ESG 101: What is it, and Why Does it Matter?
by Laura Paddock
Every year, more and more companies are beginning to discuss ESG and its impact on corporate reporting practices. But what does ESG mean exactly, and why is it important for companies to know about? Below, we’ve broken down the basics of ESG and its significance to companies of almost every shape and size.
What is ESG?
ESG stands for Environmental, Social and Governance. On their own, these terms seem broad and abstract. But they refer to the tangible impacts that your business has on the world across three dimensions.
Environmental refers to the ways your business impacts the natural environment, including carbon emissions, energy efficiency, water usage and other sustainability factors. This is what comes to mind most often when people think about ESG and ESG reporting.
It has implications for your business’s contributions to climate change, and also impacts your corporate reputation: in a 2019 Clutch survey, 71% of respondents said that environmentally friendly business practices are one of a company's most important attributes.
Social covers the ways your business impacts people and their communities. This could include equal-opportunity treatment of employees, human rights practices and health and safety measures. The “S” of ESG can have huge implications for the way people perceive your brand, as well as for the risks you’re taking with the people involved in your business.
If your business engages in philanthropic pursuits, that’s also a huge part of this dimension. Any way that your company is impacting the people in and around the business can be included in the Social aspect of ESG.
Governance, while perhaps the most easily-overlooked aspect of ESG, is a critical part of your business. It has to do with how decisions are made in the company, and how responsibility is distributed across corporate leadership. The governance of your business might be evaluated to answer questions such as:
- What is the makeup of your board of directors?
- What is the purpose of your corporation?
- What types of rights do shareholders have?
- How is corporate performance measured?
Together, ESG creates a comprehensive picture of your corporate practices, as well as the risk involved in your business. This allows prospective and current stakeholders to evaluate your company and make informed decisions.
What is an ESG Report?
ESG reports refer to the method by which companies communicate their ESG data to their stakeholders. Similar to an annual financial report, it helps stakeholders understand how your company operates across the three main categories discussed above.
Typically, companies will choose an ESG reporting standard to use as a guiding framework for the type of data disclosed in their ESG report. Organizations such as SASB, GRI and TCFD offer a multitude of frameworks that vary by industry. This way, stakeholders can evaluate different companies within an industry using a standardized criteria.
As for the format of the report, they can vary widely. While some companies are sticking to the traditional PDF or print format, many are choosing to elevate their reporting via an ESG website. Websites, as opposed to PDF or print reports, are significantly easier for stakeholders to find, and can be more easily updated year-over-year as data changes.
They’re also more sustainable, helping your report meet the very ESG standards you’re reporting on. What’s more, an ESG website is much easier to navigate and provides an easier user experience. You can also track the performance of your ESG website, measuring how users are interacting with your report and how it changes over time.
Unlike the traditional financial report, ESG reports are not currently a legal requirement in the United States. But all signs are pointing to that changing soon—the Securities and Exchange Commission (SEC) has issued proposed changes to their rules that would require more climate-related disclosures, meaning it’s only a matter of time before regulation brings ESG into the new standard of reporting.
Those are the basics behind ESG and ESG reporting. Now let’s talk about why ESG and ESG reporting is important, and how it can have a major impact on your overall brand.
Why is ESG Important?
For decades, the standard for evaluating companies and communicating with stakeholders has been annual reporting. But expectations are changing. More and more, stakeholders expect radical transparency from companies beyond financials.
That’s where ESG reporting provides a fantastic opportunity to build up your brand through transparent disclosure of data. ESG is a method of measuring risk, which in turn allows your company to manage that risk and improve over time. This allows your company to publicly align itself with certain values that affect brand perception.
You can foster a positive reputation through trust and transparency. Since your brand exists in the minds of your stakeholders, you don't own it — but you can manage it. Consistent ESG reporting is effective brand management because it can cultivate trust in a brand and create long-lasting brand loyalty.
In today’s landscape where social responsibility matters deeply to consumers and investors, authenticity is one of the best ways to stand out from the crowd. A purposeful brand that backs up its beliefs with action will be able succeed in ways other brands simply can’t.
As mentioned earlier, ESG is also quickly becoming a new legal standard for reporting as well. The SEC is indicating that they’re going to start requiring more and more disclosures related to ESG, so the time to get started measuring and reporting your ESG data is yesterday.
Get your reporting on track with ESGRP
Hopefully this article answered some of your questions on the basics of reporting and the importance of ESG to your company. If you’re curious about how ESGRP can help you align your business strategy with ESG, contact a strategist today. Using Artisan, the only ESG reporting platform licensed by SASB, you can get your report online easily and efficiently. Just take a look at some of the ways we’ve helped other companies successfully launch ESG reports.