ESG stands for environmental, social, and governance impact. There has been a push for many years for companies to become more transparent on their environmental impact, social impact, and corporate governance.
Consumers, investors, employees, and other stakeholders want to know more about the steps companies are taking in this realm and are even choosing which companies to invest in as a result of this type of information in some cases.
For companies trying to be more transparent about their ESG impacts, the following lists are some of the things included in each of the ESG categories:
- Climate change impacts
- Greenhouse gas or carbon emissions / carbon footprint
- Air quality impacts
- Water quality impacts
- Energy efficiency
- Efficiency in resource usage
- Impacts on deforestation
- Waste produced (including emissions, electronic waste, material waste, etc.)
- Labor standards
- Human rights (particularly in manufacturing, but also across the entire supply and distribution system)
- Data protection for both consumers and employees
- Community involvement and community relations
- Safety measures
- Customer satisfaction
- Acceptance of money from lobbyists
- Political affiliations or contributions
- Compensation fairness
- Whistleblower programs
- Competitive behaviors
As you can see, there are a lot of potential data points here, making it complex to report on such topics. The problem facing companies isn’t so much the need for transparency, it’s the lack of standardized methods for ESG topics.
Varied Reporting Standards
When every company reports in their own way, there’s no real way to compare across organizations even in the same industry, let alone across different industries. There’s varying terminology, frameworks, ratings systems, assessments, metrics, etc. When reporting these things, there are also both qualitative and quantitative measures and ways to present the information.
Options for ESG reporting currently come from various organizations and standards like:
- Global Reporting Initiative (GRI)
- Sustainable Accounting Standards Board (SASB)
- Task Force for Climate-related Financial Disclosures (TCFD)
- UN Global Compact
- The Carbon Disclosure Project
- The Climate Disclosure Standards Board
- The European Commission’s Corporate Sustainability Reporting Directive
- Science-Based Targets initiative (SBTi)
These are just a few of the many organizations and initiatives that are influencing the metrics and frameworks in use.
ESG Transparency Push: Business Ramifications
Businesses can utilize ESG reporting to show their commitment to the companies stated core values. It can help to show potential investors, employees, and customers why they should believe in the organization.
Many are saying the Securities and Exchange Commission (SEC) should step in and make ESG reporting mandatory. In fact, there has been legislation to that effect recently passed in the House – the Corporate Governance Improvement and Investor Protection Act would create a requirement for public disclosure of numerous ESG metrics.
This bill is actually a combination of several others, including the ESG Disclosure and Simplification Act of 2021 and the Climate Risk Disclosure Act of 2021. The key here is that there’s a public push and a legislative push to make ESG reporting not only mandatory, but to give more guidance about it too.
All businesses should watch this space and consider making preparations to report on these topics if they’re not doing so already.