ESG Reporting: Meaning and Importance
Earlier, the only factor that interested an investor was the steady growth in a company’s profits. However, with changes in the business environment, especially the impact of climate affecting business profits, investors have shifted their focus to the ESG framework. But what is ESG, and how is ESG reporting important for businesses? Let’s find out.
Understanding ESG
- Environmental (E): The environmental criterion describes the company’s usage of energy resources and its overall impact on the environment. Other aspects of businesses that can impact the climate include water treatment, air quality, carbon dioxide emissions, waste, pollution, etc.
- Social (S): The social criterion describes the management and interaction of the company with its employees, culture, and other businesses. It includes employee engagement, customer interaction, diversity, workplace policies, human rights, etc.
- Governance (G): The governance criterion concerns the company’s internal system of practices, procedures, and controls. It includes decision-making, accountability, transparency, compliance, and inclusivity.
What is ESG Reporting?
ESG, an abbreviation for Environmental, Social, and Governance, are a set of criteria that help determine how “socially responsible” a company is. It provides a snapshot of business strategies and helps investment screening for all stakeholders, such as investors, employees, and society. ESG sustainability reporting helps investors steer clear of companies that might pose a higher financial risk due to their poor environmental, social, or governance practices.
Importance of ESG Reporting
While ESG reporting is still voluntary for most countries, several future-focused companies have realised the importance of communicating ESG practices in their business strategy. There are several benefits to ESG reporting, which include:-
- ESG Reporting Creates Transparency
Providing ESG data in the company’s annual reporting allows investors to determine its goals and targets. Transparency helps investors understand how the organisation creates solutions for the major global issues the business faces in respect of these three criteria. This is how ESG offers investors a chance to make an informed decision about the company to invest in.
- ESG Reporting Encourages Accountability
Accountability is essential to any business as it helps ensure following best practices and acting upon critical issues. ESG reporting is important as it holds board members and stakeholders accountable for business practices related to the ESG sustainability criteria.
- ESG Reporting Boosts Confidence in the Company’s Claims
Investors and lenders are attracted to businesses when they are convinced that their information is legitimate. While any company can claim to be committed to sustainability issues, only accurate and effective ESG reporting can verify those claims.
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