Markets seem not to be ready to assess risks and opportunities concerning a range of environmental, social, and governance (ESG) challenges. Over the past years, ESG criteria have risen at the very top of the corporate and public agenda, as the percentage of companies integrating ESG factors into analysis and decision-making has increased considerably. In parallel, the COVID-19 has exposed the strengths and weaknesses of companies with regards to ESG issues
On another note, a recent article in the Financial Times pinpoints an underlying problem with sustainability reporting: the proliferation of frameworks that threaten to overwhelm investors and reporters. What we really need is a coherent and comprehensive corporate disclosure framework to ensure flexibility and drive progress.
ESG reports and their importance
Disclosure and transparency about how corporate objective aligns with ESG reporting are important to businesses. Companies that take their environmental and social responsibilities seriously and have strong governance have demonstrated better financial performance and resilience. The COVID-19 crisis has accelerated companies’ adoption of responsible investment and corporate sustainability practices in the ESG and put them at the top of their agendas.
The disclosure explains how companies’ work creates value for a group of stakeholders. When screening potential investments, investors often consider the company’s performance and influence on ESG issues, along with its risks, opportunities, and long-term financial performance. ESG reports reveal data that explain the corporate business impact, added value, strategy and future plans in three areas: Environment, Social and Corporate Governance.
ESG reports provide a summary of quantitative and qualitative disclosures supported by analysis of performance across ESG factors, including:
- Environment: climate change, carbon emissions, air and water quality, deforestation, energy efficiency, waste management, pollution, biodiversity, natural resource conservation.
- Social: customer satisfaction, data protection and privacy, gender and diversity, employee engagement, community relations, human rights, labor standards
- Governance: Board composition, audit committee structure, bribery and corruption, executive compensation, lobbying, political contributions, whistle blowing policy
Source: ESG Ratings
Although ESG disclosures are voluntary, many companies already file their own ESG reports as they recognize their importance in communicating their business strategy. The challenge with ESG reports is a lack of comparability and inconsistency. Companies are free to choose which standard to follow, and which ESG topics to focus on. The lack of a common reporting standard, leads to comparability issues among the investor community.
Regulations and policies lead towards mandatory reporting on ESG. The European Green Agreement is among the most ambitious of the regulations, with the European Commission publishing some measures related to ESG:
- Non-Financial Reporting Directive (NFRD): This requires companies to make a series of disclosures and publish regular reports on their activities’ social and environmental impacts.
- The Sustainable Finance Disclosure Regulation (SFDR): aims to provide more transparency on sustainability within the financial markets in a consistent manner to ensure comparability.
- EU Taxonomy Regulation: published in 2020 which established a classification system for environmentally sustainable economic activities. It provides appropriate definitions for companies, investors, and policymakers whose economic activities can be environmentally sustainable.
- Corporate Sustainability Reporting Directive (CSRD): aims to improve the flow of sustainability information in the corporate world, making the report more consistent, comparable, and reliable.
Efforts towards convergence of standards
International frameworks and standards guide ESG reporting to drive convergence to a single internationally accepted reporting standard. In 2020, The Global Reporting Initiative (GRI), CDP, Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) issued a Statement of Intent to Work Together Towards Comprehensive Corporate Reporting. In this paper, the reporting entities agreed on a joint commitment to deepen their cooperation and facilitate the interoperability of frameworks and standards.
IIRC and SASB have announced their merge and the creation of the Value Reporting Foundation, a major step towards simplifying the corporate reporting system. The Foundation will provide companies with an integrated and comprehensive framework for sustainability reporting. It will also develop sustainability disclosure standards to streamline the reporting system, create value and drive global sustainability performance.
The future of ESG
The future of ESG is promising and challenging. Incorporating ESG into corporate reporting and business strategy is a powerful tool for gaining a competitive advantage, strengthening internal operations and maintaining a good relationship with investors and other stakeholders. Companies and investors are expected to increase their efforts in sustainability and adopt measurable ESG practices for long-term success. Through measurement tools and a coherent, consistent and comprehensive disclosure, companies and markets can understand the risks and opportunities related to ESG, act and thus create sustainable value.
Photo by Anika Huizinga on Unsplash
About Sustainability Knowledge Group
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Sustainability Knowledge Group has recently launched in partnership with the Cyprus International Institute of Management (CIIM) the pioneering CIIM-Centre for ESG. The Centre has a goal to enable organizations of all sizes and across sectors to embrace the opportunities offered by Sustainability and ESG integration into strategy and decision making.