ESG — Environmental, social and governance reporting — has been a driving force behind investor interest for some time now, with more and more public companies making the jump to try and meet stakeholder demand. Why is that? ESG helps attract investors to your company since many stakeholders believe companies should be leading the way in sustainability practices, adding value across stakeholder groups over the long term and decarbonizing the global economy.
ESG is not just an adjective to use to attract investors, it’s crucial that your company meets predetermined standards to use the terminology. The term ESG was initially used in 2004 as part of the United Nations Global Compact Initiative “Who Cares Wins” report.¹ Over the last few years, ESG has gained visibility at a higher frequency as a result of many factors, including the Covid-19 pandemic, growing concern over the impact of climate change, global supply chain issues, economic challenges and social justice movements.
Sustainability provides a clear view of a company’s behavior alongside traditional financial metrics. More and more evidence is beginning to show that investing in sustainable businesses can lead to better financial performance over the long term. As more companies adopt ESG practices, and more investors continue to demand it, competition among companies will grow, making adoption integral to the future global economy.
A survey by GreenPrint highlights that 64% of Americans will spend extra money to buy from a company that promotes sustainability, but many don’t know how to identify these companies.² This is where an ESG report comes into play. An ESG report will disclose your company’s ESG initiatives to the public in a condensed snapshot to demonstrate how sustainable your business operations really are.
To develop an ESG strategy, companies need to define a framework that aligns with their values and set clear targets they want to reach and record their progress through reporting. Defining your “why” as part of your company ethos is an important means for creating your ESG priorities and getting buy-in across your organization. ESG encompasses a broad range of topics that define not only your sustainability practices but also how you treat your human capital and partners, your stance on social issues and safeguards that are in place for ensuring ethical standards are maintained. When setting targets, you should consider which aspects of ESG your company aligns with. What topics are important to your stakeholders and what fits the mission of your business? A great step in defining this is conducting a materiality assessment where you survey key stakeholders to better understand their view of what is important.
Standards for reporting are detailed and will explicitly explain how data should be collected and how reporting should be done. While your report does not need to follow a framework of reporting standards, it is worth considering your future ESG goals and working back from there. which are laid out by a few different organizations, such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosure (TCFD) and United Nations Global Compact (UNGC).
Your company can use more than one framework for reporting or none at all, but we would caution consideration of two factors in preparing to move forward. First, consider your peer set –- are they reporting within a specific framework that will allow investors to easily compare your disclosure and results, aiding in swifter investment determinations? The other factor to consider is the proposed SEC regulation related to climate disclosure. The proposed rules, set to be finalized sometime this year, could require disclosure on your company’s direct and indirect emissions and specifics about ESG strategies in materials like fund prospectuses and annual reports.
Data collected, summarized and disclosed for your report will likely include quantitative as well as qualitative information spanning financial and non-financial data, and frameworks will define how to document both clearly. One example of this is a sustainability scorecard, which is an internally-focused tool used to track initiatives and achievements toward ESG goals used by some companies. If you plan to have your firm rated by a framework, it is worth the upfront effort to create a matrix identifying inputs for the framework and then categorizing into: data that exists at your company, data that can be derived with some internal resources, data you may need outside help identifying and items you don’t believe you can detail. This will help define your data collection roadmap.
Next you will decide how often you will disclose this information. Will it be quarterly or yearly? There is no set rule for how often you need to report data, but providing stakeholders with current information and total transparency is crucial. Consider making ESG updates part of your quarterly reporting to stand out in a crowded field of investment opportunities and to further engrain policies into your corporate culture.
Finally, you want your company to always strive for improvement. Once you have your ESG report made, brainstorm how you can improve your next one. How can you score higher or become more sustainable? How can you develop an ESG communications strategy to amplify your annual submissions? While ESG has been around for some time, there has been a real lack of clarity on why it is relevant and what frameworks to follow. But don’t let that intimidate you –- do your research and develop a program that is authentic to your company. Gregory FCA’s investor relations team with deep experience in strategic communications, crafting ESG reports and campaign development is here to help when you are ready to commit to developing and publicizing an ESG strategy.
1. United Nations (2004) – Who Cares Wins, 2004-08
2. Business Wire (3/22/21) – GreenPrint Survey Finds Consumers Want to Buy Eco-Friendly Products, but Don’t Know How to Identify Them