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If you get assigned to do a “report” what kind of feelings or memories does that bring up to you? It could bring up memories of school reports - having to research to find the right data or statistics to tell a compelling story, but having no idea where to start or what method to use. Much like that, environmental, social, and governance (ESG), or sustainability reporting, could conjure up feelings of anxiety or confusion. It’s like doing long division but instead of having a clear set of steps to follow you have to decide which method to use without having a right or wrong answer in the end. In ESG reporting you have to put in the analysis and show your work; how are you getting from point A to point B in the data and steps you’re taking? You may question the methodology – are you doing it right? Are you completely off base and you need to erase it all and start over? Do you need to raise your hand and ask the teacher for help? Well here we are, let’s take a short lesson in ESG reporting; what is it and why is it becoming critical for corporations around the world.
ESG reporting has become a key priority for many businesses. The goal of ESG reporting is to produce a public-facing document that conveys strategic objectives for a business’ ESG efforts, highlights specific topic areas and targets for future development, and communicates strategies to close gaps between the current and ideal future states. Such reports are expected by investors, customers, business partners, and other key stakeholders, and the information must be presented as clearly and accurately as possible to be meaningful to audiences. Watch for our second blog on this topic, outlining some of the key differences between some of the most commonly used ESG and Sustainability reporting frameworks from our Associate Antea Group Belgium.
Evolving Motivation of ESG Reporting
Historically, corporate sustainability reporting was focused on risk mitigation and used to complement compliance reporting focused on addressing environmental issues related to resource depletion and pollution. As the interest in sustainable products grew amongst the general public, sustainability reporting shifted to aid market positioning and brand image. Most recently, a diverse set of stakeholders have pushed for more robust reporting that covers ESG topics that either augment or disrupt financial conditions, business operations, or brand value. In other words, ESG topics are “material” to businesses. Therefore, ESG disclosure is now viewed by many as a key avenue for generating enterprise value and maintaining a competitive edge.
At its core, ESG reporting provides transparency to stakeholders on a company’s actions on sustainability and social equity, and allows them to take credit for building a safer, cleaner, more just world. On the other hand, companies can no longer easily hide information from their stakeholders and external audiences, including any controversies that might negatively impact public perception. In this new digital age, consumers expect easy access to information on the impacts related to the products and services that they spend time and money on. Negative information, including controversial events such as illegal activities and harmful product components, affect consumer purchasing decisions and may even provoke regulatory actions. On the positive side, consumers are also actively searching for more environmentally friendly and ethical companies to purchase from. According to Business Wire in a global survey from October 2021, sustainability is rated as an important purchase criterion for 60 percent of consumers and many are willing to pay a premium for those brands. Therefore, businesses are increasingly relying on ESG reporting to ensure key stakeholders, as well as larger external audiences including consumers, are provided with accurate and complete data on their management approaches across environmental and social impacts resulting from business activities.
Keys to Business Continuity and Risk Management
ESG reporting helps supplement traditional corporate reporting activities by providing stakeholders with non-financial information to assess tangible and intangible business risks and opportunities. These key stakeholders could include the board of a company, the financial community, or business partners in the supply chain. In particular, ESG factors help indicate corporate resiliency, brand value, and growth potential. Stakeholders use this information to determine whether to invest in, purchase from, or have business relationships with corporations. These stakeholders increasingly stress the importance of making sure that ESG information is complete, high-quality, and comparable for effective decision-making. It is becoming more important for smaller companies to also ensure they are following best ESG disclosure practices for their own growth and reputation. As larger corporations are increasingly cascading down their ESG goals and management to the supply chain, smaller companies are obligated to provide ESG data and demonstrate progress to meet their customers’ ESG objectives and criteria.
Application of ESG Information
Due to the potential for ESG outcomes to impact an asset’s growth and, by extension, its actual or perceived value, investors are starting to integrate quantitative and qualitative ESG data into investment decisions. As the market demands more eco-friendly and/or ethical products, consumers and watchdog organizations look for ESG information to verify claims related to sustainable products and examine corporate strategies related to the environment, stakeholders, and communities. Concerns around social justice and climate change have pushed for corporate disclosures on how companies are managing these issues and demonstrating responsible corporate citizenship.
The final reason that ESG reporting is important is for legal compliance. EU law (Directive 2014/95/EU, also known as the Non-Financial Reporting Directive), requires large “public-interest” companies with more than 500 employees to prepare an annual report of non-financial and diversity information. This report must include information related to environmental matters, treatment of employees, anti-corruption and bribery, diversity, and respect for human rights, and the EU has prepared a set of guidelines to help companies prepare their disclosures properly. This Directive has been amended multiple times over the years, and in April 2021 the European Commission adopted a new proposal that extends the scope of the Directive to a wider set of companies. The case of the EU is just one example where legislation is changing quickly – similar requirements exist in several countries in Southeast Asia, and the U.S. Securities and Exchange Commission is currently (at the time of publication) pondering similar disclosure rules, within climate disclosures. Compliance with appropriate regulations is a key reason for business leaders to invest in sustainability and ESG reporting.
Issues with ESG Reporting
With the proliferation of ESG reporting, stakeholders have been faced with information overload. The absence of a common ESG reporting framework has resulted in irrelevant and immaterial issues being discussed and overly lengthy reports. The lack of focus on material issues also supports greenwashing as relevant negative ESG data might be omitted from disclosure. Additionally, as there are no uniform disclosure standards and metrics, stakeholders face an overly burdensome task of finding comparable data for ESG performance assessment and industry benchmarking. The absence of ESG accounting principles and data assurance requirements also generates concerns related to the accuracy and verifiability of ESG data.
While there is currently no uniform approach to ESG reporting, certain reporting frameworks like the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Taskforce on Climate-related Financial Disclosures (TCFD) have gained traction within the ESG reporting space. Preparing ESG disclosures in alignment with these third-party frameworks not only indicates a company’s maturity in ESG reporting but also ensures the information provided is comparable, decision-useful, and credible. To learn more about the characteristics of these frameworks to understand which best suits your unique and diverse reporting needs, please read the next blog in our series.
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