Why your business needs an ESG reporting strategy

Why your business needs an ESG reporting strategy

Implementing an effective environmental, social and governance (ESG) strategy has become an essential part of corporate governance. But it’s not enough to have a strategy; it needs to be communicated publicly, to enable accountability and comply with regulatory requirements. This is why ESG reporting has become such a significant focus in recent years, and why PR teams need to stay informed.

For certain large companies in the UK, such as some publicly traded companies and financial services businesses, the reporting requirements around sustainability and governance reporting have been in place since the Non-Financial Reporting Directive (NFRD) came into force in 2016. The new Corporate Sustainability Reporting Directive (CSRD) expands on the requirements of the NFRD and affected firms must comply by 2024. However, even if your business isn’t covered by mandatory ESG regulations there are still a myriad of reasons for voluntary ESG reporting.

It’s no secret that ESG has become highly politicised. There are just as many detractors out there as there are supporters. While many of these debates have value, the fundamentals of ESG reporting remain: the process of documenting and communicating your activities relating to environmental, social and governance issues will support greater transparency and build trust with stakeholders.

So what are the key ESG criteria that underpin any reporting framework, standard or rating?

ESG factors

  • Environmental: Impact on climate change and mitigation of climate-related risks; sustainability initiatives; greenhouse gas emissions; biodiversity; animal testing; disposal of waste, etc.
  • Social: Human rights; diversity and inclusion; privacy and data protection; community and charity activities; how employees are treated; work/life balance, etc.
  • Governance: Accounting methods; industry requirements; whistleblowing policy; remuneration of executives; political contributions; board composition; bribery; processes for dealing with policy infringement and identified governance risks, etc.

ESG reporting frameworks

Outside of premium listed companies covered by the CSRD, which requires reporting using the European Sustainability Reporting Standards (ESRS), there are a number of voluntary disclosure frameworks that companies can use for reporting data in a credible, consistent way. These include ESG frameworks produced by the IFRS Foundation, Global Reporting Initiative (GRI) and Value Reporting Foundation among others. Frameworks and standards vary but, as an example, the GRI standards use a modular system so businesses can report on the ESG topics relevant to them. These ESG issues are called “material topics” because they have a material impact on the business.

Under the latest and most respected frameworks, the concept of double materiality is included in reporting requirements: meaning that not only climate or ESG-related impacts on the company are relevant but also the impact the company has on these areas.

Whether or not your business is currently required to report using any of these frameworks, there are multiple benefits to communicating your ESG program externally.

Five ways an ESG report can support your business

Transparency and accountability

ESG reports provide a platform for businesses to demonstrate their commitment to transparency and accountability. They are a way to track progress against the goals of your ESG strategy. For example, many company websites make vague claims that the business is committed to reducing climate change. However, to be believable, these pledges need to be backed by a robust ESG communications strategy that stands up to scrutiny.

Using ESG frameworks can help present to key audiences how you perform against competitors in areas such as climate-related financial disclosures. By disclosing information about environmental impact, social initiatives and governance practices, businesses showcase their responsible behaviour and build trust with stakeholders.

Investor confidence and access to capital

ESG reporting has become a critical factor for evaluating potential investments. Companies with robust ESG strategies are more likely to be able to form business relationships with asset managers working on ESG funds looking for sustainable investment opportunities.

When your business is being assessed for funding awards or investment, the company’s performance encompasses not only financial risks but also ESG-related risks. Demonstrating adherence to ESG reporting standards helps ensure sustainability reports stand up to scrutiny. In addition, the Sustainable Finance Disclosure Regulation (SFDR), implemented in 2021, requires financial services firms to consider ESG risks in investment decisions and make it clear how they do so e.g. by using ESG scores to compare investments. A strong ESG performance enhances investor confidence and contributes to long-term business resilience.

Reputation and brand differentiation

ESG reporting allows businesses to showcase their values, purpose and positive societal impact. By proactively addressing environmental and social challenges, companies can differentiate themselves from competitors and build a reputable brand that resonates with customers, employees and other stakeholders.

Most businesses now know to avoid greenwashing their business activities, where ESG data is presented in a misleadingly positive way, but another emerging issue is what’s known as greenhushing: deliberately burying ESG disclosures that paint your company in a bad light or declining to discuss the issue at all. If the information is discovered later, this can discredit the business. This is bad enough for companies engaging with voluntary disclosure frameworks for their ESG requirements, but for those whose industry reporting requirements require mandatory disclosures of ESG factors it could lead to regulatory action.

Risk mitigation and long-term sustainability

ESG reporting enables businesses to identify and mitigate potential risks associated with environmental, social and governance factors.

When businesses first assess their ESG information, the results can be disheartening if there is a long list of issues that will be hard to progress. It’s often better to focus on improvements and sustainable growth in relation to one or two issues initially, rather than using a scattergun approach and achieving little progress on any ESG risks over the year. By implementing sustainable practices and sticking to a clear reporting framework for an annual ESG report, companies can minimise regulatory, reputational and operational risks, ensuring long-term business sustainability.

Attracting and retaining talent

ESG reporting is increasingly important for internal and external stakeholders alike. Reading your sustainability report is as likely to form part of the job application process for top talent as reading annual reports once was, particularly among the younger workforce. Employees seek meaningful work experiences aligned with a company’s purpose and values, and corporate disclosure can both attract and retain staff.

Public disclosures on the Social aspect of ESG give a job hunter an idea of what it would be like to work for a business, and existing employees can benefit from policies around diversity, inclusion and internal culture. A robust ESG report communicates a company’s commitment to social responsibility, creating an attractive work environment for prospective employees and fostering higher employee engagement and retention rates.

Environmental, social and governance: why it matters

An effective ESG reporting strategy is no longer a choice but a necessity for businesses looking to establish a reputable image. Ensuring ethical communication and utilising one of the ESG standards guidance frameworks should form part of the business strategy for most organisations. By embracing transparency, accountability and responsible business practices through ESG reporting, companies can enhance their reputation, attract investors, mitigate risks, differentiate their brand and attract top talent.

The principal risks related to reporting ESG issues, however, should not be underestimated. Robust risk management should be put in place around ESG compliance to avoid accusations of greenwashing or underreporting. As long as risks are mitigated, an ESG-focused approach contributes to long-term sustainability, and positions businesses as responsible corporate citizens in an increasingly conscious and purpose-driven world.

 

If you want to solidify your ESG reporting strategy and need advice, get in touch to speak to our experts.