Climate change is one of the most emerging topics in today’s society. Without a doubt, the drawbacks of the changing climate have significantly impacted human activities in recent years. Apart from taking green initiatives as individuals, how can corporations respond to the conundrum? How can investors, or even the general public evaluate their dedication to tackling climate change? The answer to these questions is ESG reporting.
So...what is ESG & ESG Reporting?
ESG stands for “Environment”, “Social” and “Governance”. According to CFI (Corporate Finance Institute)(1), these are the three areas of interest that investors consider crucial to incorporate their values and concerns, especially environmental concerns, into their selection of investments. Therefore, not only does ESG reporting reveal the environmental performance of the corporate, but also their social and governance achievements. Still, the “Environment pillar” accounts for a large portion of ESG reports.
A wide range of topics are defined according to the three “pillars”, as shown in Figure 1 (2). To disclose and summarize different sets of data and strategies on ESG, ESG reports are usually published on a corporate scale annually. In fact, the 2020 KPMG Survey of Sustainability Reporting (3) found that 96% of the world’s largest 250 companies (the G250) report on their sustainability performance in 2020 (4).
ESG Standards and Metrics
So, how do corporates reflect their sustainability progress in their ESG reports? Worldwide standards are implemented in the report. As there are a wide variety of standards, different companies may opt for their ideal standards since these standards vary across industry sectors, targeted stakeholders and other factors.
Key elements of ESG by PricewaterhouseCoopers
One renowned standard is GRI (Global Reporting Initiative) Standards, which was established in 1997. In 2017, 75% of the G250 used the frameworks given by GRI Standard. It focuses on economic, environmental and social impacts of the activities of a company, and its contributions towards sustainable development (5). In short, the GRI Standard is separated into 2 categories. GRI 1-3 provides the universal standards, while GRI 201-418 provides the standards of a particular topic. For instance, GRI 201-207 describes the standards of reporting economic aspects, and GRI 301-308 describes the standards of reporting environmental aspects. Corporates need not to report on every aspect, but they can extract particular standards to report on. For example, an engineering company uses water to manufacture goods, and effluents are produced. Thus, GRI 303: Water and Effluents can be attached to their ESG report.
SASB (Sustainability Accounting Standards Board) was founded in 2011 and launched in 2018. It has its own standards which identify the subset of ESG issues most relevant to financial performance (6). SASB standards are divided into five dimensions (Environment, Social Capital, Human Capital, Business Model & Innovation), and sub-divided into 26 general issue categories. Also, SASB defines a total of 77 industry sectors (7), in which each industry sector contains a particular set of general issue categories for corporations to report on. They are free to select one sector or more to fulfill the requirements of SASB reporting.
ESG Reporting for Corporations
Listed companies have a more stringent policy on ESG reporting. In Hong Kong, listed companies must follow the “Environmental, Social and Governance Reporting Guide” from HKEX (Hong Kong Exchanges and Clearing Limited).
The 30 ESG metrics defined by Nasdaq
Similarly, Nasdaq (8) defined a total of 30 ESG metrics for listed companies to report on. For each of the metrics, it connects to different sustainability frameworks like GRI and SASB as introduced. As to foster corporate social responsibility, all listed companies are mandated to disclose the required information based on the stock exchange where the corporation is listed. With the global trend of maintaining a sustainable world, investors nowadays consider the non-financial factors, especially environmental impacts, as part of their analysis process to identify material risks and growth opportunities (9). This triggers corporations to understand the importance of being environmentally friendly, by launching more comprehensive and latest green initiatives than their companions and rivals.
The Future of ESG Reporting
Upholding the principles of sustainability has become a global trend. ESG reporting has a bright future as investors start to realize the importance for corporates to lead the way in ESG, especially in the “E” pillar. As mentioned, even though the concept of ESG has been introduced worldwide, some aspects of it can still be improved. For instance, the credibility of the reporting. GRESB (Global Real Estate Sustainability Benchmark) recommends creating a complete and holistic platform where the user could get a unique and “one-size-fits-all” ESG report by simply feeding the technology with business information. Unique software, together with business management software such as Enterprise Resource Planning (ERP), can be integrated to guarantee data centralization, consistency and quality. To sum up, the development of ESG reporting is bright since the general public, especially corporations, has noticed the importance of upholding sustainability. Who knows if we can see more breakthroughs in the foreseeable future, for instance, standardization in all ESG metrics, frameworks and standards?
1 ESG (environmental, social and governance). Corporate Finance Institute. (2021, August 28). Retrieved November 1, 2021,from https://corporatefinanceinstitute.com/resources/knowledge/other/esg-environmental-social-governance/ .
2 ESG (environmental, social and governance). Corporate Finance Institute. (2021, August 28). Retrieved November 1, 2021,from https://corporatefinanceinstitute.com/resources/knowledge/other/esg-environmental-social-governance/ .
3 KPMG. (2020, December). The KPMG Survey of Sustainability Reporting 2020. Retrieved November 1, 2021, from https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/11/the-time-has-come.pdf .
4 A Practical Guide to Sustainability Reporting Using GRI and SASB Standards. (n.d.). Retrieved November 1, 2021, from https://www.globalreporting.org/media/mlkjpn1i/gri-sasb-joint-publication-april-2021.pdf .
5 A Practical Guide to Sustainability Reporting Using GRI and SASB Standards. (n.d.). Retrieved November 1, 2021, from https://www.globalreporting.org/media/mlkjpn1i/gri-sasb-joint-publication-april-2021.pdf .
6 A Practical Guide to Sustainability Reporting Using GRI and SASB Standards. (n.d.). Retrieved November 1, 2021, from https://www.globalreporting.org/media/mlkjpn1i/gri-sasb-joint-publication-april-2021.pdf .
7 A Practical Guide to Sustainability Reporting Using GRI and SASB Standards. (n.d.). Retrieved November 1, 2021, from https://www.globalreporting.org/media/mlkjpn1i/gri-sasb-joint-publication-april-2021.pdf .
8 A Practical Guide to Sustainability Reporting Using GRI and SASB Standards. (n.d.). Retrieved November 1, 2021, from https://www.globalreporting.org/media/mlkjpn1i/gri-sasb-joint-publication-april-2021.pdf .
9 ESG investing and analysis. CFA Institute. (n.d.). Retrieved November 28, 2021, from https://www.cfainstitute.org/en/research/esg-investing .