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.
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:
To make sure that the information you provide is complete and clear, it helps to understand the three components of ESG.
This component covers the wide range of sustainable activities in which your organization participates to improve the environment. It includes:
This section discusses what you're doing to help make people's lives better. It covers:
This section discusses what your organization does to prevent corruption and make sure your investments remain sustainable. This includes:
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.
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:
It's mandatory to report scope 1 and 2 emissions, while scope 3 are voluntary standards and generally the hardest to monitor.
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:
This helps you limit the principal risks your company may face, making it more appealing to investors.
ESG reporting may feel like just more paperwork, but it plays a significant role in investment decisions.
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:
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.
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.
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.