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Sustainability Risks to the Reputation of a Business [ESG Reporting Explained]

Written by Paul Perry on March 19, 2021

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Today’s business environment is shining a spotlight on the areas of environmental, social and corporate governance. As new opportunities arise and risks become more widespread, businesses must emphasize the importance of ESG reporting to secure funding, improve business practices and positively contribute to the changing business landscape.

What Is ESG Reporting?

ESG reporting involves disclosing a company’s environmental, social and governance performance. This process involves making company activities public in these areas and being held accountable by consumers and investors regarding ESG-related issues.

ESG reporting, also referred to as sustainability reporting, is related to important performance metrics that apply to non-financial assessments. Common measures include corporate social responsibility and triple bottom line reporting.

What Is the Purpose of ESG Reporting?

More and more consumers, including both customers and vendors, have prioritized many important environmental, social and governance (ESG) related issues in their business decisions.

This has spurred record spending in terms of sustainable funding, including both ESG funds and exchange-traded funds (ETFs). In response to this boom in investment, businesses have emphasized disclosure of their activities in ESG areas.

It’s important to provide reliable information to the public regarding ESG activities because investors, as well as other stakeholders, depend on this data when making decisions. This is also why the use of an independent auditor can add valuable credibility to your ESG reporting. Similar to an audit of financial statements, the use of a third-party in providing assurance that your ESG reporting is accurate can enhance its credibility.

What Are the Benefits of ESG Reporting?

While ESG reporting may not be mandatory for some businesses, particularly small and medium-sized enterprises, there are many compelling reasons why a company would submit these reports.

Mitigate Risk

When you account for ESG activities in your organization, you’re employing a long-term focus concerning your operations. This attention to detail can uncover risks that can significantly impact your operations down the line. During this process of uncovering potential hazards, you’ll be better able to assess the ability of your organization to respond to these risks and develop strategies to effectively mitigate these obstacles.

Attract Investors

Investors today use ESG to screen investment opportunities. As a result, organizations that lag behind in these areas are at risk of being ignored by the investment community in favor of organizations that take a proactive approach to ESG and ESG reporting.

Compliance

More and more jurisdictions have been introducing or expanding ESG reporting requirements. Being aware of these regulations, and even potential upcoming changes to regulations, can help your company avoid fees and other negative impacts related to noncompliance. Getting started in ESG reporting will help you get up to speed with compliance issues that are bound to become more important to your company as the future unfolds.

Streamline Operations

Engaging in ESG reporting often takes a great deal of time and effort. The process often leads to new discoveries concerning a firm, its systems and its operations. The insights gained can help identify valuable opportunities to make your organization more efficient and streamline your operations.

What Are the ESG Reporting Requirements?

While there has been a steady stream of new frameworks and regulations surrounding ESG reporting in recent years, it appears that a more standardized structure is coming. Recent developments in mandatory disclosure, investor demand and consolidated ESG standards suggest that standardized ESG reporting requirements may be approaching.

Mandatory Disclosure

Policymakers around the globe are promoting ESG disclosure.

For example, in 2021, the European Union (EU) will be tightening the ‘Non-Financial Reporting Directive’ that requires ESG disclosure of companies employing more than 500 workers conducting operations in the EU.

Regulations by the Securities and Exchange Commission (SEC) in the United States require listed companies to disclose all environmental compliance expenses. China and India have also introduced measures to require ESG reporting of firms.

Investor Demand

In 2020, ESG investments totaled over $40 trillion, which represents a total greater than the GDP of the U.S. Investors want ESG reporting to make better-informed decisions. As a result, this is likely to influence greater ESG reporting and ESG requirements.

Consolidated ESG Standards

There is a current push to develop ESG reporting standards that can be applied to any organization or industry. Leading organizations involved in setting sustainability standards have agreed to collaborate toward the development of a comprehensive ESG reporting system.

The International Business Council (IBC) has also published a report outlining metrics that enable reporting of sustainable value creation, and the International Financial Reporting Standards (IFRS) has stated plans to develop ESG reporting standards. These examples show a concerted effort to develop a universal system for ESG reporting. The question of ESG reporting standards is a matter of when and not if.

The Future Includes ESG Reporting

Public companies already face more stringent requirements regarding ESG reporting. But, given the benefits that it provides to all stakeholders, it’s just a matter of time before it becomes part of normal business practices for everyone.

If you are looking for added authority for your ESG reports or need advice on setting up an ESG reporting line for your business, contact your Warren Averett advisor or ask a member of our team to reach out to you.

 

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