What is ESG? Everything You Need to Know About Environmental, Social, and Governance
Here’s the introductory ESG guide you’ve been looking for. We’re keeping things simple in hopes that by the time you’ve finished reading this, you’ll better understand the basics of the ever-changing ESG landscape.
What is ESG?
ESG refers to the environmental, social, and governance factors that investors measure when analyzing a company's sustainability efforts from a holistic view.
Many companies publish ESG reports in alignment with ESG reporting frameworks, standards, regulations, or investor expectations to demonstrate transparency and disclose the environmental, social, and governance factors that contribute to the overall risks and opportunities involved with a company’s operations.
ESG data includes more than just each company’s individual impact. It also includes partners, community impact, and companies in their supply chain. The types of data included can vary from greenhouse gas emissions to labor practices, workforce diversity, executive compensation, and more.
Confused yet? Don’t worry, we’re going to break all of this down for you.
The “E” in ESG means the environmental responsibility companies have, including energy use and how they manage their environmental impacts as stewards of the planet. Some examples of environmental issues are:
- Carbon emissions
- Energy consumption
- Climate change effects
- Waste disposal
- Renewable energy
- Resource depletion
The data disclosed in the social responsibility portion of ESG covers a wide range of topics from how companies are fostering people and culture to diversity statistics and community impact. Some examples of social topics are:
- Community relations
Governance in ESG covers how companies are directed and controlled—and how leaders are held accountable. Increased transparency into corporate governance is quickly becoming an expectation. Some example topics related to governance include:
- Executive compensation
- Shareholder rights
- Takeover defense
- Independent directors
- Board elections
- Political contributions
Unsure how to develop your ESG strategy? Here’s where to begin:
1. Identify ESG stakeholders, and build your team
Once you have determined the internal and external stakeholders whom you serve, it's time to tap into your company network and build a team of self-motivated individuals who are eager to support your ESG program. Build a diverse, cross-functional team with expertise in different areas, like finance, human resources, internal audit, investor relations, and risk.
2. Research peers' ESG reports
Download ESG reports to compare and determine what data peers are disclosing and which ESG frameworks they're using. Based on this research, engage your ESG stakeholders to brainstorm which metrics are important to your organization, identify what ESG data you're already collecting, and determine the data you still need.
3. Determine ESG materiality and build your ESG reporting roadmap
Use information gathered from stakeholders to refine the metrics and values that matter to your organization. Then map the journey to achieving your goals for ESG reporting and ESG performance overall.
Why is ESG so complicated?
Global and industry ESG reporting standards are rapidly changing — and the regulations, frameworks, and standards don’t all align on the information they request from a company, whether it’s about the supply chain, ESG goals, or performance. This has led many companies to disclose only what they’re required to, or to use ESG frameworks that make the most sense for their stakeholders.
ESG rating agencies and rankers use different criteria and methods to determine ESG scores. Many companies haven’t been collecting ESG data or do not have structures or a team in place to put a complete ESG report together. Working across departments to compile, analyze, and report financial and non-financial data for ESG disclosures isn't always easy — this is where ESG frameworks and ESG reporting software and platforms come into play.
ESG data includes environmental, social, and governance data from a business and its value chain, which includes customers and suppliers. The types of ESG data that a business can disclose can be vast.
- On the environmental side, it can range from greenhouse gas emissions to water and raw material usage or even waste management.
- Social ESG data can include statistics on company diversity, human rights, animal rights, and even information related to labor practices in the company's supply chain.
- ESG disclosures around governance provide transparency into company leadership and operations. Investors are often looking for details on company values, employee relations, and corruption concerns as well as employee and executive compensation.
What metrics are used to determine ESG scores?
Most ESG rating agencies and rankers determine companies’ ESG scores through proprietary evaluation processes that provide limited transparency. ESG metrics aligned to frameworks and standards generally inform these scores, but raters and rankers also may include media trends, controversy analysis, and other public information. ESG metrics serve as a baseline for ESG reporting consistency and provide guidance for companies starting their ESG journey.
ESG reporting involves disclosing information about a company’s operations and risks in three areas: environmental stewardship, social responsibility, and corporate governance.
Investors can use ESG reports to identify which companies to invest in with less financial risk because of their environmental impact, social standards, or governance structure. ESG reports help investors avoid companies that may be impacted by more strict ESG metrics in the future or other risks related to ESG data included in their reports. This is called ESG investing and it’s driving companies to adjust their corporate ESG strategies to focus on providing more information and transparency in their ESG disclosures.
Why are ESG reports important?
Investors and providers of capital are increasingly using ESG reports as a factor in their decision-making process. ESG reports provide transparency for investors and allow them to make more informed business decisions. They also help businesses analyze and evaluate their impact on our world and make strides toward setting and achieving their ESG goals — all while realizing business value in the process.
ESG investing is when investors prioritize and consider environmental, social and governance performance and metrics in their investment decision-making process. The pressure for companies to be more transparent and forthcoming on their ESG reports comes from modern investors and the push from the broader investment community.
Here are some results from a ESG Attitudes Survey Workiva commissioned in 2021:
- More than half (61%) of adults want to know their moral beliefs align with a company before investing
- More than half (64%) agree that ordinary investors should put pressures on companies to be more transparent
- A majority (68%) shared they want data they can trust
For years, companies haven’t had many rules to follow for ESG reporting, though the U.S. Securities and Exchange Commission has for years told publicly traded companies to disclose financially material climate-related matters. As regulators around the world finalize ESG reporting requirements, a growing number of organizations have been aligning with ESG reporting frameworks and standards including the Global Reporting Initiative Standards, Sustainability Accounting Standards Board Standards, and recommendations of the Task Force on Climate-Related Financial Disclosures—or the GRI Standards, SASB Standards, and TCFD recommendations.
Among ESG reporting software providers, Workiva has embedded top frameworks into its platform so companies can map their ESG data to frameworks and standards as they create their annual ESG reports.
ESG scores can be looked at as ESG risk indicators. They are generated based upon a company's performance across their numerous environmental, social, and governance metrics. Put simply, ESG scores are a numerical value to help simplify the ESG risk and performance rating of a company for comparative purposes.
These ESG scores are complicated though because score providers, ratings agencies, and rankers evaluate different criteria to determine scores. Some request information from companies via surveys or questionnaires, others review public disclosures, and some do a combination. ESG scores are important because they provide a baseline for evaluating a company’s ESG risk, but without broad and standardized reporting frameworks (and regulations to enforce accurate and complete reporting), ESG scores are only as accurate as the data that companies have chosen to disclose—or what can be found online.
Nevertheless, investors are using these scores to help evaluate where to direct their money in the absence of standardized disclosures.
Sustainability and ESG often seem interchangeable, but this isn’t the case. The meaning of sustainability can be broad but is generally focused on protecting the planet and people. ESG is focused on the material issues—emissions, water use, diversity, equity, and inclusion—that pose imminent financial risks to a company because of its industry, business practices and operations.
ESG frameworks and standards
A number of ESG frameworks and standards exist to help create comparable disclosure. They also help companies determine how to report and how to measure. A single company can use multiple frameworks or customize their reports to share their most relevant ESG data. It is recommended to look at which ESG frameworks similar companies within your industry are using, in addition to engaging stakeholders on their disclosure needs and start from there.
Dive deeper into ESG
We’ve barely scratched the surface of ESG and ESG reporting, but we hope you’ve learned something new in this guide. If you’re looking for more ESG goodness, we’re always publishing new and timely pieces on our ESG content hub, and check out the ESG Talk podcast with host Mandi McReynolds for the latest ESG trends, topics, and tips.
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