Read this blog before you establish your ESG reporting process
When it comes to ESG reporting, there's a lot at stake: stock prices, investor confidence, the fate of the world…
There's also a lot of confusion.
Is ESG a compliance task, or is there more to it? With so many reporting frameworks, which is the best one to choose? Should ESG be a health and safety, compliance, or investor relations process?
These are big questions! We're here to help answer them. This post will lay out a new perspective on ESG so you have all the info you need to make sound decisions before you create your ESG reporting process.
More than doing good: ESG risks are business risks
There's a tendency to conflate ESG with sustainability. But they're two very different things. Sustainability looks at how businesses materially impact the environment and society, while ESG looks at how environment, social, and governance initiatives affect a company's financial performance.
While companies should seek to balance both, when we clarify these two components, it becomes evident that ESG is much more of a risk reporting process than it first appears. What's bad for the world is bad for the company. And stakeholders are taking note.
In a recent report, Gartner found that:
- 85% of investors considered ESG factors in their investments in 2020
- Investors consider ESG investments safer and more stable bets
- Ninety-one percent of banks monitor ESG, along with 24 global credit rating agencies, 71% of fixed income investors, and over 90% of insurers
- ESG considerations have driven some insurers to limit coverage or investments in certain sectors.
- 69% of banks screen their loan portfolios for ESG risks
Each of these findings represent material risks that could impact the viability of an organization. What if lending is pulled? What if insurance is denied? What if investors divest or choose another outlet?
Even ESG scoring bodies are risk-oriented. ESG scores given by third-party rating organizations are primarily based on risk exposure. A good ESG score would mean a company's risk in a given area is low, whereas a bad score would mean that the company's risk is high.
For these reasons, organizations must see ESG risks as business risks — and ESG reporting, voluntary compliance, and a company-wide push for sustainability are as vital to their operations as cash flow management.
Need help identifying ESG risks? The UN's six principles of responsible investing can be a helpful framework for identifying ESG risks. Complying with relevant ESG reporting frameworks can help you identify risks as well.
More than compliance: ESG reporting frameworks and scoring are strategic
Compliance with ESG reporting frameworks and ESG scores can be strategic tools if used correctly. By volunteering your ESG performance information, you're demonstrating your organization is protecting itself — and its stakeholders! — from ESG risks.
Investors might be more willing to invest if they see that your company has an ethical supply chain. It shows your company cares about ethics.
Lenders might be more willing to approve financing if your company is taking steps to reduce its carbon footprint. Your company is less of a long-term risk.
Insurers will be more likely to provide insurance when you’re limiting the use of harmful pollutants and chemicals. Your company is less likely to be a liability.
ESG frameworks and scores can also:
- Help you understand what's relevant to your stakeholders
- Give stakeholders a basis for comparison with your competitors — this is beneficial, especially if you're outperforming them or they haven't demonstrated a strong ESG commitment.
- Be a form of PR. By voluntarily adhering to frameworks or disclosing ESG performance to scoring bodies, ESG reports demonstrate the goodwill of your organization.
It's important to note that, unlike scoring questionnaires, frameworks aren't all or nothing. As PwC writes, "Companies don't have to disclose all the recommended metrics for their specific industry designation. They can use their own judgment as to what is financial material and select relevant metrics from across the standards suggested."
This handy chart by EY gives you a sense of the frameworks and scoring bodies that you can opt to engage with:
Need help determining the best ESG frameworks to use?
The ESG landscape is a mess of different frameworks, and most frameworks are voluntary. Choosing the best framework for your organization will depend primarily on:
- What stakeholders care about. What matters to your investors, lenders, government, consumers, and employees?
- How stakeholders use that information. Will stakeholders use ESG outputs for investment decisions, comparison with competitors, approving financing, compliance, or purchasing decisions?
- What your company can deliver on. What are your organization's values? What are feasible goals?
- Your location and industry. Sector and regional requirements will also be at play.
More than reporting: ESG is a performance management process
ESG has many different perspectives. You can look at ESG strictly through a health and safety lens, a risk management lens, an IR/PR lens, or a reporting lens.
Here's the problem with using a singular lens:
ESG doesn't just impact any one department. It's an integrated process that ropes in HR, supply chain, risk management, PR/IR, finance, marketing, and operations.
ESG isn't just non-financial data. ESG's non-financial data impacts financial outcomes and operational performance.
ESG isn't just reporting. It's data collection, consolidation, regulatory compliance, analysis, budgeting, planning, and forecasting. It's cost containment, CAPEX, and OPEX. It's profitability analysis.
ESG isn't a one-and-done initiative. ESG will be an ongoing performance management process that requires a solid technology foundation for growing data, increasing regulation, KPI monitoring, goal setting, and collaborators company-wide.
For these reasons, we recommend seeing ESG as an integrated, enterprise-wide performance management process worth investing in.
Need help establishing ESG as a performance management process?
The main challenges to ESG performance management are:
- Isolated, widespread, incongruent data
- Changing ESG disclosure frameworks
- Lack of ESG risk management and KPI oversight
As a result, many organizations turn to software to establish a solid foundation for a future full of ESG. There are many vendors to choose from, all with different functionality and focuses. To help you determine the best software for your ESG needs, we put together a checklist to help you resolve critical capabilities.