Interest in ESG is rising. Whether you’re an investor looking for a low risk addition to your portfolio, or a consumer seeking to back a business that aligns with your personal values, ESG reports are a shortcut to clarity.
Progress in the fields of Environmental, Social and Governance policy is an increasingly essential aspect of any business’ strategy and growth. Just look at the uplift that Google Trends shows with regard to the frequency of searches linked to the acronym.
In this article, we’ll pose the question – what exactly is an ESG report? What should be included in an ESG report - and how can they be used to maximum advantage by businesses, today and in the future? Let’s dig in…
What is an ESG report?
An ESG report is a form of professional disclosure in which a business shares information pertaining to its performance and progress within the fields of Environmental, Social and Governance.
At a top level, an ESG report will typically present data that provides a clear overview of a business's impact on the environment and society. It will also show how robust and transparent its governance is, in terms of company leadership, executive pay, audits, internal controls, and shareholder rights.
Who compiles ESG reports? Currently, the business itself. Although ESG reporting as a mandatory requirement for larger companies is increasing, at present, ESG reports are internally created or commissioned and self-published. While this theoretically leaves the door open to “favourable representation” it also enhances the need for clear metrics and measures, as a means to developing a reputation for transparency and honest accountability.
Although ESG reports are self published, some universal standards can still be adhered to, and these can be helpful in terms of adding credibility and relevance, especially when it comes to matters of comparison. GRI (Global Reporting Initiative) and SDG standards apply to non financial reporting. These standards “reflect global best practice for sustainability reporting, helping organisations respond to emerging information demands from stakeholders and regulators.”
Even though the GRI standards are non-mandatory and non-binding, they have been used to inform and formulate the Corporate Sustainability Reporting Directive (CSRD) and the mandatory European Sustainability Reporting Standards (ESRS) – both of which are legal requirements for a range of EU businesses.
Via high quality reporting (based upon GRI standards), organisations are able to better understand, communicate, and manage their contributions to the United Nations Sustainable Development Goals (UN SDG).
Does Your Business Need To Produce an ESG Report?
The key word within this question is “need.” In some cases, sustainability reporting is now, of course, mandatory – but we would argue that all businesses, regardless of size, “need” to, at the very least, consider sustainability reporting, for reasons which we’ll expand upon later.
In terms of mandatory reporting, the determining factors include the size of a business and its location, as the demand for ESG reporting varies according to national legislation. For example for reporting periods in 2024 and beyond, the EU’s Corporate Sustainability Reporting Directive will see mandatory reporting for all listed EU entities, as well all large companies that meet two of the following three criteria
More than 250 employees
More than €40 million net turnover
More than €20 million on the statement of financial position
This is an extension of the preexisting European directive on sustainability reporting: the Non-Financial Reporting Directive (NFRD) which previously required only public interest companies (i.e. banks, insurers and publicly traded companies) with more than 500 employees to comply.
Other recent European regulations, for example, the Sustainable Finance Disclosure Regulation (SFDR) also place a strong emphasis on disclosure requirements of environmental, social & governance (ESG) metrics at both entity- and product-level.
In the US, the US Securities and Exchange Commission (SEC) proposed climate-risk disclosure requirements in 2022, which aim to increase the annual reporting requirements of publicly traded companies. In addition, companies would be bound to disclose their Scope 1 and 2 emissions in line with the GHG Protocol.
Ultimately, it’s clear that the trend towards mandatory reporting is increasing – now is the time to get familiar with the associated processes, both internal and external.
What Should Be Included In an ESG Report?
An ESG report needs to provide information across the full spectrum of Environmental, Social and Governance factors linked to the operation of the business in question.
The environmental element on an ESG report places its focus on how the business is attempting to minimise its impact on the environment.
This might include actions such as:
Switching to the development of greener products or services.
Reviewing business models with the intention of bringing more circular or regenerative aspects into operation.
Improving energy efficiency, by either reducing overall energy consumption (i.e. replacing lighting across the business with LED systems) or switching renewable energy in the attempt to become a net zero (or even carbon negative) company.
Reviewing products and packaging to move towards a zero-waste policy – either by phasing out virgin materials, or by switching to biodegradable materials.
Improving internal recycling practices, through better education and infrastructure.
The social aspect of an ESG report focuses on how a business impacts wider society and its own internal culture within the workforce.
This might include actions such as:
Promoting and enabling equality, inclusivity and diversity within the workforce, via tangible and well-enforced policies.
Taking an active role in ensuring that their full supply chain is ethical and free from the abuse of labour rights i.e. by implementing a modern slavery policy.
Involvement with Community initiatives and NGOs, either via volunteer or financial support.
The creation and maintenance of robust data security measures, keeping customer data safe and secure.
Ensure the adequate training and advancement of your workforce.
The ethical leverage of zero and first party data.
Investment in and engagement with local community projects - either through financial and product-based donation or the contribution of valuable skills and volunteering hours.
Finally, Governance refers to the processes of decision-making, reporting, and the logistics of running a business.
Within the context of an ESG report, this might include actions such as:
Exemplary stakeholder reporting, with regard to financial performance, business strategy and operations.
Policies and procedures that actively guard against unethical practices within business, such as bribery and nepotism.
A focus on achieving diversity within leadership.
Transparency regarding executive pay.
How Can an ESG Report Be Used?
Once an ESG report has been compiled, how can it be leveraged? There are many ways in which businesses can ensure that their ESG report is actively used for the betterment of their organisation – and putting effort into ensuring that this is the case will pay dividends.
ESG reports play an important role in ensuring better transparency to stakeholders. This could relate to internal and external stakeholders, and is particularly pertinent when it comes to investors. The rise of impact investing in recent years has been considerable, and ESG is having a big impact upon the way that investors consider new opportunities.
ESG reports are also an important PR play, especially when it comes to increased public scrutiny and suspicion around aspects such as greenwashing. A proactive approach to ESG goes a long way to ensuring public trust and transparency, which is an increasingly important aspect of consumer relationships and brand building.
It’s important for businesses taking the time to compile ESG reports to consider the way in which they publish their documentation. While there’s no “one size fits all” approach to publication, ESG reports should generally be made available digitally - i.e. publicly or by request (for example, to allow for additional investor insight..)
What’s Next For ESG Reporting?
As more businesses wake up to the importance and opportunity of ESG reporting (and indeed, as mandatory requirements increase) we can confidently predict an uptick in the demand for ESG consulting services, as businesses seek expert guidance in the field.
ESG will be something that companies actively plan for and invest in, and this means that reporting is also likely to become increasingly professional and accuracy or depth of insight will come under tighter scrutiny.
We can also predict more standardisation within reporting, as typical conventions emerge and become established. This will be particularly pertinent with regard to the metrics that are of increased importance to investors.
Of course, more mandatory reporting is inevitable, and we predict that this will especially be true in the case of ESG metrics linked to sustainability. We’re also likely to see an upward trend of ESG reporting as an important aspect of marketing and employer branding.
Finally, we’ll see (and need!( better tech to help in the compilation of tracked metrics and reporting. This is where ESG platforms such as KindLink have an important role to play - increasing transparency and engagement with ESG related activities overtime.
Is your business ready for ESG reporting?
ESG reporting represents a huge opportunity for businesses. The sooner your ESG reporting strategy is perfected, the more likely you are to stand out from the competition and the quicker your responses to new market demands.
ESG reporting tools such as those provided by KindLink offer the perfect platform to help support businesses in planning and implementing its ESG strategy - today and tomorrow, whatever the future holds for mandatory ESG reporting.