ESG reporting refers to the disclosure of data covering the company’s operations in three areas: environmental, social and corporate governance. It provides a snapshot of the business’s impact in these three areas for investors.
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.
- Environmental: The environmental criterion considers how companies use energy and manage their environmental impact as stewards of the planet. The “E” considers how a company uses resources across the board – Scope 1 to Scope 3. Factors considered are energy efficiency, climate change, carbon emissions, biodiversity, air and water quality, deforestation, and waste management. Companies that do not consider these environmental risks may face unforeseen financial risks and investor scrutiny.
- 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, labor standards.
- Governance: Governance considers a company’s internal system of controls, practices, and procedures, how an organization stays ahead of violations. It ensures transparency and industry best practices and includes dialogue with regulators. 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.
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.
- As of July 2020, 90% of companies in the S&P 500 have already published their annual corporate sustainability/ESG reports.
ESG transparency will be a key focus for companies in 2021 and beyond. Investors are increasingly considering ESG issues to help manage investment risks. The Deloitte Center for Financial Services expects ESG-mandated assets in the United States to comprise 50% of all professionally managed investments by 2025. ESG performance improvements and reports show investors how a company mitigates risks and generates sustainable long-term financial returns.. 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.
