ESG Reporting 101: All You Need to Know & How to Get Started
More and more investors want their investments to have an environmental or social impact. According to a recent survey by the CFA Institute, for which 900 institutional investors, around 3,500 private investors and 2,800 practitioners from the financial industry were interviewed worldwide, 85% of investment managers across countries are increasingly incorporating ESG criteria into investment decisions. On top of that, 76% of institutional investors and 81% of private investors in Germany are interested in ESG investments or are already positioned accordingly. According to the report, the volume of ESG-linked loans to companies in Europe has more than quadrupled from €27 billion in 2017 to €102 billion in 2019. With that increased global interest in environmental and social topics, the importance of ESG reporting has also risen and has become an indispensable part for businesses. With an increasing number of companies for which ESG reporting is already mandatory, it is probably just a matter of time until your business will have to start reporting on ESG-related matters as well. Here you will find all you need to know about ESG reporting and how to get started.
What is ESG Reporting?
Before we jump into the topic, let’s start off with a basic explanation of what ESG stands for. The abbreviation ESG stands for environment, social and governance:
- Environment: Climate change and carbon emissions, pollution and waste, biodiversity, deforestation, energy efficiency, electronic waste
- Social: Customer satisfaction, human rights, health and safety, data protection and privacy, gender and diversity, community relations
- Governance: Board diversity, business ethics, audit committee structure, tax transparency, corruption and instability, lobbying, whistleblower programmes
ESG reports disclose data and explain the impact and added value of a company in three areas: environment, society and corporate governance. ESG or sustainability reports contain summaries of quantitative and qualitative information and are complemented by a performance analysis in these three areas to provide stakeholders and investors with an insight into the goals, achievements and the impact of your business.
Why is ESG reporting important?
With the constant increase of regulations concerning corporate ESG data reporting, it becomes increasingly important for businesses to report on those topics. Even though ESG reporting is not yet mandatory in all countries, an increasing number of companies disclose this information voluntarily since they’ve recognised the importance of communicating their business strategy and the impact their business has on our planet. In fact, since July 2020 about 90% of the companies in the S&P 500 have already created annual ESG reports and made it a standard.
Regulations make ESG reporting mandatory
Nonetheless, from 2023 onwards, more companies will actually be obliged to publish sustainability information. In April 2021, the EU Commission presented a new proposal for a Corporate Sustainability Reporting Directive (CSRD), which would be an EU sustainability reporting standard improving the existing requirements of the current Non-Financial Reporting Directive (NFRD). Under this new directive, up to 50.000 large public-interest European companies, as well as all listed companies on EU regulated markets, will be required to report on ESG related factors, as compared to only 11.000 companies under the current NFRD. ESG disclosures are already mandatory for asset managers and other financial market participants according to the Sustainable Finance Disclosure Regulation (SFDR). As of 1 July 2022, further Level 2 disclosures will be required by the SFRD, comprising a variety of quantitative ESG criteria.
ESG reporting makes your business more attractive for various stakeholders
ESG reporting is important, since it enables companies to be more transparent about the opportunities and risks they face, and to show investors how they manage to manage and reduce risks. A lack of transparency might lead to investors not actually considering you for investments, since they might see the non-disclosure of performance in those three areas posing a higher financial risk, and thus avoid you.
Reporting on ESG issues can also make you more attractive as a brand and as an employer. A survey from First Insight has actually shown that customers, and in particular Gen Z, are more willing to support brands that support ESG issues. Accordingly, up to 62% of Gen Z would prefer to buy from a sustainable brand, and 73% of them would be willing to spend up to 10% more for sustainable products. The same goes for your attractiveness as an employer - with 76% of millennials stating the sustainability agenda of an employer to be an essential factor, reporting on ESG will increase your chances to attract new talent.
On top of that, a report by Fidelity Investments has shown that companies with a strong ESG performance also create better returns and thus are able to obtain a competitive position on capital markets.
Evidently, ESG already is and will remain to be a key focus for companies in 2021 and the years to come. So, how can your company report on ESG criteria?
ESG Reporting Standards
At present, organisations are still quite flexible regarding the disclosure of ESG information, which means that they might highlight or downplay different aspects while reporting that they consider to be the most beneficial for their business and the purpose behind their report.
Reporting standards are a useful tool for businesses, so they know how to structure, measure and communicate the ESG information they want to disclose to the public. It is hereby recommended for businesses to base their reporting on recognised standards and frameworks to facilitate the transparency and consistency of the reporting process.
During the past years, a variety of ESG reporting guidelines have been developed, including frameworks, national and international legislation, and voluntary standards. Some frameworks are industry specific, while others are specific to climate change, like for example the Task Force on Climate-related Financial Disclosures (TCFD). However, all these guidelines have different requirements, and are therefore difficult to compare. Thus, the calls for a unified standard are getting increasingly louder.
In Europe, one of the most commonly used reporting standards stems from the Global Reporting Initiative (GRI), representing the global best practices regarding the disclosure of sustainability information.
The new proposal for the Corporate Sustainability Reporting Directive (CSRD) by the European Commission, under which more companies will be required to report on ESG-related topics, will also be of high relevance to ESG Reporting.
Another available standard is The Sustainable Financial Disclosure Regulation (SFDR), which has the objective to promote transparency and liability in the world towards sustainable investments, and allows investors to compare investments offers more directly on the level of sustainability.
On a positive note, the International Financial Reporting Standards foundation (IFRS) announced in February 2021 that they will start developing a global sustainability reporting standard to achieve a greater standardisation and unification for ESG reports all around the world.
5 Tips how to get started with ESG reporting
When starting your ESG reporting, there are a couple of steps that you should keep in mind in order to ensure a smooth implementation. Here are 5 tips how to get started with your ESG reporting today:
1. Start off with creating an ESG strategy
Decide on the short-term and long-term goals of your sustainability strategy and make sure that you constantly review this strategy over time and adjust it accordingly, if need be. Besides that, you should make sure to get all teams and departments of your company on board and update them on changes and progress regarding your strategy accordingly.
2. Gather information internally
It might seem overwhelming at first having to gather all the input needed to create the report. Yet, a lot of that information can already be found internally. Get an overview of all ESG-related information that is available across different departments and stakeholders, as this will facilitate your data and information analysis process. Fortunately, technology and software, like Planetly’s Climate Impact Manager, can already simplify the data collection process immensely today.
3. Decide on the reporting framework you want to use:
There is a wide range of different frameworks available that meet different needs. Generally speaking, there is no right or wrong here when selecting your framework, but you should always keep in mind who you are reporting to and what exactly your company wants to report.
4. Ensure reliability and transparency in your reporting
As we already established earlier, transparency plays a crucial role in ESG reporting, as well as the quality and validity of your data. Thus, aim to develop consistent and controlled policies that will permit you to quantify your metrics. Also, make your metrics SMART (Specific-Measurable-Achievable-Realistic-Time Bound), so you can easily demonstrate your progress and achievements over time.
5. Communicate how your ESG report aligns with your business strategy
Inform the public and your stakeholders about how your environmental, social and governance-related performance aligns with your business strategy. Be specific and transparent when communicating your progress, and share insights you gained from the report.
ESG reporting can be highly beneficial to your business and give you a competitive advantage with investors, customers or employees.
And lastly, do not hesitate to get support. There is always someone who can help you out, including us here at Planetly. If you need help with your ESG reporting, feel free to reach out to us today, and we will help you to get started.