ESG is essential in modern business. Let’s talk about it. 

Environmental issues have long been a game of finger-pointing. Individuals, businesses, nor governments wanted to shoulder the responsibility, fearing the challenges of change. Businesses, in particular, were concerned with potential profit loss associated with new approaches. As a result, for a long time, companies pushed the narrative that the environment could be saved if only individuals made small changes in their daily lives.

As people painstakingly sorted their recycling, minimized their water use, and carpooled to work, big businesses continued to ravage the earth with their industrial-era practices, pushing the climate issue into a climate crisis. Now, we cannot ignore the fact that businesses and industry have the biggest role to play when it comes to solving climate issues, and consumers demand action.

This has led to a little thing called ESG reporting. Although it is currently voluntary in most countries, the next few years will see a surge of legislation in the U.S. and the E.U. that will require such reporting. It’s designed to create transparency and accountability surrounding impact while helping companies improve their impact overall.

Companies that care about their influence should be investing in ESG to ascertain where exactly their company stands and how they might improve. Even if they don’t care about their actions, they still need to be aware of the potential consequences of ignoring ESG.

But, what exactly is ESG, and how will it transform the future of business? Let’s dive in. 

What is ESG reporting?

ESG stands for Environment, Social, and Governance. It essentially covers all of the ways that a business can impact our planet and its people. ESG reporting, then, is the disclosure of the data and details of a company’s footprint in these three pillars. The primary goal of ESG is to assess risk for investors and decision-makers. However, it is also used to measure a company’s impact so that they can strategize ways to improve.

An unbiased ESG report should be done by a third-party entity that is qualified for such reporting. It analyzes multiple facets of a company to provide qualitative and quantitative data surrounding its impact. Trustworthy ESG will follow a sustainability framework set forth by a reliable entity. From this data, a company will be provided a score that can be used to promote itself to investors and customers. The score can also be used as a leaping-off point in order to improve the company’s practices.

The three pillars of ESG

ESG reporting covers three key facets: Environment, Social, and Governance. These areas are meant to cover the greatest aspects of a company’s impact, and it goes beyond sustainability to include its adherence to human rights and labor laws as well as its internal accountability.

Environment

The first pillar, Environment, is the area that often receives the most weight as it’s the most important to consumers—people demand that companies take responsibility for their environmental footprint—and it’s also the most dire. Most experts agree that we have little time to slow climate change before we reach the point of no return. Businesses and industry have a huge part to play if we are to avoid disaster.

Social

The second pillar, almost as heavily regarded as the first, is Social. This covers issues surrounding labor, human rights, and how a company affects its communities. A good social score means that the company donates to causes within its communities, does not support supply chains with unethical labor practices, and more.

Governance

The final pillar, Governance, analyzes how a company is run internally. While consumers might not hold this area in high regard, it’s often important to investors, so it should not be ignored. It will look into things like internal procedures, accountability, democracy, and corruption within the company. 

Why is ESG reporting important?

There are loads of reasons why a company should not only invest in their ESG reporting but heed their scores and use the data to improve their business model and sustainability targets.

ESG reporting can help your company avoid greenwashing claims because you’ll have the data to back yourself up. It can also shape your message as you’ll discover the areas where your claims are strong. 

But, it’s not just about your message. ESG reporting gives you a picture of where your company stands so it can then develop plans and strategies to improve. There’s always room for refinement, and sustainability is a journey. No matter where your ESG scores lie, you can use them to be better.

It also helps investors decide if they want to support you. Having excellent ESG scores shows investors that you are committed to a positive impact and that the governance of your company is solid. Investors are more likely to support companies that can showcase strength in all three of these pillars. 

ESG reporting will not remain voluntary for long, so it’s important that companies start working on their goals so that they can achieve high scores. As legislation arises that requires ESG reporting, you want to ensure that you come out on top rather than scrambling to improve your scores.

Challenges and concerns surrounding ESG

Although ESG requirements are ultimately a good thing—the key to a more sustainable future is in corporate action guided by government regulation—there are quite a few concerns associated with the practice. A lack of global standards makes it easy for companies to greenwash, and strategies tend to focus on issues that are trending rather than taking a comprehensive approach. Let’s take a closer look at some of the biggest challenges.

Greenwashing

Although effective ESG reporting should prevent a company from greenwashing, as it requires a third party audit in order to provide an objective score, a lack of global or even national standards makes it possible for companies to receive high scores, even without effective strategies. If a company chooses an ESG reporting service that has a poor methodology, they may receive a high environmental score while still polluting the planet. Because of this, it’s important that investors and consumers are critical of ESG scores. Furthermore, companies should ensure that the ESG reporting services that they invest in use trusted sustainability frameworks and have reputable green certification.

Virtue signaling

Because consumers demand sustainability from the companies they support, businesses often cherrypick their sustainability strategies based on the issue of the day. Plastic straws offer a great example. In 2015, a single video of a sea turtle with a plastic straw up its nose caused global demand to ban plastic straws. Almost instantaneously, companies made the switch to biodegradable straws or banned straws entirely. However, this act was almost entirely empty, and it became arguably one of the greatest moments of collective greenwashing. Businesses were able to claim that they cared because they got rid of plastic straws, but they still sold plastic lids, plastic-lined cups, and other plastic materials. Overall, nothing positive happened for the environment. We were left with soggy straws and false morality.

Poor ESG methodology allows companies to focus on trending sustainability topics while ignoring effective strategies. They can make small, ultimately meaningless, changes, find an ESG reporting agency that will give them a high score for these changes, and market themselves as “green.” If an ESG reporting system is to be effective, it must be science-backed and comprehensive. It cannot simply follow the trends of the day.

Incomprehensive

Even if a company has the best intentions, their strategies often fail to be comprehensive. It may put all of its focus in the environmental aspect and ignore the social and governance, for example. Or, it could put a lot of effort into ensuring high scores internally, but it will ignore its supply chains. In order for ESG to be effective, it has to take everything into consideration. It cannot just focus on one or two things. If a company truly wants to be a good steward to the planet and its people, it needs to ensure that its ESG strategies take everything into account.

Although the challenges and critiques surrounding ESG are valid, they are not insurmountable. In lieu of global standards, it’s important for companies to create strategies and invest in ESG that follows established frameworks.

Sustainability frameworks

Happily, there are many science-backed entities that offer measurement and reporting so that your company can know where it stands.

Although these are far from comprehensive, here are some top ESG frameworks.

National Greenhouse and Energy Reporting is the Australian framework for reporting greenhouse gas emissions and clean energy. 

The Dow Jones Sustainability Index provides benchmarks for a wide range of areas of sustainability, including the environment, social responsibility, and more. 

The Carbon Disclosure Project helps companies to measure and analyze their carbon output in order to minimize their carbon footprint.

The Global Reporting Initiative is the most popular ESG reporting framework with corporations in over 90 countries making use of its system.

The keys to effective ESG

ESG reporting shouldn’t only be completed for your customers and your investors. An effective ESG report will help your company see the areas where it’s doing well and where it can improve. It’s a highly useful tool that allows your company to be more efficient, less harmful to the environment, and ultimately, save money while saving the planet.

The only way that your company can benefit from ESG is by ensuring that its strategy has some key features:

• Third-party verification from a trusted source. ESG reporting cannot be done internally. You must have an unbiased entity analyze your business to determine your ESG score.
• Comprehensive reports. It’s not enough if you only look at one aspect of your company. There are so many things to consider, from the impact of your supply chains to the happiness of your employees. You should analyze all areas of your company so that you can strategize better ways moving forward.
• Proper strategy. Once you have a comprehensive score, you need to prioritize the areas that you want to improve. For example, if you realize that your carbon output is larger than you want it to be, invest in carbon offsetting programs while figuring out ways to reduce your carbon emissions. You should always begin with the areas where you have the most impact.
• Always do better. The journey toward sustainability will never be over. There is always something more that we can do to reduce our impact. Once you’ve reached your sustainability goals, don’t stop. Strategize ways to be even better.

ESG reporting is a hugely important pursuit in modern business. Companies large and small should invest in ESG, whether it’s required or not. It’s not just the right thing to do for the planet; it’s essential to remain competitive in the current market.

Do you already have an ESG strategy that you’re proud of? Let’s talk about how I can help you spread the word.