The Benefits of Integrated ESG Reporting

ESG stands for environmental, social, and governance, and refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business. ESG reporting is the practice of disclosing information related to these factors in order to manage the material risk factors of the organization. This type of reporting is becoming increasingly important as companies, investors, and regulators recognize the significant risks and opportunities associated with ESG issues.

There are many benefits to ESG reporting, including the ability to identify and manage risks and opportunities related to environmental and social impact, build trust and transparency with investors and stakeholders, and attract sustainable investors. In this blog, we will explore each of these benefits in more detail.

Attract and retain investors: It is clear that ESG has value to investors. As awareness of the importance of ESG issues grows, investors are increasingly looking for companies that are committed to these issues and are willing to disclose information. As primary consumers of ESG disclosure data, investment and finance stakeholders typically use the data to inform ESG rating platforms and ESG scores, which help with benchmark performance and comparability across companies. In the past decade, the risks of climate change that could physically destroy the value of assets have come to light, compounding the rise of ESG dealing with climate resilience as an important investor asset class. A new survey by Morningstar found that out of 500 asset owner fiduciaries 85% said that ESG factors are “very material” to the investment process. A study from PWC identifies investor expectations of ESG. The study states that 8 out of 10 investors plan to increase their allocations to ESG products over the next two years, and ESG-related assets under management (AUM) are expected to continue to surge reaching $34 trillion or 21.5% of all assets by 2026. Additionally, corporations should be aware that their investments in fossil fuels may become uninsurable, as many large insurance agencies are ending support for new oil and gas fields. This will drive investment out of stranded assets and into materially relevant ESG funds

Build brand reputation, trust, & transparency: By providing detailed and accurate information on a company’s ESG performance, companies can demonstrate their commitment to sustainability and ethical business practices. Consumers, employees, and prospective business partners who value sustainability will use the ESG disclosure data to better inform which organizations they wish to support or work for.

Better identify and manage risks: This can include identifying potential risks from climate change, such as physical damages, supply chain disruptions, and regulatory changes, or risks associated with subpar governance, employee well-being, and equity policies. The increase in claims for climate-related damages from flooding, wildfires, and other hazards have increased markedly in the past 10 years, leading insurance companies to issue far more nonrenewals on existing policies. At least on the environmental end, insurance companies deem ESG matters a sizable risk, and this should not be overlooked by the everyday business decisions of firms.

Capture opportunities: Reporting on sustainability and social metrics consolidates the data and planning needed to lock in significant financial opportunities associated with the net zero transition and green products. To name a few: green premium pricing on sustainable buildings, reduced operating costs associated with energy savings, price stability and energy independence with the adoption of renewable power, and unlocking new shares of consumers and clients with sustainable products and services.

Comply with regulatory requirements and industry standards: Ignoring ESG now could be shortsighted when global reporting mandates seem inevitable in the near future. Corporations are responding to the expectations of many large institutional shareholders that have begun to quasi-mandate that companies report to these disclosure frameworks or risk losing their support. There are 3 main proposed ESG framework proposals intended to transform and standardize the ecosystem of ESG reporting in 2023: EU regulations and disclosure proposal part of the Corporate Sustainability Reporting Directive (CRSD), ISSB (International Sustainability Standards Board) proposal, and the SEC climate-related disclosure rules. Not only will these proposals mandate reporting for many firms, but this move towards more consolidated and accepted baselines for reporting standards will further push the market to see reporting as bare minimum standards for investable firms. Regulators and government agencies will also utilize ESG data in order to incentivize socially conscious businesses with tax breaks and subsidies or to levy penalties if ESG disclosure laws are in place.

Good reporting data yields better strategies and impact: Sustainability or ESG data collected with the sole purpose of reporting in mind will lead to a strong foundation upon which a firm can actually act on sustainability goals and projects. The most ESG-savvy firms will fully utilize the data collected in ESG reports operationalizing sustainability with energy, water, and waste efficiency measures, technology upgrades, and competitive differentiation in markets that favor low-carbon products/services. After all, good management of material ESG issues contributes to financial performance.

Overall, ESG reporting is an important tool for companies to manage their environmental and social impact, build trust and transparency, and attract sustainable investors.