In the world of business and finance, ESG (Environmental, Social, Governance) is proving its worth. Much like the fabled tortoise in its race against the hare, the steady pace of ESG adoption has caught up to conventional measures of business success. In fact, the two are now tied together in a three-legged race to the finish line: surfacing accurate information that tells the full story of a firm’s financial performance, impact, risk and future returns..
Originally conceived in 2005 as a method of corporate valuation, ESG reporting has been so successful in helping investors understand a company’s true performance and prospects that governments, businesses and non-governmental organizations (NGOs) around the globe have adopted it as a standard by which for-profit organizations can be measured.
Let’s take a closer look at why ESG frameworks have become such a vital part of doing business, shaping the future of corporate finance and reporting.
ESG frameworks are guidelines for documenting and reporting on corporate commitments to environmental, social, and governance goals. These frameworks are developed by international standards boards as well as governing bodies that mandate ESG reporting, such as government agencies, stock exchanges, and NGOs.
There are several different ESG frameworks to choose from. Which framework your company chooses to use depends largely on the location of your operations, type of industry, legal structure and corporate objectives.
Examples of well known organizations that set standards for focusing on sustainability and environmental reporting are:
These reporting frameworks originated out of a call by stakeholders to not only know more about the financial stability of a company but also understand its commitment to long-term sustainability for the communities where it operates and sources raw materials, its employees, customers, investors and the environment.
In many cases, ESG frameworks are used voluntarily to achieve a certain level of certification, such as B Corp Certification, which recognizes companies meeting high standards of social and environmental performance, accountability, and transparency. Such a certification can be a requirement of a large customer, a group of investors or in order to be included in stock indexes and portfolios. There are a growing number of governments at the country, provincial, and state level using ESG frameworks to develop disclosure requirements.
The central purpose of ESG reporting is to demonstrate a company's long-term commitment to the highest standards of business and financial management around environmental, social, and governance performance. Start your assessment with our global tool: ESG Pre-Screening Assessment Tool | Inogen
Climate change has created a sense of urgency around the globe in terms of corporations taking responsibility for their environmental impact.
Common environmental goals include:
From racial equity to public health policy to human rights conflicts, the impact of social issues on the workplace is more apparent than ever. Workers, community members, and other key stakeholders are asking brands to take a more active role in social issues.
Common social goals include:
Poor organizational governance can have far-reaching consequences for shareholders and the public. The purpose of a board is to thoughtfully steer the direction of an organization to the benefit of all stakeholders.
Common governance goals include:
The degree of self-examination and transparency these frameworks offer is good not only for key stakeholders but also for the business itself. ESG reporting has been around long enough now that data backs up the positive impact of embracing ESG accountability.
According to a recent McKinsey report, ESG funds saw an astounding 1,300% increase in assets under management (AUM) between 2018 and 2021. Organizations earn a place in these investment funds by having strong ESG ratings.
These investments can also perform better over the long run, because the businesses behind the funds have taken a long-term view of building corporate wealth.
By taking a deeper look at the lasting impact of business activity, companies can enact changes that make them more resilient in the face of climate change and water insecurity, and be of greater value to local communities, while offering new revenue potential.
Csaba Csiszkó, head of sustainability at denkstatt Hungary, recently said in an interview: “Traditionally, a company’s prime objective has been to generate money. Undoubtedly, profits are indispensable for covering employees’ wages and supporting the growth of a business. But over the years, especially since sustainability has become an integral part of finance in the form of ESG [environmental, social and governance] reports, the corporate world has started entertaining an interest in how they make money, focusing on social and environmental impacts too.”
A whole host of new regulations around environmental impact reporting, diversity reporting, and financial disclosure are spurring more organizations to conduct ESG audits.
In an ESG roundtable, Klaas Nijs of Antea Group Belgium shared, “Regulation is broadening in scope: whereas in the past regulators tended to focus on large emitters first and foremost, they are now also shifting focus on smaller companies because in the end, effective climate change regulation needs to address all actors.”
Every company’s ESG journey is unique, to its particular industry, the regions it impacts, and its products, business model, culture, and strategy.
As your organization prepares for an ESG-aligned future, it’s important to consider where you focus your goals and invest to make the greatest positive impact. Understanding ESG frameworks and reporting will help your organization prioritize and achieve those goals.
"The range of emerging, complex environmental and social issues facing business come with many names. The challenge is not what you call it but what you do about it—what do you do to create value over time, for owners, employees, customers, investors and society? As population grows and the global middle class expands, we will exert unprecedented pressures on earth's systems to meet human needs. Call it whatever you want. The fact is this: successful companies, communities and countries will be those that figure how to broaden their vision, take full responsibility for their impacts (intended or not), and to grow responsibly," says Erik Foley, a Senior Consultant at Antea Group USA.
ESG has proven to be a valuable tool for both sustainability efforts and corporate financial performance. For ESG to be successful, organizations need to commit to combating real problems.
“Measure your current ESG footprint—that’s crucial,” Simpson of McKinsey offered. “Then discover the magic: What is the essential strength that you bring, which is understood and felt by your employees and stakeholders and everybody can get excited about? Then make that a strategic differentiating factor.”
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