ESG Reporting: What It Is and Why Investors Care About It
As the world becomes increasingly aware of businesses’ impact on the environment, society, and governance, investors are shifting their focus toward companies that prioritize environmental, social, and governance (ESG) reporting. In this blog, we’ll take a closer look at what ESG reporting is, why investors care about it, and some notable ESG frameworks that companies can use to disclose their ESG impacts.
What is ESG Reporting?
ESG reporting refers to the practice of disclosing a company’s environmental, social, and governance impact to investors and other stakeholders. ESG reporting helps investors evaluate the risks and opportunities associated with investing in a particular company. This includes identifying potential environmental risks like climate change, social risks like poor labor practices, and governance risks like fraud or corruption.
Difference between ESG frameworks and standards
Two terms that often come up in the context of ESG reporting are frameworks and standards. These terms are related but distinct, and understanding the difference is important for companies that want to produce a credible and useful ESG report.
An ESG framework is a broad set of principles that guide the direction of ESG reporting. A framework gives companies a structure for organizing their reporting on ESG issues but does not provide specific criteria for what needs to be reported or how it should be reported. Frameworks are useful for providing guidance in areas where there is no well-defined standard or for using alongside a specific ESG standard.
On the other hand, an ESG standard is a specific set of guidelines that define what needs to be reported and how it should be reported. Standards make frameworks more actionable by ensuring comparable, consistent, and reliable disclosure. They contain detailed criteria explaining what needs to be reported and can help companies collect and share ESG data that affect their business decisions.
Notable ESG Frameworks & Standards
While companies have the freedom to present ESG information in a way they consider most useful, using recognized ESG frameworks is recommended. Here are a few notable ESG frameworks:
- Global Reporting Initiative (GRI): GRI helps companies disclose both the positive and negative impact their business has on the environment, the economy, and society. GRI is the most referenced ESG framework among all industries, receiving 83% of total references to ESG frameworks.
- Sustainability Accounting Standards Board (SASB): SASB provides industry-specific guidelines for companies to collect and share ESG data that affects their business decisions and explains the financial impact of sustainability.
- Task Force on Climate-related Financial Disclosures (TCFD): TCFD provides recommendations for managing and reporting climate risks with a focus on financial risk disclosures.
- Carbon Disclosure Project (CDP): CDP helps companies disclose information related to GHG emissions, water use, and forestry.
- Streamlined Energy and Carbon Reporting (SECR): SECR is a framework created by the UK government that guides organizations on how to report their carbon emissions and energy usage on an annual basis.
- Workforce Disclosure Initiative (WDI): WDI provides companies with a framework for disclosing comprehensive and comparable workforce data to improve transparency and accountability on workforce issues.
why investors care about ESG reporting
One reason why investors care about ESG reporting is that it can provide valuable insights into a company’s risk management strategies. For example, if a company is not adequately managing its environmental risks, it may be exposed to fines, legal liabilities, or reputational damage that could harm its financial performance. Similarly, a company with poor labor practices may face employee turnover, unionization efforts, or consumer boycotts that could affect its bottom line.
In addition, investors are increasingly interested in supporting companies that are aligned with their values and mission. For example, a socially responsible investor may want to avoid investing in companies that produce tobacco, alcohol, or firearms. Similarly, an investor who is committed to fighting climate change may want to invest in companies that are actively reducing their carbon footprint.
The growing interest in ESG reporting can be seen in the increasing number of signatories to the Principles for Responsible Investment (PRI). The PRI is a group of investors that was established in 2006 to help investors integrate ESG factors into their investment decision-making. Since its inception, the number of signatories to the PRI has grown significantly, from 63 signatories in 2006 to over 3,800 signatories in 2021, representing over $100 trillion in assets under management.
According to the Deloitte Center for Financial Services, ESG-mandated assets in the United States are expected to account for 50% of all professionally managed investments by 2025. This growth is being driven by a number of factors, including increasing awareness of the potential risks and opportunities associated with ESG factors, changing consumer preferences, and regulatory pressures.
As investors become increasingly aware of the impact businesses have on the environment, society, and governance, ESG reporting has become an essential tool for companies to attract investment. By providing investors with a more comprehensive understanding of a company’s performance, ESG reporting can help companies identify and reduce potential environmental, social, and governance risks. Using recognized ESG frameworks can make ESG reporting more actionable by ensuring comparable, consistent, and reliable disclosure.