What is ESG Reporting and Why is it Important For Your Organization?
By Ananya Chaturvedi
3rd September 2021
ESG reporting is the disclosure about a company's impact in three areas: environmental, social, and corporate governance. This report is addressed to investors, employees, media and other stakeholders. The performance analysis across these ESG factors summarizes quantitative and qualitative disclosures and aids in the screening of investments. ESG reporting assists investors in avoiding companies that may pose a higher financial risk in the future as a result of their bad environmental performance or other social or governmental practices.
And as for why is it important? After the Paris Agreement, it became clear that climate change is a reality that we will have to come face-to-face with sooner or later. This led to countries becoming more vigilant about their environmental and social impact. As a result of this, governments have set their first-ever net zero goals. The burden of achieving these net-zero goals falls on the shoulders of the companies. Hence, countries have now started tightening their business ESG reporting regulations towards companies.
Investors increasingly believe that companies that score high on ESG metrics are less risky, better positioned for the long term, and better prepared for uncertainty. Firms that realign their agendas to the agenda of stakeholder capitalism may have a competitive advantage over those that try to pursue business as usual. Several ESG standards and frameworks, such as the Global Reporting Initiative (GRI) and the Task Force on Climate-Related Financial Disclosures (TCFD) are seeing increased compliance alongside more traditional reporting.
According to the Deloitte Center for Financial Services, ESG-mandated assets will account for half of all professionally managed investments in the United States by 2025. ESG performance enhancements and reports demonstrate to investors how a company mitigates risks and generates long-term financial returns. ESG performance enhancements and reports demonstrate to investors how a company mitigates risks and generates long-term financial returns.
ESG reporting and disclosures assist companies in gaining access to capital markets and obtaining a license to operate.
Strong ESG performance is rewarded by investors over companies whose environmental or other practices may pose a greater financial risk by cheaper cost of capital. Robust sustainability and ESG strategies improve business resilience and overall performance.
Let us simplify sustainability for you; the terms “ESG” and “sustainability” are used interchangeably when benchmarking and disclosing data. Sustainability is a catch-all term for many green concepts and corporate responsibility, whereas ESG has become the preferred term among investors and capital markets. Although the industry began with sustainability efforts, it has since expanded to include ESG practices, performance, reporting, and relevance to capital opportunities. ESG data aids in the identification of risk-adjusted returns. The emphasis on all three pillars has aided in the shift in how businesses measure and disclose their performance. An easy way to look at this is ESG allows for quantification of sustainability.
But the challenge is: While the demand for and practice of ESG reporting has grown, there is still a significant knowledge gap between what the companies publish and what the investors and regulators want. This disparity is caused by a number of factors, including disparities in ESG reporting standards and frameworks, non mandatory reporting regimes, and high data collection and reporting time and costs. These can stymie efforts to provide higher-quality data to the various stakeholders to help them make better decisions. Companies, fortunately, can collaborate with experts to develop and integrate ESG-balanced strategies into their overall performance.
We believe that over the next 10 years, ESG reporting will become a mandatory reporting alongside annual financial reports for all companies, big or small.
Oren is here to simplify sustainability for you and your organisation furthermore: with Oren's expert assistance and ESG solutions, your organization can effortlessly navigate the ESG arena.
Oren provides specialised services, to make it easy for your organisation to incorporate ESG reporting.