While the topic of ESG reporting is not new, it continues to gain attention with the rise of climate-related regulations and policies. For companies to maintain strong relationships with their stakeholders, they must disclose their ESG efforts. In this article, we examine the current state of ESG reporting and what businesses should keep in mind moving forward.
What Is ESG Reporting?
ESG reporting involves disclosing information on the environmental, social and governance (ESG) initiatives of a company and its global implications. It allows organisations to become more transparent about the opportunities and risks they face.
ESG reporting is an ideal communication tool that plays a significant role in persuading key stakeholders that a business’s actions are sincere. The rise in ESG reporting trends is supported by the fact that investors and other stakeholders are compelling businesses to reveal more about their sustainability and ESG efforts.
What Does ESG Reporting Include?
ESG reporting includes both qualitative disclosures along with quantitative metrics used to measure an organisation’s performance against ESG threats, opportunities and related strategies. It is an effective way of facilitating businesses to respond in one document to a wide range of questions related to their sustainability initiatives.
The Growing Importance of ESG Reporting
Initially, ESG reporting wasn’t common practice among businesses, and the data they shared varied considerably. There was no proper structure, consistency or guidance in the reports. However, today ESG reporting has garnered massive interest from investors and stakeholders, which is impelling businesses to disclose their ESG initiatives in more consistent and structured reports.
The increasing importance of ESG reporting can be attributed to the rise of sustainability-related policies and regulations in different countries since 2006. Some of these regulations include:
1. European Green Deal
The European Green Deal targets achieving climate neutrality by the year 2050. To achieve this, the European Commission has laid out action plans relatable to each pillar of E, S, and G. These include:
- The EU Climate Adaptation Strategy: Strategies such as this boost long-term resilience to climate emergency. Your business can take similar measures proportionate to the action taken by the EU.
- Sustainable Finance Strategies: Employing strong and forward-thinking governance policies will help to future-proof your business against the externalities of climate change. The sooner such measures are taken, the lesser the impact in years to come.
- Raw Materials Alliance: Partnering with accredited producers and organizations will mitigate risk within your supply chain, providing greater levels of business confidence.
Along with other sustainability efforts, the European Green Deal necessitates companies to disclose in their ESG reports what initiatives they are taking to reduce greenhouse gas emissions.
2. Non-Financial Reporting Directive (NFRD)
NFRD is the EU legal framework for regulating the disclosure of non-financial information by companies. It necessitates large companies (with over 500 workers) to publish regular ESG reports on the social and environmental impacts of their activities in the following areas:
- Environmental – use of resources, pollution, climate change mitigation, biodiversity, etc.
- Social – human rights, equal opportunities, gender and disabilities equality, working conditions, work-life balance, labour market access, etc.
- Governance – internal control and risk management, anti-corruption, political and lobbying activities, business partner relationship management, etc.
3. Sustainable Finance Disclosure Regulation (SFDR)
SFDR provides more transparency on sustainability within the financial markets. It requires organisations to reveal in their ESG reports how they consider sustainability threats in their investment practices and the way they manage the adverse effects of their investment decisions on sustainability aspects. This helps prevent greenwashing and ensures comparability.
4. The Taxonomy Regulation
The Taxonomy Regulation established a classification system for environmentally sustainable economic activities. It provides definitions to businesses, stakeholders and policymakers on which economic undertakings can be considered environmentally sustainable. As per this regulation, companies are required to report how environmentally sustainable their economic activities are in their ESG reports.
5. German Supply Chain Due Diligence Act
The German Supply Chain Due Diligence Act necessitates large corporations to ensure they observe social and environmental standards in their supply chain. Businesses have to monitor their own operations and their direct suppliers internationally. Moreover, they need to take action in the event of violations. This Act necessitates organisations to report how they are performing due diligence and what steps they are taking to tackle supply chain risks.
6. UK Modern Slavery Act
The UK Modern Slavery Act specifies a range of measures on how human trafficking and modern slavery should be dealt with in the United Kingdom. It obligates certain organisations to publish a yearly Modern Slavery Act statement as part of their ESG report, mentioning the steps they’ve taken to detect and address their modern slavery risks.
What Can You Expect Next?
Businesses in nearly all industries are raising the bar with better transparency and a greater emphasis on underlying ESG performance. Whether you want to operate as a well-governed organisation that manages ESG risks and opportunities, be recognised as an ESG leader or merely avoid the bottom quartile of ESG ratings, you should focus on advancing your reporting strategy.
Keep in mind that ESG reporting is a non-linear evolution that doesn’t follow a step-by-step progression. Every company must prioritise what it’ll focus on based on its own culture, organisation, strategy and desire to improve its reporting. Moreover, your company should stay aware of what your peers are doing to avoid being labelled as lazy by investors and rating agencies.
ESG reporting holds businesses more accountable for their impact and gives integrity to businesses that report their information transparently and consistently. Irrespective of the reporting framework you select, each disclosure must be supported by data.
However, creating a data-driven ESG report can be complex and time-consuming, as it must fulfil the requirements of the reporting methodology. Besides, businesses have to determine how to communicate relevant information and what ESG indicators and data to report.
At ethiXbase, we help you tackle ESG reporting challenges with ethiXbase GreenLITE, our new sustainability supply chain risk management platform that lets you fully identify, address and understand ESG and sustainability threats posed by your supply chain. It combines robust technology and data analytics to support companies and third-party entities across the globe to build and maintain sustainable business practices. We are committed to promoting sustainable and lasting change, propelling the world forward towards a more sustainable future.