Most business owners know that Environmental, Social, and Governance (ESG) has become an analysis framework that financial markets use to understand your company's contributions to improving sustainability issues. In fact, ESG reports are considered some of the fastest-growing voluntary disclosures in history.
However, since they're voluntary, they're not audited, mandated, or regulated by the government, they can vary quite a bit across firms and industries. To help make ESG reporting more consistent across the board, some organizations have set reporting standards. Keep reading to understand how ESG reporting standards work and how they can affect your business.
What Are ESG Reporting Standards?
Global ESG reporting standards provide a framework used to disclose your company's sustainability initiatives to potential investors.
Because this can influence investment decisions, it's important to provide clear and relevant metrics in a standardized format that institutional investors can easily interpret. If you disclose ESG information without an appropriate framework, potential investors may suspect underhandedness, which could harm business relationships and your position in capital markets.
This is why companies use common frameworks to make quarterly and annual ESG disclosures. These frameworks have been put in place by standard-setters like:
- Global Reporting Initiative
- Principles for Responsible Investment
- Sustainability Accounting Standards Board
To make sure that the information you provide is complete and clear, it helps to understand the three components of ESG.
Environmental
This component covers the wide range of sustainable activities in which your organization participates to improve the environment. It includes:
- How you combat climate change
- What you're doing to cut down on carbon emissions
- How you're responsibly using resources and your supply chain
- How you will preserve biodiversity, prevent deforestation, or responsibly manage your waste
Social
This section discusses what you're doing to help make people's lives better. It covers:
- How you improve your building's sustainability to take care of your staff's health
- What initiatives you take for gender, BIPOC, and LGBTQ+ inclusivity
- What you do for data protection and privacy
- How you encourage community involvement
Corporate Governance
This section discusses what your organization does to prevent corruption and make sure your investments remain sustainable. This includes:
- Your company's internal controls
- The policies, principles, and procedures in place that govern your leadership, executive compensation, audit committee structure, board composition, shareholder rights, whistleblower programs, lobbying, bribery, and political contributions
What Does This Look Like in Practice?
Now that you understand what ESG reporting standards and frameworks are, you may wonder how to implement them in your own company. Here are two common ways you can focus on ESG.
Monitoring Carbon Emissions
As the average global temperature rises, investors increasingly value your carbon emissions reports. They want to know that you monitor the greenhouse gases (like carbon dioxide and particulate matter) that you release into the atmosphere and how you try to reduce the adverse impacts of your emissions. As a result, carbon emissions are among the most valuable disclosure topics.
Companies generally follow the Greenhouse Gas Protocol to report their carbon emissions. The protocol divides emissions into three scopes:
- Scope 1 emissions. These come directly from your company or its controlled entities. These emissions are divided into four categories — stationary, covering fuels and heating sources; mobile combustion for the vehicles your company owns or controls; fugitive emissions for greenhouse gas emission leaks; and process emissions that come from industrial processes.
- Scope 2 emissions. These emissions are indirect, as a result of generating energy you've bought from a utility provider. Most companies' scope 2 emissions come just from using electricity.
- Scope 3 emissions. These cover all indirect emissions, both upstream and downstream, that are linked to your company's operations and don't fit into scope 2. Upstream activities include business travel, employee commuting, and waste generation, while downstream activities largely include investments, equity, project finance, and client services.
It's mandatory to report scope 1 and 2 emissions, while scope 3 are voluntary standards and generally the hardest to monitor.
Mitigating Your Risks
Recent research has found that companies with high to severe ESG incidents lost 6% of their market capitalization, on average. Using an ESG framework helps you shift from a reactive, compliance-based mindset to one that's more forward-thinking and proactive. It gives you a lens to answer questions like:
- What environmental, social, and corporate governance issues could have a financial impact on your company or industry?
- How does your company tackle or approach these material risks?
- How can these risks affect your growth and value in the long run?
This helps you limit the principal risks your company may face, making it more appealing to investors.
How ESG Reporting Affects Your Business
ESG reporting may feel like just more paperwork, but it plays a significant role in investment decisions.
ESG Scores
Like a bond rating or credit score, your ESG score is a way to bridge the gap between your disclosures and the general public's perception. Certain third-party organizations assign you these scores by assessing your ability to meet your commitments to ESG, your performance, and your risk exposure according to their own set of criteria.
These organizations include:
- Carbon Disclosure Project (CDP)
- Bloomberg ESG Data Services
- Dow Jones Sustainability Index Family
- RepRisk
Financial analysts often consider your ESG score when making decisions on how they allocate their capital. For instance, the CDP is a non-governmental organization (NGO) scoring system that assesses your performance on stakeholder issues, like how you create value for your employees, suppliers, and local communities.
Financial Impact
A recent NYU study of the relationship between ESG and financial performance showed that corporations with sustainability initiatives tend to perform better because they have better risk management and more innovation. Managing for a low-carbon future also improves financial performance, which may go against more traditional beliefs that sustainable development is expensive.
In fact, the benefits of adopting and acting on your ESG reporting standards become even more visible in the long run — companies with strong ESG scores had up to 3.8% higher returns than expected in both mid-term and long-term.
How To Implement Sustainability Initiatives
Implementing sustainability initiatives can encourage hesitant investors to give their money to you, rather than a competitor. Since it's still a relatively new framework, improving your ESG scores can help you get an edge in your market.
Attune can set you up with real-time energy and water monitoring, along with data collection and automated controls, so you have all the insights you need for energy and water-related initiatives. Book a demo with Attune to learn how we can help you set carbon reduction targets and more to improve your bottom line.