There’s been a recent shift in capital markets and business where investors increasingly focus on areas like an organization’s sustainability and customer relations. While these areas used to be considered philanthropic activities, they’re now seen as essential pillars of a successful organization.
Many consumers have also shifted their support to more environmentally friendly and socially conscious organizations.
As a result, many organizations release ESG reports to attract investors and provide transparency to stakeholders, employees, and customers. But what is an ESG report, and why might you need one for your organization?
This article will explain what ESG reporting is, why it’s important, and what creating one entails.
What is ESG reporting for companies?
ESG, or environmental, social, and governance reporting, is comprised of various data disclosures for business operations related to ESG. They inform stakeholders, investors, employees, and customers about an organization’s progress toward its ESG-related goals.
These reports are often included in an organization’s annual report but can be released at any time or frequency.
Each pillar of ESG reporting addresses an organization’s risk management, sustainability, and social responsibility. When progress is made, it can make an organization more attractive to investors and customers.
ESG reporting began with socially responsible investing, but it was brought to the forefront of the business world when the United Nations partnered with various major financial institutions to find ways to integrate ESG concerns into investing.
According to Deloitte1, the number of retail and institutional investors that use ESG reports for at least 25% of their portfolios rose from 48% in 2017 to 75% in 2019. They also predict that the number of ESG-mandated assets in the U.S. could account for half of all investments by 2025.
Is ESG reporting mandatory?
While ESG reporting itself isn’t mandatory in the U.S., certain aspects of it are required for public companies.
The Securities and Exchange Commission (SEC) requires all publicly traded companies to publish environmental compliance costs. All organizations on the New York Stock Exchange must also adopt and publish their code of corporate behavior and ethics.
Additionally, in March 2022, the SEC proposed requiring organizations2 to publish their climate risks and risk management processes. Under the proposal, organizations must release their greenhouse gas emissions and certain climate-related financial disclosures.
Outside of the U.S., many places in Europe require ESG reporting due to ESG regulations. For example, the EU aims to eliminate net greenhouse gas emissions by 2050. Certain ESG reports are required for larger organizations.
Why do companies report on ESG?
Reporting on ESG has many benefits to organizations willing to put in the effort and use it to improve their organization.
First, it creates transparency with employees, investors, and customers. When organizations are transparent about climate risk, their environmental impact, and their social impact, they encourage accountability. This allows organizations to work toward solutions, further attracting new investors, customers, and employees.
That brings us to the next benefit: ESG reporting attracts investors. Many lenders and capital management groups use ESG reports to determine risk exposure and project future finances to make sustainable investments.
According to MorganStanley3, 75% of investors are interested in sustainable investing or investing in organizations with a positive social or environmental impact.
ESG reports can also help you meet your stakeholders' demands, including customers. According to First Insight4, Gen X consumers’ preferences for sustainable brands increased by almost 25%, and their willingness to pay more for sustainable products increased by 42% since 2019. Gen Z and Millennials are more likely than Gen X to support environmentally and socially conscious brands.
By publishing a sustainability report as part of ESG, you can continue to reduce your environmental impact and grow your customer base.
What do ESG reports include?
Within the ESG reporting process, there are several reporting frameworks, each corresponding to one of the pillars. Within each category, there are various types of data you can include in your reports depending on your organization's and your customers' needs.
Some of the factors that ESG reporting can address include:
- Environmental issues: What is your organization doing to address its environmental impacts?
- Climate change impacts and how an organization is fighting climate change
- Greenhouse gas emissions
- Deforestation impact and how an organization is helping fight it
- Water usage and conservation
- How an organization reduces waste
- Resource consumption
- Current pollution and carbon emissions output and progress toward reducing it
- Social issues: What is your organization doing to improve the lives of its employees, customers, and communities?
- Customer relations, such as customer satisfaction
- Employee relations and culture
- Employee wellbeing
- Community relations and impact
- Health and safety record
- Supply chain
- Community service
- Diversity, equity, inclusion, and belonging (DEIB)
- Governance issues: What is your organization doing to fight corruption and fraud and remain sustainable?
Currently, there are no ESG reporting standards in the U.S. This gives organizations flexibility in how they structure their reports.
While ESG reporting isn’t required for most organizations, it’s increasingly important for attracting new customers and potential investments. By incorporating robust reporting for ESG into your business strategy now, you’ll be better equipped to make changes to mitigate climate-related risks, governance risks, and other challenges.