What Is ESG Reporting and Why Is It Important?
ESG performance has become vital for businesses in recent years.
Consumers and investors alike seek companies that can show they are environmentally and socially responsible.
According to research from the Environmental Defense Fund, 93% of consumers want to hold businesses accountable for their environmental performance.
If you’re wondering, “what is ESG reporting?” then there are a few key things you need to know. Let’s take a look at what ESG reporting is, the criteria for it, the reason for its importance, and how to get an excellent ESG score for your business.
What Is ESG Reporting?
ESG stands for Environmental, Social and Governance. These are the three areas that companies will report on to give a snapshot of how sustainable and responsible their company is.
Investors use this information to make informed decisions about companies they think they would invest in. Investors now often look for excellent ESG performance because it’s something that customers care deeply about. ESG investing is a form of socially responsible investment.
Companies voluntarily disclose this information to consultancies and agencies that then use their responses to generate ESG scores. These scores are what tell investors about how the companies are performing.
As mentioned above, there are three critical criteria for ESG reporting – environmental, social and governance. If you’re intent on improving your company’s ESG reporting, then you need to make these three things a deeply ingrained part of your company’s foundational statements.
Let’s take a closer look at each of these criteria and what they mean in terms of ESG performance reporting.
The environmental criterion describes companies’ energy use and their overall environmental impact and responsibility. This can be any aspect of their business that has an effect on the climate, but some examples include:
- Energy use
- Water treatment
- Treatment of animals
- Carbon dioxide emissions
- Air quality
Companies are evaluated on how they identify and respond to both ongoing and potential environmental issues. For example, suppose a company knows that it is handling toxic or dangerous waste materials as part of its business. In that case, they should be able to show they are aware of the dangers and have strategies in place to mitigate them.
Investors and customers see companies that don’t report these aspects as non-caring about the climate and the environment, and they are likely to take their money elsewhere.
The social aspect is about how companies manage and interact with people, other businesses, and cultures. For example, do your company’s suppliers adhere to the same ethos and set of principles? Does your business contribute to local nonprofits? Does your company make a difference in the communities in which it operates?
Some other things that this criterion covers are:
- Gender issues
- Employee engagement
- Customer interaction
- Labor standards
Businesses cannot exist within a vacuum. They need to show they are responsible employers who care deeply about their local community and engage in furthering positive social causes.
When surveyed by the BSR, 76% of 152 top business leaders considered ethics and integrity a critical part of their business operations and a high priority area to focus on.
The governance criterion is all about how your company works internally. Investors will want to know that your internal procedures are accurate and transparent and that there is a good deal of democracy in making significant decisions.
Investors will also want to know that the company is following the best practices in its given industry and that the company is staying on top of any potential violations of either local regulations or its own internal rules.
This criterion also covers whether or not your company has any potential conflicts of interest with its board members and that the company is not using any political contributions to curry favors.
Why Is ESG Reporting Important?
Now let’s look at why ESG reporting is important. We can also break this down into three categories – transparency, accountability, and confidence.
Investors want to see that you’re taking your values seriously. To do that, you need your values to translate into consistent behaviors that show your commitment to good ESG performance.
ESG reporting allows investors to see what your targets and goals are. It shows investors how you’re handling any current or potential issues against the three criteria.
Take gender-based pay issues, for example. Reporting on the presence (or lack thereof) of gender-based pay differences gives investors and customers a snapshot of how your company deals with these issues.
Reporting gives investors a chance to make an informed decision on which businesses they want to invest in, so it’s in your best interests to report accurately and honestly on all issues you’re facing.
Another reason ESG reporting is so important is that it holds board members and stakeholders accountable for their behaviors regarding ESG issues.
Accountability is essential in all walks of life. Scrutiny and accountability help to ensure businesses are always following best practices and acting upon issues they regard as important.
Any business can say they can care about environmental or social issues, but ESG reporting lets its behaviors and practices speak for themselves.
Reporting is also good for comparability. It can provide a benchmark for companies to work against by comparing them with other business leaders in their industries. It can also help to show investors and businesses the areas of the company that need to be focused on more intensely.
Finally, ESG reporting can give credence to any claims a company makes. As mentioned above, any company can talk about its commitment to green issues, but robust and honest reporting validated by an ESG scoring company can verify those claims.
Investors are far more likely to put money into a business when they can be sure that the information they’re providing is accurate and legitimate. Regardless of whether they’re investors or customers, people like to know that their money is going towards companies that share their values, and robust ESG reporting is one of the best ways to show that to them.
ESG Reporting Standards
While there are no set ESG reporting standards across the board, there are some best practices, and similar things investors look for. ESG throughout the supply chain and the rest of your business should be constantly monitored to be included in your report.
How to Report
If you’re wondering how to do ESG reporting, there are a few avenues you can take. Many companies opt to do their ESG reporting through annual sustainability and integrated reports. These reports should be detailed, transparent, and cover all the criteria.
Another thing companies can do is voluntarily sign up to be scored on their ESG performance. This procedure usually involves filling out a survey provided by a third party, who then scores your responses based on a set of methodologies and criteria.
Scoring and Methodologies
There is no set scoring methodology for companies to follow. Those that do ESG scoring will often have their own internal methodologies. But, some common themes throughout them can help you understand how the scoring works.
The first thing is disclosure. Scorers want to see that you’ve been able to adequately identify an ESG problem and be able to explain its effects and importance.
Next, scorers will want to see how you’ve managed the challenges. This can be either redemptive or pre-preemptive action depending on the context. Finally, scorers are looking to see if your company is leading the way in its response and prevention of environmental or social issues.
How to Get a Good Score
The best way to get a good ESG score is to always ensure your business practices and behaviors are closely aligned with sustainable and responsible values.
When you ingrain this as part of your company thinking, recognizing and solving ESG problems becomes second nature to your team. There are a few other things you can do to maximize your chances of getting a good score.
Metric and Frameworks
Make sure you’re prioritizing the metrics and frameworks that are most applicable to your company. Reporting great water treatment procedures is no use to a company that doesn’t work with water.
Doing this helps show that your business is taking the appropriate steps in areas that are a high priority.
Don’t just focus on how you solved problems. Be sure to report on the processes your company has in place to head off any potential issues before they arrive.
This shows investors that you’re committed to good ESG performance as a habit rather than a necessity.
Don’t view your ESG responsibilities as some separate matter to be dealt with later. Make it a part of every aspect of your company.
Lots of small actions can add up and become huge changes. The other benefit of this is your company can create a platform for dealing with future problems. It also means your annual ESG reporting won’t become some burdensome chore, as you have a full year’s worth of everyday work to back it up.
Transform Your Business Today
So, what is ESG reporting? It’s an important tool for creating transparency, accountability, and confidence in your brand for investors and customers. Good ESG performance can determine the future of your brand’s success.
If you need help transforming your brand and making it as successful as it could be, contact us at Savage Brands today. Our team of experts can help you create a great business culture and set your company apart from the crowd.
Savage Brands believes in unleashing the good inherent within all organizations. Business results are driven by connecting with people at the belief level. That’s why we align everything a company says and does with its Purpose through a proven process that links strategy and execution with “why.” We solve the challenges corporate America faces by building tribal loyalty from the inside out, focusing on people first to deliver authentic brand experiences. Savage builds purposeful brands, communications, leaders and cultures.