Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
Lately, three letters have been blooming everywhere whenever conversation revolves around sustainability reporting: ‘ESG’. The concept of ESG first appeared in 2001, as such, the topic is not new, prescient concepts such as social, ethical, or environmental issues (SSE), or socially responsible investment (SRI) were already reported by different industries and businesses in the preceding decades. ESG stands for Environment, Social, and Governance. The letters alone might not mean much, but together they represent an entity’s behavior on environmental issues, its engagement with society, and the strength of its governance. At first, reporting of this area was not common practice among companies and the information disclosed varied significantly, with no structure, guidance, or consistency. However, with time, ESG information generated more attention from investors and stakeholders, who began attributing value to ESGs, influencing companies to disclose their ESG efforts in more structured and consistent reports. This greater attention brought ESG content, that in the past appeared in only one or two annexed pages of the entity’s annual report, to grabbing more of the spotlight with more pertinent details and figures.
The rise of regulations and policies in different geographies related to sustainability is also moving the needle towards obligatory ESG reporting. The Carrots & Sticks 2020 report, published three interesting insights:
- The total number of voluntary and mandatory provisions in different countries has been increasing considerably since 2006.
- Governments and financial regulators remain the most active in issuing reporting requirements and guidance (reporting provisions), followed by stock exchanges and industry bodies.
- Europe is the region with the largest number of reporting provisions with 245, followed by the Asia Pacific with 174.
Arguably, the most ambitious upcoming regulation is the European Green Deal, which targets achieving climate neutrality by the year 2050. In order to achieve this goal, the European Commission has published a few ESG-related measures:
- The Non-Financial Reporting Directive (NFRD) published in 2014, requires large companies to publish regular reports on the social and environmental impacts of their activities. Tighter rules will be published this year
- The Sustainable Finance Disclosure Regulation (SFDR) published in 2019, aims to provide more transparency on sustainability within the financial markets in a standardized way, thus preventing greenwashing and ensuring comparability.
The Taxonomy Regulation published in 2020, established a classification system for environmentally sustainable economic activities. Providing appropriate definitions to companies, investors and policymakers on which economic activities can be considered environmentally sustainable, it is expected to have widespread impact on Europe’s economic system
To keep pace, the European Financial Reporting Advisory Group (EFRAG) and EFRAG’s Project Task Force published a report recently that proposes a roadmap for the development of EU sustainability reporting standards beyond the implementation of the aforementioned instruments.
The future for ESG looks promising and defiant, with more companies now feeling the need to launch ESG reports for maintaining a good relationship with their stakeholders and to fulfil policies and avoid penalizations. International frameworks, indices and initiatives, such as the UN 2030 agenda, sustainable development goals, and the Paris Climate Agreement are increasing and deepening the number of ESG topics reported by companies. As a consequence, different frameworks, standards, ratings and indexes with international recognition have started to guide ESG reporting, and ever since, they have not stopped evolving. These four instruments are complementary and can work in and alongside each other.
- Standards are metrics based on processes that provide specific rules for ESG measurement and disclosure. ESG Standards will dictate what companies must report.
- Frameworks are high-level guidelines that provide principles and guidance for how information should be disclosed.
- Rating agencies develop surveys and methodologies to gather ESG data from different companies.
- Indexes compile data into a single metric and they represent a particular market or strategy. Indexes allow investors to track the performance of a company concerning their ESG reports.
Here we include the most relevant ESG tools that are paving the sustainability reporting road:
The existence of these tools reflects the importance and evolution of ESG disclosure, however understanding and following different guidelines can be quite confusing for companies. This is specifically true as reporting standards have not only become more numerous, but they have also become more sophisticated and mature. With this continuously evolving complexity, it can be challenging to identify the most suitable frameworks and standards for disclosure and how to best use them to communicate your company’s ESG profile to institutional and, increasingly, retail investors.
For this reason, in 2020 reporting organizations CDP, CDSB, GRI, IIRC, and SASB presented their “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting”. In this paper, the reporting entities agreed on a joint commitment to deepen the collaboration between them and to facilitate the interoperability of frameworks and standards. The paper also discusses the importance of technology in reporting, since it can enable greater connectivity between disclosers and viewers. The evolution of communication channels requires innovative and clear ways to share the correct message. Nowadays, the leading companies understand that integrating ESG reporting into their internal and external communication plans, is a powerful tool to gain competitive advantage. If companies want engagement, their digital platforms must offer a friendly user experience with clear information. Since Millennials are gaining a larger foothold in the global economy, they also have the power to decide whether to work, buy, engage or invest in a company with active ESG commitments. This generation is also demanding to see quality and consistency in information.
As different needs evolve, the constant question for companies is: How to keep pace with all the evolving ESG requirements? The stages for report creation can be complex and time-consuming, without mentioning that quality is crucial. An ideal solution would come in the shape of a platform or application, so complete and holistic where the user would just need to feed the technology with business information to get a unique and “one-size-fits-all” ESG report. Then, instead of investing a significant amount of resources in collecting data or deciding which ESG standard or frameworks would best fit the requirement, a unique software solution alongside an expert team could build ESG reports for companies with the latest information available. And even better, this technology could be paired with a company’s business management software such as Enterprise Resource Planning (ERP), to guarantee data centralization, consistency and quality. Fortunately, this future is not that far away, and leading companies such as Schneider Electric are already working on solutions that are already catalyzing such a future.
In the future, we can envisage all types of companies, consistently reporting their ESG activities in some form. Many companies are spearheading hybridized standard approaches with strategic resources to their ESG reporting, thus connecting most relevant frameworks. Digital solutions enable these approaches by connecting data streams and automating responses input. The significance of this for our environment and society is hugely profound. More companies reporting ESG activities in addition to the existing regulations also set a standard of what should be the minimum requirement for companies, and whenever a company fails to report, the danger of losing stakeholders can be foreseen.
Whether you are new with ESG reporting or not, we recommend you consider the following:
- Understand the ESG reporting frameworks
The number of frameworks is constantly evolving and maturing. Knowing the basics about these instruments and how they can bring added value to your reporting process can be a real differentiator among your stakeholders. Ratings and indexes can get you closer to potential investors and markets. Who are the top leaders of your segment? How did their ESG report bring them to that position? What in your ESG report can be improved for you to get a better rating?
Knowledge is power.
- Define your competitive advantage
ESG reports are now a powerful market differentiator. What story is your ESG report narrating to the stakeholders? Have you identified an opportunity that could be turned into a strength for your future ESG reports?
- Connect ESG reporting to your core business strategy
What role is your company playing in the world? Beyond the stakeholder investments attraction and market leadership, an ESG report reflects your company’s intentions to the environment and society, setting an immediate precedent. Is the board from your company taking ESG conscious decisions? Is your company making efforts to reduce the carbon footprint? Are you engaged with your community? Is your supply chain communicated and committed?