ESG Reporting 101: What You Need To Know
In this Guide
If you're reading this guide, you've probably felt the public's demands for more environmental, social, and governance (ESG) reporting. You might be wondering what that means for you, your organization, and changes to your reporting. Instead of treating ESG reporting as a regulatory requirement or "nice to have," you have an opportunity to tell your organization's ESG story with data, build a brand reputation, and provide what investors need to make informed decisions.
What is ESG reporting?
ESG reporting is all about disclosing information covering an organization's operations and risks in three areas: environmental stewardship, social responsibility, and corporate governance. Consumers look to ESG reports to figure out if their dollars are supporting a company whose values align with theirs. Meanwhile, investors are looking for both qualitative and quantitative information to help them screen investment opportunities according to the ESG factors below.
Environmental
How are organizations using energy and managing their environmental impacts as stewards of the planet?
Examples: carbon emissions, climate change effects, pollution, waste disposal, renewable energy, resource depletion
Social
How are organizations fostering people and culture, and what kind of impact does that have on the community?
Examples: supply chain, discrimination, political contributions, diversity, human rights, community relations
Governance
How are organizations directed and controlled, and how are leaders held accountable?
Examples: executive compensation, shareholders' rights, takeover defense, staggered boards, independent directors, board elections
ESG Scores
You may have seen companies publish ESG scores from organizations such as Bloomberg, S&P Dow Jones Indices (S&P DJI), or others. Ratings measure the degree to which a company's economic value is at risk due to ESG factors and therefore whether a company is investable. Companies that are willing to more thoroughly report ESG performance than others tend to score higher. A lack of ESG reporting can hurt an organization's ESG score.
The global issuance of bonds for environmental, social, and governance goals in 2021 was on pace to hit $1 trillion for the first time ever, more than double what was sold in all of 2020.
- Bloomberg 2021
The demand for ESG data.
Moral Beliefs
More than half of adults want to know their moral beliefs align with a company before investing, according to a Workiva survey.*
Transparency
More than half (64%) agree that ordinary investors should put pressures on companies to be more transparent.
Trust
A majority (68%) shared they want data they can trust.
*Workiva commissioned a survey of 1,000 adults in the United States, United Kingdom, Germany, and France in the spring of 2021.
Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation.
- ESG and Financial Performance, NYU Stern Center for Sustainable Business and Rockefeller Asset Management, 2021
Strong ESG strategies are linked to better outcomes.
Better Performance
Studies indicate that managing for a low carbon future improves financial performance, a report by NYU Stern Center for Sustainable Business and Rockefeller Asset Management found.
Sunny Sentiments
Sentiment scores, which indicate the overall tone of an earnings call, tended to be higher for companies that discussed ESG factors in Q1 2020 and Q1 2021 than for those who didn't talk about ESG strategy and goals, Nasdaq said in a report that looked at Q1 2020 and 2021 earnings.
Steady As She Goes
Companies that discussed ESG topics the most in earnings releases were less volatile in the 30 days afterward, the Nasdaq report found.
Plenty of Upside
A strong ESG proposition can create value by driving growth, cutting costs, reducing legal and regulatory headaches, boosting productivity, and helping to optimize your investments, McKinsey & Company says.
Is ESG reporting mandatory?
Well...in the United States, the Securities and Exchange Commission provided guidance in 2010 that said companies might have to disclose risks and opportunities related to climate change.
The SEC said in 2021 that it would propose amendments to enhance those disclosures. We'll be watching.
ESG reporting across regions.
Europe
The European Union's Sustainable Finance Disclosure Regulation (SFDR), which applies to financial market participants and advisors, aims to steer capital toward sustainable investments through mandated ESG reporting. The European Commission also has proposed the Corporate Sustainability Reporting Directive (CSRD) to require even unlisted companies to report how sustainability issues affect their businesses, as well as how their businesses affect people and the environment.