical practices, and long-term value creation for all stakeholders, including customers.
ESG reporting has become increasingly important for several reasons, including:
Stakeholder Expectations
Stakeholders, including investors, customers, employees, and regulators, are demanding greater transparency and accountability from companies regarding their environmental, social, and governance practices. ESG reporting addresses these expectations and builds trust and credibility with stakeholders.
Risk Management
ESG reporting helps companies identify and manage risks associated with environmental, social, and governance factors, such as climate change, human rights violations, or governance failures. By proactively addressing these risks, companies can mitigate potential negative impacts and protect their reputation and long-term value.
Investor Demand
Investors are increasingly integrating ESG considerations into their investment decisions, recognizing the potential financial implications of ESG risks and opportunities. ESG reporting provides investors with the information they need to assess a company's sustainability performance and make informed investment choices.
Regulatory and Legal Compliance
Many jurisdictions are introducing mandatory or voluntary ESG reporting requirements, and companies need to comply with these regulations to avoid penalties or reputational damage.
Competitive Advantage
Businesses with good practices around environment, society, and governance can stand out. They are open about what they do. This helps attract and keep talented workers. People today care more about companies doing the right things. So, being a leader in ESG gives an edge over competitors.
Operational Efficiency
Reporting on ESG makes companies look at using less energy, cutting waste, and keeping employees happy. Fixing issues in these areas saves money and makes operations run better.
Reputation and Brand Value
Good ESG reporting boosts a company's image and brand value. People trust the company more. Customers stay loyal longer. The company gets permission to keep doing business. This helps the company last into the future.
Challenges of ESG Reporting
Companies face some hurdles when doing ESG reporting, which looks at environmental, social, and governance factors. But ESG reporting in turn helps companies a lot more than perceived.
Data Collection and Measurement
Getting correct ESG data from all parts of a company can be tough. Companies have different locations, units, and supply chains. Gathering data from all these places takes work.
Lack of Standardization
There is no single way that everyone reports ESG. This makes it hard to compare companies. Different companies report in different ways.
Materiality Assessments
Deciding which ESG issues matter most for a company is not easy. Companies must talk to people and look at a lot of information. What's important can be subjective.
Integration With Existing Reporting Processes
Putting ESG reporting into a company's normal financial reporting takes planning. Different teams must work together to align the processes.
Assurance and Verification
Ensuring the accuracy and credibility of ESG data and disclosures may require independent assurance or verification, which can be costly and time consuming.
Capacity and Expertise
Many businesses do not have enough people or skills to create good reports on environmental, social, and governance issues. They may not have the time or knowhow to make detailed ESG reports.
Stakeholder Engagement
Talking to all the different groups that care about ESG can be hard. These groups have different interests and expectations about ESG. Companies must listen to everyone's concerns and address them properly.
Benefits of ESG Reporting
ESG reporting offers several benefits for companies and stakeholders:
Builds Trust and Accountability
ESG reporting shows stakeholders like investors, customers, and employees that a company is serious about sustainability and ethics. By being transparent, it demonstrates a real commitment to doing good business practices.
Reduces Risks
Identifying and dealing with ESG risks head-on through reporting helps companies avoid potential messes that could damage their reputation, disrupt operations, or impact their bottom line in the long term.
Attracts Responsible Investors
More and more investors want to put their money into companies that walk the talk on environmental, social and governance issues. Solid ESG reporting builds confidence with these sustainability-minded investors.
Boosts Efficiency and Cuts Costs
The process of ESG reporting often uncovers areas where efficiencies can be improved — whether it's using less energy, reducing waste, or improving employee engagement. Making those fixes leads to real operational and cost savings.
Gaining an Edge Over Competitors
Top-notch ESG efforts and reporting can help a company stand out from rivals. It makes them more attractive to talented potential employees, builds up their brand reputation, and keeps customers loyal.
Staying on the Right Side of the Law
There are current laws and more coming down the pike requiring companies to disclose sustainability data and non-financial info. Solid ESG reporting ensures they comply and avoid penalties or PR nightmares for violations.
Keeping Stakeholders in the Loop
Good ESG reporting opens the door for real dialogue with investors, communities, activists and other stakeholders. Companies get valuable feedback to better understand and meet the expectations of their stakeholders.
Future of ESG Reporting
Moving forward, enterprises can expect ESG reporting to get more standardized and regulated. As people keep demanding more transparency, companies are going to face intense pressure to provide consistent, comprehensive, and verified ESG disclosures that check all the boxes.
New technologies such as blockchain, AI, and advanced data analytics could make it way easier and more accurate to collect, analyze and report all the ESG data. There's also a move toward integrated reporting, where the financial numbers and non-financial sustainability stuff is combined into one unified report. This shows how a company's environmental, social, and governance impacts are interconnected with their overall performance and bottom line.
In a nutshell, ESG reporting is just going to keep getting more robust and central to how businesses operate.
How GEP Can Help
GEP understands that ESG sits at the heart of business strategy today as companies respond to new expectations of consumers, investors, governments and employees.
GEP partners with leading enterprises to not only enable their procurement and supply chain functions to drive organization ESG goals across the value chain, but also become more efficient while tracking and tracing results.
True ESG champions know that they need to go beyond the business to make a truly positive impact. Explore how GEP can help you achieve ESG excellence.
