What Is ESG Reporting?
ESG reporting refers to the disclosure of data covering the company’s operations in three areas: environmental, social and corporate governance. Environmental, Social and Governance (ESG) analysis and reporting can provide valuable insights and help create long-term value for stakeholders.
The analysis of performance across these ESG factors summarizes quantitative and qualitative disclosures and helps screen investments. ESG reporting helps investors avoid companies that might pose a greater financial risk due to their environmental performance or other social or governmental practices.
Understanding ESG
- Environmental: The environmental criterion considers how companies use energy and manage their environmental impact as stewards of the planet. Factors considered are energy efficiency, climate change, carbon emissions, biodiversity, air and water quality, deforestation, and waste management.
- Social: The social criterion examines how a company fosters its people and culture, and how that has ripple effects on the broader community. Factors considered are inclusivity, gender and diversity, employee engagement, customer satisfaction, data protection, privacy, community relations, human rights, labour standards.
- Governance: Governance considers a company’s internal system of controls, practices, and procedures, how an organization stays ahead of violations. Factors considered are the company’s leadership, board composition, executive compensation, audit committee structure, internal controls, and shareholder rights, bribery and corruption, lobbying, political contributions, and whistleblower programs.
There has been a massive surge in ESG reporting in the past few years. Many companies now integrate their ESG reporting in their annual reporting to demonstrate how sustainability is embedded in their business.
Why Is ESG Reporting Important?
While it’s still voluntarily for most countries, there are increasing global regulations regarding corporate ESG data reporting.
Proactive and future-focused companies understand the importance of communicating ESG criteria in their business strategy and purpose. They are voluntarily providing their ESG data in their annual reporting.
Companies with strong ESG performance have demonstrated higher returns on their investments, lower risks and better resiliency during a crisis.
ESG performance improvements and reports show investors how a company mitigates risks and generates sustainable long-term financial returns.
On the other hand, companies that do not provide these reports show a lack of transparency and concerned investors may overlook them as potential investments.
What are the key ESG reporting frameworks and regulations?
The landscape of ESG reporting frameworks and standards is diverse and evolving, with organizations adopting a variety of approaches to meet their reporting requirements.
Prominent frameworks and standards include:
- The Corporate Sustainability Reporting Directive (CSRD), adopted in 2021 by the European Commission, aims to enhance the transparency and comparability of ESG disclosures among European companies. It introduces standardized reporting requirements and establishes the EU Taxonomy and the European Sustainability Reporting Standards (ESRS) as frameworks for ESG reporting.
- The International Sustainability Standards Board (ISSB), established by the IFRS Foundation in 2023, develops global sustainability reporting standards to facilitate consistent and comparable ESG disclosures. The ISSB’s standards, including IFRS S1 and IFRS S2, provide a common language for reporting on sustainability issues and enable investors to assess companies’ ESG performance and risk exposure.
- The Sustainability Accounting Standards Board (SASB), in collaboration with the IFRS Foundation, develops industry-specific sustainability accounting standards to help companies disclose material ESG information to investors.
- The Securities and Exchange Commission (SEC), through its rules adopted in 2024, enhances climate-related disclosures for investors, requiring companies to assess and disclose the impact of climate-related risks and opportunities on their business operations, financial performance, and strategic objectives.
- The Global Reporting Initiative (GRI), established in 1997, develops sustainability reporting standards that help organizations communicate their ESG impacts and demonstrate accountability for their environmental, social, and economic performance. GRI’s standards provide a comprehensive framework for reporting on sustainability issues, enabling companies to identify, measure, and manage their ESG risks and opportunities.
The future of ESG reporting
Key trends shaping the future of ESG reporting include:
- Predicting trends: An ever-evolving global ESG regulatory landscape: Regulatory developments, such as the adoption of international sustainability standards and enhanced climate-related disclosures, will shape the future of ESG reporting, driving greater transparency, consistency, and comparability in ESG disclosures.
- The growing influence of ESG reporting on corporate policy: ESG considerations are increasingly integrated into corporate decision-making processes, influencing strategic priorities, risk management practices, and stakeholder engagement strategies.
- ESG reporting in the age of digital transparency and accountability: Advancements in technology, including ESG reporting software, data analytics tools, digital platforms and AI, are revolutionizing the way companies collect, analyze, and disclose ESG data.
By embracing these trends and adopting innovative technologies, companies can enhance the effectiveness and credibility of their ESG reporting practices, driving positive social, environmental, and governance outcomes and creating long-term value for stakeholders.
Taking the next steps in ESG reporting – Concluding Remarks
Now that we’ve explored the fundamentals of ESG reporting, its significance, challenges, and future trends, it’s essential for organizations to take the next steps in their ESG reporting journey.
It’s safe to assume sustainability has become one of the reigning priorities in the mind of the investor — and one that is very closely aligned with the investor’s perception of a company to be profitable for the long term.
With 80% of N100 firms (the N100 is a group of 100 of the largest companies in 49 countries, as determined by revenue) across the globe now reporting on sustainability, a global framework for ESG is a question of when, not if.
In the next article, we’ll consider how to begin your journey in ESG reporting and discuss how companies are preparing for ESG reporting in South Africa.
Gervase Mwango (CA-ACCA)