What are the key business benefits of ESG reporting?
As organisations face a sharp increase in ESG requirements, a question emerges: what are the real business benefits of a robust ESG disclosure process?
Many rating agencies have already published reports exploring the impact of ESG scores on credit ratings. S&P Global Ratings have noted a direct link between ESG practices and creditworthiness, whilst Moody’s has found that one in five organisations suffers a credit rating setback following an assessment of their ESG practices.
A company’s ESG score is now routinely taken into consideration during a bank loan application, affecting the decision-making process and pricing. The European Banking Authority has solidified this in its official guidelines on loan origination and monitoring, which outline the need to consider ESG factors throughout the entire credit risk lifecycle, from the practices themselves all the way through to reporting.
This should all make one thing clear to senior management and decision makers: the quality of a company’s ESG disclosures has a direct impact on its access to capital.
In their 2023 ESG Outlook, Moody’s identified 4 key ESG trends that will impact credit over the coming year:
- Growing scrutiny of corporate decarbonisation plans
- Elevated social risks driven by high cost of living concerns
- Greater refinancing risks for lower-rated issuers with governance challenges
- An increasingly complex ESG regulatory and political landscape
From a corporate perspective, these areas of risk have one thing in common: they can, to one extent or another, be mitigated through robust and detailed ESG disclosures.
Behind these risks lie opportunities. Building on the key trends above, we can start to identify the tangible business benefits of having strong ESG reporting and disclosure practices:
Improved risk management: Companies with strong ESG reporting practices are better equipped to identify and address potential risks to their operations and reputation. One clear example here is climate change. Events once considered “acts of God”—flooding, catastrophic weather, scarcity of resources—must now be viewed through the lens of climate risk, and incorporated into a robust risk identification processes with mitigating controls. By doing this, organisations will be better prepared to withstand these events, leading to a more stable and resilient organisation while providing a sense of comfort and stability to stakeholders.
Increased access to capital: Financial service institutions are now required to disclose the nature of their investments, and are directing their focus towards organisations who won’t negatively impact their climate risk management disclosures. Companies with detailed ESG disclosures, who include climate in their enterprise risk management (ERM) process, are therefore more likely to attract investors.
These considerations will only become more important. Future capital requirements will be defined with climate risk in mind, meaning that companies with insubstantial disclosure practices are more likely to be penalized by FSIs, which will further impact their access to capital.
Enhanced reputation and brand value: Companies with strong ESG practices are often viewed as responsible corporate citizens. Reputational value in this area is becoming more important than ever, not just in terms of consumers and top-line growth, but also in respect to the pressures now being placed by individual investors on institutional investors for sustainable investment options.
Meanwhile, the liability risks of misleading investors with inaccurate ESG disclosures have become too great to ignore. Subpar ESG operations and reporting practices will inevitably lead to accusations of greenwashing, which can have devastating ramifications for an organisation and its leaders.
Improved stakeholder relationships: Maintaining a strong relationship with stakeholders requires a firm understanding of the social and environmental context in which they operate. It stands to reason, then, that clear communication, accurate disclosures and tangible actions regarding these important topics should be pivotal in establishing and building trust with both direct and indirect stakeholders.
Companies are also facing pressures from their own employees to do more within the sustainability space. This is evidenced from Deloitte’s 2023 CxO Sustainability Report, which states:
“More than half of CxOs said employee activism on climate matters has led their organizations to increase sustainability actions over the last year—24% of which said it led to a “significant” increase.”
Increased operational efficiency: Continually monitoring and tackling social and environmental risks through strong ESG reporting and disclosure practices enable companies to limit potentially costly disruptions, while also identifying unsustainable (and therefore also costly) areas within the organisation and its supply chain.
By establishing a cross-functional ESG process, corporations can help improve collaboration, awareness and positive action across business lines and functions, thereby creating a ‘virtuous cycle’ of improved operational efficiency.
Compliance with laws and regulations: As increasingly specific and prescribed regulations surrounding ESG continue to emerge, it becomes crucial for corporations to identify which laws, regulations and frameworks they need to adhere to. These requirements are not going away, so organisations need to start facing the complex task of assessing what changes need to be made. Ignorance here is no longer an excuse, and ignoring them now will only lead to greater costs and damages further down the line.
So what does this all mean in practice?
These benefits should act as the driving force behind key operational changes. Few businesses, if any, will be able to immediately showcase entirely sustainable practices, but by focusing their efforts on building a comprehensive and robust ESG reporting process, organisations can show stakeholders that they are taking the process seriously. By communicating with rigor and transparency while they transform their operations, business leaders can continue to build company value while helping lay the foundations for a more environmentally and socially sustainable future.