The demand for transparency on sustainable and socially responsible practices is on the rise. From regulatory obligations or accountability towards different stakeholders, to even attracting new talent, ESG reporting remains to be a key focus for companies in the coming years.
Someone who knows all about this is Anna Alex, the founder and Chief Customer Officer (CCO) of Planetly. Planetly is a climate tech company that develops digital tools that help companies calculate, reduce and offset their CO2 emissions. Planetly’s declared goal is to make the business world “planet-positive”, i.e. climate-neutral.
When we talk about investments, there is one thing that is greatly beneficial for your business. Something that is an investment not just in environmental sustainability, but also in the long-term viability of businesses. It is paying attention to your own ESG KPIs. And start reporting and acting on them..
The abbreviation ESG stands for environment, social and governance. The key pillars are evolving around climate change and carbon emissions, pollution and waste or biodiversity (environment), customer satisfaction, human rights, health and safety or community relations (social) and board diversity, business ethics, tax transparency, corruption and, for example, instability (governance).
ESG reports disclose data and explain the impact and added value of a company in these areas, containing summaries of quantitative and qualitative information. The performance analysis provides stakeholders and investors with an insight into the goals, achievements and the impact of your business.
As I like to say, impact is an equation of purpose and scale. And following this equation, ESG reporting is not a nice-to-have, it’s a must-have. More and more investors want their investments to have an environmental or social impact. In that sense, the ESG approach to business is vital.
According to a recent survey by the CFA Institute, 85% of investment managers across countries are increasingly incorporating ESG criteria into investment decisions. The volume of ESG-linked loans to companies in Europe has more than quadrupled from €27 billion in 2017 to €102 billion in 2019. That being said, the increased global interest in environmental and social topics, means the importance of ESG reporting has also risen and has become an indispensable part for businesses.
Even though ESG reporting is not yet mandatory in all countries, an increasing number of companies disclose this information voluntarily since they’ve recognised the importance of communicating their business strategy and the impact their business has on our planet. In fact, from July 2020 about 90% of the companies in the S&P 500 have already created annual ESG reports and made it a standard. Acting even if the regulations are lagging behind gives you as a business a huge benefit for your customer brand, your employer brand and the efficiency of your internal processes and supply chain management.
And it’s only a matter of time until regulations are catching up. . From 2023 onwards, more companies will actually be obliged to publish sustainability information. In April 2021, the EU Commission presented a new proposal for a Corporate Sustainability Reporting Directive (CSRD), which would be an EU sustainability reporting standard improving the existing requirements of the current Non-Financial Reporting Directive (NFRD). Under this new directive, up to 50 000 large public-interest European companies, as well as all listed companies on EU regulated markets, will be required to report on ESG related factors.
Illustrating the potential of ESG reporting, we can look at its importance in several directions. Investors and other stakeholders want better ESG disclosures to help them understand more about how a company performs, makes decisions and creates value and impact. A lack of transparency might lead to investors not actually considering you for investments.
On the other hand, consumers also want to understand the impact their choices are having on the world. They are also willing to pay more for sustainable products. A survey from First Insight shows that customers, namely up to 62% of Gen Z would prefer to buy from a sustainable brand, and 73% of them would be willing to spend up to 10% more for sustainable products.
And employees want to understand whether their company is driving more sustainable communities, greater equality, or better working conditions. Since there is a war for talent going on, especially tech talent, reporting on ESG issues can also make you more attractive as a brand and as an employer. The above mentioned survey also showed that 76% of millennials stated the sustainability agenda of an employer to be an essential factor.
At present, organisations are still quite flexible regarding the disclosure of ESG information which means that they might highlight or downplay different aspects. During the past years, a variety of ESG reporting guidelines have been developed, but all of them have different requirements, and are therefore difficult to compare. Thus, the calls for a unified standard are getting increasingly louder.
In Europe, one of the most commonly used reporting standards stems from the Global Reporting Initiative (GRI), representing the global best practices regarding the disclosure of sustainability information. The new proposal for the Corporate Sustainability Reporting Directive (CSRD) by the European Commission, under which more companies will be required to report on ESG-related topics, will also be of high relevance to ESG reporting.
As part of the EU action plan on Sustainable Finance, SFDR (Sustainable Finance Disclosure Regulation) Level 2 will apply to all Financial Market Participants from January 2023 onwards. The main goal of this regulation is to promote transparency, liability and comparability in the world of sustainable investments. To do so, the regulation proposes a classification of financial products based on their degree of sustainability. Products that are categorised as sustainable will have to comply and face disclosure obligations in order to prevent greenwashing overall.
Therefore, sustainable products and their entities will have to be transparent on their performance in regards to ESG, collect and aggregate the so-called quantitative PAI (Principal Adverse Impact) indicators from their assets. Investors will then be able to compare products not only from a financial perspective but also from a sustainable perspective.
Knowing all of this, the next step is to implement ESG reporting in your business. And here are a few guidelines. Firstly, decide on the short-term and long-term goals of your sustainability strategy, make sure to inform all departments and constantly review this strategy over time. Then, get an overview of all ESG-related information that is available across different departments and stakeholders and decide which ones are most relevant for you. This is the so-called materiality assessment. Technology and software, like Planetly’s Climate Impact Manager and ESG Suite, can already simplify the data collection process immensely today and give you guidance in the jungle of reporting requirements. Then, decide on the reporting framework you want to use and ensure reliability and transparency in your reporting – that is the key. Lastly, communicate how your ESG report aligns with your business strategy, both to the public and the stakeholders.
You cannot manage what you cannot measure. That is why ESG reporting is one of the crucial factors in the fight against climate change, the one that we are all fighting. Sustainability should be the new normal.