With the latest climate-related reporting requirements rolling out, there’s a new spotlight on ESG practices. Approaches to ESG measurement are ever-evolving, so read on to get up to speed on the basics.
Environmental, Social, and Governance (ESG) practices are actions taken by companies looking to do less harm or more good. While the term was first coined in 2004, the concept has existed for decades. Today ESG is a common way to measure a business’s impact on the planet and society, along with their system of decision-making and control.
Put simply, ESG reports provide a snapshot of a company’s positive and negative practices. A new wave of investors reference ESG reports to help screen for values-aligned companies that might make for solid investment opportunities. And prospective customers and employees may look to a company’s ESG commmunications, in particular, their sustainability and social impact, before making a purchase or accepting a job. Recording and measuring ESG factors is now all but mandatory for businesses.
Currently, ESG reporting lacks a single set of guidelines, standardized metrics, or definitions. However, many measurement leaders advocate for creating more consistent ESG reporting guidelines, and some regions have taken steps to mandate reports. The EU Corporate Sustainability Reporting Directive (CSRD) now requires major companies in the European Union to report on their environmental, social, and human rights impacts. Meanwhile, the US Securities and Exchange Commission (SEC) recently rolled out climate disclosure rules for US-based businesses to protect investors through policies and procedures that would share the impact of climate change-related risk on business strategy and outlook.
Most large companies publish ESG reports that follow one or more popular reporting frameworks for consistent data. For example, popular approaches today include the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosures (TCFD), and International Sustainability Standards Board (ISSB).
Typically, frameworks cover three key areas of an organization’s operations and risks:
Environmental metrics
What actions does your business take to help the environment? You may include measurements of efforts to reduce greenhouse gas emissions, manage waste responsibly, improve air and water quality, and conserve natural resources, to name a few.
Social metrics
What is your company doing to improve lives? This reporting may include metrics on employee well-being, diversity initiatives, data protection and privacy policies, community involvement, and human rights and labor standards.
Governance metrics
What is your leadership doing to guard against corruption and ensure investments remain sustainable into the future? This reporting demonstrates whether your company follows industry best practices for internal controls, principles, procedures, board and executive composition, and whistleblower programs.
A carefully considered approach to ESG reporting will save your business time and produce more meaningful reports. To ensure that your ESG strategy is prioritized, involvement from your board and C-Suite is crucial. Here are a few more steps you can take to facilitate the ESG reporting process:
1. Engage constituents in the reporting process. Understand who among your customers, employees, and supply chain is most central to your impact.
2. Understand what factors are most relevant to your business. The areas where you should focus attention will be unique to the risks in your operations. Start with a materiality assessment, which measures what is significant to your constituents.
3. Set realistic and measurable ESG goals. Well-defined short- and long-term goals are important at the earliest stages of reporting. This will ensure the data you collect is precise and confirmable.
4. Refine reporting strategies. ESG reporting is an ongoing process that requires companies to improve their process every year.
In recent years, the topic of ESG has become the subject of growing backlash. Opinions range from casual skepticism to strong political opposition. Opponents feel the emphasis on ESG reduces economic freedom. Meanwhile, champions of ESG feel it’s an important tool for driving better business practices. About half of large US-based companies have experienced some form of backlash against ESG, according to a survey from The Conference Board. The current moment is an opportunity to align your ESG approach with core strategy and clarify your ESG communications.
The benefits of ESG reporting remain clear. ESG continues to guide business improvements and attract investors, customers, and other collaborators. How the acronym and concepts will evolve over the next two decades is unclear. But the idea of measurement for better business has staying power.
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