ESG reporting: Driving Sustainability and Responsible Business Practices

Introduction

With increasing Climate change impacts and rising global temperatures, there have been increasing concerns to protect the environment and make the world a sustainable living place. Earlier efforts to create a sustainable world focused on efforts from the government alone. The increasing operation of private industries and their contribution to global emissions have forced governments to bring regulations like environmental social and governance (ESG) to make them accountable and responsible. Many business entities are also voluntarily make ESG reporting.

Though ESG is not a new phenomenon, it has gained immense popularity and participation in recent times. At present major global economies like the US, EU, India, and others are already started framing ESG framework and there are efforts to build a global standard for ESG. But some argue that ESG policies are difficult to measure and might act against climate equity.

ESG frameworks are a set of standards for a company that forces a company to follow better governance, environment-friendly measures, ethical practices, and social responsibility. Socially conscious investors employ this approach to conduct screening of potential investments.

It encompasses three criteria, namely environmental, social, and governance (ESG) criteria.

a) The environmental criteria consider how a company protects and preserves the environment. This includes corporate policies addressing climate change as well.
b) The social criteria evaluate how a company manages its relationships with employees, customers, suppliers, and communities in its operating region.
c) The governance criteria pertain to the company’s leadership, internal controls, audits, and shareholder rights.

Why you should not miss incorporating ESG reporting in your business?

Attract climate-conscious investors

Now a days many investors from developed countries are climate conscious. Hence, implementing ESG reporting standards will enhance transparency for investors regarding a company’s sustainable initiatives and practices. This transparency will increase the influx of investments into socially responsible and environmentally sustainable companies.

For instance, according to a Gallup study published in 2022, nearly half (48%) of investors expressed interest in sustainable investing funds. Similarly, a survey conducted by Dow Jones in the same year projected that ESG investments would experience a growth of more than double within the next three years.

Showcase your commitment to a sustainable environment

Businesses have the ability and financial means to make positive contributions towards addressing climate change. By ESG implementation, one can showcase their investment in renewable energy sources, incorporation of sustainable practices in supply chains, and support towards research and development of eco-friendly technologies. So, implementing ESG strategy will highlight your company’s role in creating a more sustainable and resilient future.

Like R&D, reap the benefits in the future with early reporting

The realm of ESG reporting is undergoing rapid transformation on a global scale due to the increasing focus on Sustainable Development Goals and the escalating efforts to address climate change. The early ESG reports are going to reap significant benefits in the near future. Hence, the sooner your business starts implementing an ESG strategy the better your business for future challenges.

Increasing consumer and stakeholders’ awareness of sustainability

ESG reporting standards are expected to have a greater impact on the evaluation of companies, not only by investors but also by consumers and stakeholders. For instance, a survey conducted by GreenPrint in 2022, which involved 1,062 U.S. residents, revealed that 66% of the participants expressed a willingness to pay a premium for environmentally friendly products. So, incorporating a consumer and stakeholder mindset is essential for the long-term sustainability of your business.

Managing climate risks and unlocking new business opportunities

Companies across various sectors face substantial risks due to climate change, encompassing physical risks such as extreme weather events, as well as transition risks linked to policy changes, technological advancements, and evolving consumer preferences. By integrating ESG reporting into your business strategies, you can enhance the ability to mitigate these risks and capitalize on emerging business prospects.

Accelerating global acceptance of ESG

Bloomberg estimates suggest that investments associated with strong ESG framework are projected to reach a staggering $53 trillion by 2025. The global participation rate for evaluating the ESG performance of organizations experienced growth, rising from 19% in 2019 to 33% in 2021, as reported by the US-based Dow Jones Sustainability Index (DJSI).

Offers a competitive advantage

Companies engaging in ESG reporting frequently obtain a competitive edge over their business competitors. The active involvement of your company in enhancing labor conditions, fostering diversity, and advocating for socioeconomic issues significantly contributes to bolstering your company’s brand.

Improve financial performance

Implementing ESG strategy will not only enhances a business’s appeal to investors but also has the potential to positively impact the overall financial performance of the business. To align with ESG initiatives, companies need to monitor essential metrics, including energy consumption, raw material usage, and waste management. This diligent tracking can ultimately result in decreased energy costs and overall expenditure.

Further, companies that follow ESG framework experience reduced exposure to fines, penalties, and other business risks, leading to a positive impact on their financial performance. For instance, in 2020, Nestlé announced it would invest up to $2.1 billion by 2025 to transition from conventional plastics to food-grade recycled plastics. This helped Nestlé in reducing its carbon footprint and lowering compliance costs, particularly in regions with stringent regulations on plastic packaging usage.

What are the global challenges in implementing ESG framework?

No Standard criteria

Currently, there is a lack of globally accepted ESG reporting standards. Investors and corporations have been relying on various frameworks such as the Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB). Similarly, various countries follow different norms for ESG reporting. In the absence of standardized norms there is a scope of misrepresentation and greenwashing from businesses.

Note: Greenwashing refers to the deceptive practice of portraying an organization’s products as environmentally friendly through false information or misleading claims. It involves making unsubstantiated assertions about the eco-friendliness of a company’s offerings to deceive customers.

ESG activities are hard to quantify

The financial performance of companies can be precisely measured using established metrics such as profits after tax and return on assets/investments. But defining similar metrics for ESG implementation is difficult. Hence, accurately assessing and comparing corporate performance on sustainability metrics is challenging.

Reluctance among corporates

Adopting sustainability measures initially increases costs for corporates. ESG strategy might impact financial viability which is against the interests of shareholders. For example, installation and operating costs of an effluent treatment plant that reduces the efflux of harmful pollutants to rivers/water bodies might be costly.

Standardization of ESG strategy might be against climate equity

The Paris Treaty is based on the foundation of the CBDR (Common But Differentiated Responsibilities) Principle. Under it, countries maintain distinct environmental standards according to their Nationally Determined Contributions (NDCs).

At this juncture, standardizing ESG Reporting and asking countries to follow uniform environmental standards under an ESG framework might go against the CBDR principle. Hence, against climate equity.

Note: The principle of CBDR is a foundational principle enshrined in the United Nations Framework Convention on Climate Change (UNFCCC). It recognizes that countries possess varying capabilities and responsibilities when it comes to addressing climate change. The principle of CBDR was established and affirmed during the Earth Summit in 1992, which took place in Rio de Janeiro, Brazil.

CBDR (Common But Differentiated Responsibilities) is founded on two distinct aspects of responsibility. The first aspect encompasses the shared responsibility of all states to address environmental preservation and sustainable development concerns. The second aspect involves differentiated responsibility, allowing states to take action for environmental protection based on their national capacity and priorities.

The EU

Europe is actively implementing an extensive range of measures, collectively known as the ‘European Green New Deal’ to make it the world’s first climate-neutral continent by 2050.

Several regulations concerning ESG reporting are a) the Taxonomy Regulation, b) the Non-Financial Reporting Directive (NFRD), c) the Corporate Sustainability Reporting Directive (CSRD), d) the Sustainable Finance Disclosure Regulation (SFDR), and e) the Corporate Sustainability Due Diligence Directive (CSDDD).

Anticipated legislative changes are on the horizon concerning EU Green Bonds and the EU Eco Label.

The UK

The Financial Conduct Authority (FCA) in the UK is actively considering the implementation of compulsory climate-related financial disclosure obligations for asset managers and asset owners. This is done under the Task Force on Climate-related Financial Disclosures (TCFD).

Germany

Germany’s Supply Chain Due Diligence Act goes into effect in 2023. The Act will require businesses to monitor supply chains for human rights and environmental violations. This legislation will place greater emphasis on ESG implementation.

The USA

The U.S. Securities and Exchange Commission (SEC) oversees the verification of advertised claims regarding ESG strategies, investment guidelines, and climate change risk assessment.

In 2021, the SEC established the Climate and ESG Task Force to identify the potential shortcomings in public company disclosures of climate risk, as per existing regulations.

Canada

The Office of the Superintendent of Financial Institutions (OSFI) in Canada has been actively involved in ongoing discussions and consultations with financial institutions regarding the risks associated with climate change, which can impact their stability and financial soundness.

China

The People’s Bank of China is actively involved in developing a robust green financial system. The establishment of green development funds is being pursued to facilitate investments in sustainable industries.

Australia

In January 2023, the Australian government published a consultation paper outlining the creation of a climate risk disclosure framework for Australian companies and financial institutions. The government intends to implement mandatory sustainability and ESG reporting obligations for major Australian entities within the coming years.

India

The Securities and Exchange Board of India (SEBI) specified a new Business Responsibility and Sustainability Report (BRSR) format. Currently, the top 1,000 listed companies in India have to mandatorily make ESG disclosures under BRSR.

Note: Figbytes offers an innovative solution that simplifies the complexities of ESG reporting with an intuitive platform. Figbytes enables your business to achieve compliance with your preferred ESG framework in a comprehensive manner.

How should ESG Reporting evolve in the future?

Focus on standardization

It is necessary to establish consistency among different reporting standards and develop a standardized ESG Reporting Framework. The G20 or the UNFCCC can play a prominent role by initiating consultations that involve representatives from both developed and developing nations.

Voluntary involvement of the corporate sector

The business industry should proactively undertake efforts to build strong internal ESG Frameworks. In relation to this, an industry expert has proposed five guiding principles. These are,

Enhance compliance in ESG reporting

The compliance norms of various countries should be gradually expanded to all listed and unlisted companies and all the corporates should make mandatory disclosure in the future.

Create awareness activities

Raising awareness about ESG norms among investors is essential to drive businesses towards adopting sustainable practices. So, governments and the private sector should collaborate and create such awareness drives.

ESG framework – the bottom line

A robust ESG framework, responsible ESG investing, and proper ESG implementation are important for creating sustainable and responsible business entities. Future studies have to pinpoint the determinants with greater accuracy so that they have a significant contribution in reducing global warming and Carbon emissions.

Companies that consider ESG implementation as a priority will be well-prepared to address the complexities of the contemporary business environment and foster positive transformations among diverse stakeholders.

With Figbytes, we are dedicated to delivering precise and dependable ESG assessments that assist your company in generating sustainable value while making meaningful contributions to society.