ESG reporting: What is it, what is it used for and why is it important?
With ESG reporting standards becoming mandatory in many countries, it’s only a matter of time before businesses worldwide will have to address the ESG reporting requirements in their region. So will yours be next, and if not — why is ESG important?
Feb 01, 2023 by Craig Woolard
There are many advantages to starting the process early before ESG reporting becomes mandatory. This guide will cover everything you need to know about ESG reporting and why kickstarting the process can give you a leg up on the competition.
Before we jump in, let’s start with a basic understanding of what ESG is — and what it’s not.
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First, ESG reporting is not the same as sustainability reporting — although it is related.
ESG is the abbreviation for “Environmental, Social, and Governance” — and this refers to a form of risk management that addresses a set of sustainability issues, including environmental and social issues.
What are ESG regulations?
ESG regulations are the guidelines to mitigate any adverse impacts their business operations could have on the environment or society.
Additionally, ESG regulations encourage companies to operate ethically, sustainably, and responsibly.
ESG and sustainability reporting
The terms “ESG” and “sustainability” are often used interchangeably, but they have slightly different meanings.
What’s the difference between ESG and sustainability?
Sustainability is a broad term that covers many “green” and environmentally friendly topics on corporate responsibility. However, for many investors, “ESG” has become the preferred term.
The key distinction between sustainability and ESG reporting lies in the stakeholders each report focuses on. ESG is a framework that investors use to assess a company’s performance and risk profile — and the increased focus on the three pillars of ESG (environmental, social, and governance) has shifted the way companies disclose their ESG performance to investors.
On the other hand, sustainability has a broader stakeholder focus and refers to a wide range of issues that factor into an organization’s long-term viability. Sustainability reporting accounts for employees, customers, and shareholders; but can also include ESG factors, such as innovation, community engagement, and resilience.
As an umbrella term, sustainability covers a broad range of economic, social, and environmental issues. In contrast to ESG reporting, sustainability standards focus more on scientific data.
ESG frameworks and standards: what’s the difference?
Understanding the difference between ESG frameworks and standards is essential before deciding which to use. Essentially, frameworks could be voluntary, but standards are likely to be a requirement.
- ESG framework: A framework helps guide compliance with ESG standards whenever a well-defined standard does not exist. Therefore, ESG frameworks are useful as a general set of principles that help guide ESG reporting. Frameworks can be voluntary.
- ESG standard: Standards make frameworks actionable. ESG standards are detailed criteria for ESG reporting and provide a method for collecting and reporting information. The details in ESG standards could include steps outlining how data is collected — ensuring comparable, consistent, and reliable disclosure. Standards may be required.
What is ESG reporting?
ESG reporting discloses a company’s environmental, social, and governance performance goals and practices to stakeholders.
This information can include details about a company’s carbon emissions, waste management practices, employee diversity, and inclusivity policies, such as its gender and LGBTQ+ human rights initiatives or anti-corruption efforts.
Presently, companies have a lot of freedom when it comes to disclosing information about their ESG performance. Companies can present this data in any way they consider to be the most useful to investors and stakeholders.
However, ESG reporting frameworks have been established by the following organizations:
- Global Reporting Initiative (GRI):
- (Africa, Asia, ASEAN, Brazil, China, LATAM, USA)
- Carbon Disclosure Project (CDP):
- (Asia, Europe, India, Japan, LATAM, UK, USA)
- Workforce Disclosure Initiative (WDI):
- (United Kingdom, European Union)
- Standards and the UN Global Compact (UNGC):
- (United Nations – 162 countries)
- Streamlined Energy and Carbon Reporting (SECR):
- (Europe, United Kingdom)
- Task Force on Climate-related Financial Disclosures (TCFD):
- (EU, UK, Japan)
- Sustainability Accounting Standards Board (SASB):
- (APAC, CAN, Europe, LATAM, Africa, Middle East, USA)
Organizations can conduct ESG reporting voluntarily, or laws may require it. Companies might also be required to disclose ESG performance in financial reports or specialized reporting frameworks — such as the Sustainability Accounting Standards Board (SASB) or the Global Reporting Initiative (GRI).
The main goal of ESG reporting is to provide investors, customers, and other stakeholders with a clear and transparent picture of a company’s overall sustainability goals and performance.
What do ESG reports include?
ESG reports generally focus on quantitative and qualitative details about the practices around environmental, social, and governance issues. The key pillars that ESG reports focus on are:
- Environmental performance: This can include information about a company’s carbon emissions, energy, and water consumption, and waste management practices. For example: what is the organization doing to be a good steward of the environment? This details the company’s efforts to reduce its impact on the environment through renewable energy, recycling programs, and responsible use of resources in the supply chain.
- Social performance: This ESG reporting can include information about a company’s labor standards, including ethnic or gender diversity/LGBTQ+ policies that nurture people in the workplace and community engagement activities. For example: what is the organization doing to improve the lives of the communities it serves? This includes special community involvement activities, employee satisfaction surveys, and investments in the community.
- Governance performance: This can include information about the company’s internal controls, such as procedures governing executive board members and compensation policies. For example: what is the organization doing to safeguard itself and mitigate the risks of corruption or conflicts of interest? Examples may include efforts to prevent corruption through special audit committees or whistleblower programs to protect companies from fraud and other criminal activities.
Currently, there is no standardized format for reporting ESG information. Companies could publish ESG reports in structured, semi-structured, or a wide variety of unstructured formats — such as a company’s website, PDF report, or scanned images of machine-printed paperwork.
Since the information layout varies in structure, finding the key data points to reliably evaluate ESG could be an ongoing challenge for many investors and organizations.
Who assigns ESG scores?
Investors use ESG scores as a criterion for evaluating the risks and opportunities associated with an organization’s impact on the planet and society. Capital market investors and analysts are example groups who use ESG scores to evaluate a company’s performance regarding its environmental, social, and governance practices.
Many third-party organizations, including rating agencies, research firms, and index providers, also assign ESG scores.
Some notable organizations include:
- Bloomberg — ESG Data Services
- Sustainalytics — ESG Risk Ratings
- Dow Jones — Sustainability Index Family
These rating agencies are the most common ESG score providers. They use a diversity of methods, procedures, and data sources to calculate scores based on ESG metrics.
Since each of these agencies use a different set of criteria to develop ESG scores, it’s worth mentioning that some ESG scores are based on publicly available information, such as the open-source unstructured data on a company’s website or the engagement on its social media channels. Others are based on additional research, data, and interviews with the company.
Adding to the complexity of ESG compliance, scores can vary between providers and may not always align. Since there is no standardized scoring system or standard ESG regulation, it’s essential to consider the methods, data sources, and scope of the ESG score when evaluating ESG performance.
How to get a good ESG score
A good ESG score grades an organization on its ESG efforts and shows investors that the company can meet its commitments. As ESG becomes a global priority for investors and companies, solid compliance will significantly impact a company’s valuation in the future.
Organizations can improve their ESG scores by implementing and communicating sustainable business practices and complying with the key steps outlined in their ESG reporting framework. Automation technology can play a key role in how companies improve their ESG scores.
Since so much ESG reporting is based on quantitative data in annual reports and qualitative data from customer surveys, emails, interview transcripts, or even open-source information on the web, next-gen artificial intelligence can help companies collect key data points from these various unstructured documents and improve their ESG scores.
For example, an end-to-end intelligent document processing (IDP) platform, such as Automation Hero’s Hero Platform_ is particularly adept at comparing information from various unstructured documents and verifying the key data points for ESG compliance with above-human accuracy.
Why Is ESG reporting important?
ESG reporting is important for several reasons:
1. ESG is required in certain countries
Many countries and regions have implemented regulations and guidelines that require companies to disclose their ESG performance, such as the EU Non-Financial Reporting (NFR) Directive and the Task Force on Climate-related Financial Disclosures (TCFD). Multinational companies may also be required to report ESG in countries where they do business, even if they’re not based there. ESG reporting frameworks can help organizations to comply with these regulations and guidelines.
2. ESG reporting helps mitigate risks
ESG risks, such as climate change, human rights abuses, and weak governance practices, can have a significant impact on an organization’s operations and reputation. ESG reporting allows organizations to identify, assess and manage these risks — which can also help to protect their long-term viability and resilience.
3. ESG promotes transparency, accountability & integrity
When companies report their ESG goals, it demonstrates transparency, accountability, and ethical integrity to multiple stakeholders.
By holding themselves accountable, ESG-compliant companies promote transparency and goodwill to employees, customers, and investors — which could also raise a company’s profile in the public domain and increase its economic evaluation.
Additionally, ESG reporting demonstrates a vested interest in society and the environment — and this instills trust in ESG-compliant companies.
4. ESG meets stakeholder expectations
Investors and customers are increasingly interested in the environmental and social impact of the companies they invest in or buy from. ESG reporting can help organizations meet these expectations and build trust with stakeholders.
Consequently, ESG reporting is a critical opportunity for a company to communicate its environmental, social, and governance goals for attracting and winning new investors.
5. ESG reporting is good for business
Savvy investors know “goodwill” is one of the most valuable intangible assets on the balance sheet. While goodwill represents many things that are not easily quantified, its value can give another acquiring company a competitive advantage.
For example, the value of a company’s brand, reputation, built-in customer base, and employee relations all factor into the premium one company may pay to acquire another.
Since ESG compliance is an ethical decision, reporting ESG performance can potentially increase a company’s valuation. While ESG reporting is optional in many regions, it’s also good for business, and that’s what makes it such an important investment decision.
Organizations that implement sustainable business practices and disclose their ESG performance may be better positioned to manage risks, access capital, and attract and retain customers and employees. This can ultimately lead to improved financial performance.
Ready to take the next step?
Learn how the right tool can automate ESG reporting:
The laws and regulations around ESG compliance change fast. Keeping up with them is not only a challenge — it’s simply impossible.
However, that’s where artificial intelligence (AI), specifically intelligent document processing (IDP), can help.
- Learn how IDP works — our guide to IDP will guide you every step of the way.
- See how IDP works — watch dozens of use cases. Filter by industry and see what IDP can do.
- Speak with an expert — tell us about your specific use case.
- Get a personalized demo — schedule a demo, and our Heroes will get in touch!
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