The world is changing and so are the business standards for investors. What used to be an afterthought is now an integral part of business. Sustainability, especially as it relates to ESG Reporting, has become an indispensable part of the market as a whole.
Investors of all types — from small family-run businesses to larger businesses — are beginning to look at companies through a different lens. They’re no longer just interested in how much profit a company makes, but also how the business impacts society and the environment.
In this blog, we’ll explore ESG (environmental, social, and governance), looking at general reporting requirements. We’ll also cover why they matter, who benefits from them, and when companies should begin implementing ESG reporting in their operations.
What does ESG stand for?
- Environmental: The environmental part takes into account energy use and the impact the business and its operations have on the planet. It generally encompasses climate change, carbon emissions, waste management and energy efficiency, among other things.
- Social: The social element of the framework pays particular attention to society at large, and the impact the business has on people and communities. It may take into consideration inclusivity and diversity, human rights, privacy, and much more.
- Governance: Governance looks primarily within the company and its internal systems, factoring in best practice considerations, such as the makeup of the board, auditing, leadership and regulation.
What are ESG reporting requirements?
ESG reporting requirements are a set of standards that investors use to measure the impact of companies on the environment and on society. The standards are applied to all types of companies, regardless of their size or business model. Although ESG trends often change and go through cycles, investors are increasingly using this information to determine which companies are worth investing in.
Companies typically report ESG metrics to investors. Investors then use the metrics to determine how much value a company adds to the world. Once a company discloses its ESG metrics, it can become part of the public record. Investors can then access the data as easily as they can access financial statements. The public also can see the data, allowing them to make more informed decisions about their purchases. Investors and consumers can use the data to identify which companies are best suited to their needs.
For example, a company that is environmentally conscious may be a better fit for someone looking for a green energy solution. A company that is socially conscious may be a better fit for someone who wants to align with a company that practices responsible business.
Although ESG reporting is not mandatory, things are changing. In March 2022, for instance, the US Securities and Exchange Commission (SEC) proposed requirements for the disclosing of climate-risk information for publicly traded companies.
Banks, asset managers and others have been reporting ESG metrics for some time now, as part of various listing rules (like TCFD) or voluntarily, through things like the Global Reporting Initiative (GRI) or the Sustainable Finance Disclosure Regulation (SFDR).
However, this is set to change. Along with the aforementioned SEC proposal, other important things are happening, and the requirements are moving ever closer to mandatory ESG reporting.
Many of the UK’s largest financial institutions and traded companies must now report under the Task Force on Climate-Related Financial Disclosures (TCFD) and ESG reporting is expected to become UK law by 2025 at the latest due to movement from The International Sustainability Standards Board (ISSB).
Why is ESG reporting important?
Investors are increasingly looking at more than just a company’s financials when deciding if and where to invest capital. They also want to understand how a company impacts the environment and how it manages its relationships with employees and customers.
If a company fails to report its ESG metrics it is at risk of losing investors or failing to attract new ones, which could have a significant impact on the company’s bottom line. A company that fails or refuses to report its ESG metrics, or misrepresents them, it could then find itself cut off from funding sources.
Major banks and financial institutions may require ESG reporting as a condition for loaning money now, too. Without that money, the company’s operations could grind to a halt. Its ability to provide products and services would be severely limited and it may even have to close its doors.
Who benefits from ESG reporting?
Investors and consumers are the main beneficiaries of ESG reporting requirements. Investors can use the data to make better-informed decisions about which companies to invest in. Consumers can use the data to make more informed purchasing decisions.
A company that does not have good environmental practices is likely to face consequences for the environment, and it might also have to deal with the fallout from bad public relations. People vote with their wallets, and we’ve seen numerous examples of environmentally-harmful companies boycotted by the general public.
But it’s not all for the benefit of society and the environment, the company itself benefits from reporting ESG data, too. It ultimately helps them avoid the reputational risk associated with unethical business practices or a lack of transparency, which is becoming increasingly important in society. It also helps the company make key business decisions that further benefit the company and its stakeholders.
When should companies start ESG reporting?
Companies should begin implementing ESG reporting as soon as possible. Especially as we’re moving closer to mandatory ESG reporting. Some businesses have begun incorporating their ESG teams with the finance department, so they can pay as much attention to this as they do their finances.
Ideally, companies should start doing so at the beginning of their operations — or even before they begin operations. The sooner companies start implementing ESG standards in their operations, the better. This allows the companies to build up a track record of best practices and positive impacts on the environment and on society. Investors and consumers will then have a better understanding of how a company impacts the environment, its employees and society.
If companies wait until the last minute to implement ESG standards, they’ll have a limited amount of time to prove their worth to investors. Some investors may cut off funding until the company makes changes to meet the standards and others may wait until the company finishes implementing the standards before funding it. Either way, the company could face a serious setback.
The future of ESG reporting
As the world grows ever more conscious of environmental and social issues, it’s increasingly important for businesses to report their ESG metrics. A company that wants to be successful and sustainable needs to follow the same rules that apply to individuals. It needs to take care of its employees, consider the impact it has on society and the environment, and be honest about its practices. Investors and consumers alike look to these reports as a guide to making informed funding and buying decisions.
