What is ESG reporting?

ESG reporting is the disclosure of information about corporate operations related to environmental, social and governance (ESG) aspects of business. The goal of this of reporting is to measure how a company's ESG initiatives align with industry standards and goals, providing valuable insights to stakeholders to support decision-making and identify opportunities and risks that can impact company value.

Unlike concepts such as sustainability or corporate social responsibility (CSR), which motivate organizations and their employees to act in the interest of society, ESG reporting aims to provide data on the results of these initiatives. This data is essential for informed decision-making by stakeholders.

What does ESG mean?

ESG consists of three main components: environmental, social and governance.

– Environmental: Assesses how the organization manages its environmental impact and covers topics such as greenhouse gases (GHG), biodiversity loss, carbon emissions and pollution.
– Social: Examines the organisation's impact on people, culture and communities and includes areas such as diversity, inclusion, human rights and supply chains.
– Governance: Covers the way the organization is managed and controlled, including executive remuneration, board governance practices, data security and fraud prevention.

Why is ESG reporting important?

In today's capital markets, businesses are closely monitored by stakeholders. A company's reputation can directly affect its economic results. Investors often demand ESG metrics to ensure that companies are sound investment options and that they are aligned with their values, such as climate change and corporate social responsibility.

A comprehensive ESG strategy ensures that businesses operate in accordance with ESG regulations, identify potential opportunities and risks, and act in the interests of their stakeholders. ESG reporting enables companies to show how they are achieving the goals and milestones set out in their ESG strategy and inform stakeholders of their importance and impact.

The significance and impact of ESG

– Materiality: Organizations should focus on those ESG areas that have the greatest impact on their business. To determine materiality, they can identify potential ESG risks and their implications, thereby predicting areas that need priority attention through various approaches such as a "risk matrix".
– Double materiality: This concept encourages companies to assess materiality from two perspectives – financial materiality and materiality to the market, environment and people. By applying dual materiality, companies can identify financial and non-financial risks and focus on a holistic ESG strategy.

Advantages of ESG reporting

– Regulatory compliance: Global regions have different requirements for ESG disclosure. For example, in Europe, ESG reporting is mandatory, while in the US, the Securities and Exchange Commission (SEC) requires disclosure of only information important to investors.
– Risk management and goal tracking: ESG reporting helps predict potential risks and track the success of long-term ESG goals.
– Transparency and visibility: Firms are expected to provide greater transparency, which improves their reputation and can achieve higher ESG scores.

Who determines the ESG score?

The ESG Score is used to track a company's ESG performance, providing greater visibility to investors, stakeholders and regulators. In the US, the SEC monitors ESG-related fraud, while third parties such as Bloomberg and S&P Dow Jones Indices assess the potential impact of ESG risks. In Europe, ESG reporting is mandatory and a new proposal from the European Commission seeks to improve ESG reporting for ESG assessment providers.

What are ESG reporting frameworks?

ESG reporting frameworks provide guidance on focusing on ESG topics and structuring information for disclosure. Choosing the right framework depends on the organization's business goals, geography and sector. Frameworks can be divided into three categories: reference, voluntary and regulatory.

– Reference: These frameworks require answers to all questions and usually include an assessment element (eg Carbon Disclosure Project, GRESB).
– Voluntary: Companies can choose the questions they want to answer (e.g. Global Reporting Initiative, TCFD).
– Regulatory: Frameworks required by government bodies that do not always include evaluation (e.g. CSRD, SFDR).

Comprehensive ESG reporting contributes to better business plans, compliance, transparency and the ability to predict and manage risks, thereby increasing the long-term value of the firm.

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