Corporate ESG and Sustainability Reporting Go Hand in Hand
Corporations everywhere are feeling the urgency surrounding environmental, social, and governance (ESG) compliance planning. U.S. companies in particular, are feeling the pressure as the Securities and Exchange Commission (SEC) announced its proposed climate-related reporting regulations in the spring of 2022. The Corporate Sustainability Reporting Requirements issued in the EU place similar demands on companies to disclose their impacts. These new reporting rules are a direct indication that current voluntary disclosures are not enough to meet the U.N. Intergovernmental Panel on Climate Change (IPCC) 2030 goal of at least a 45% reduction in greenhouse gas (GHG) emissions, and ultimately, achieve net zero GHG emissions by 2050.
As an organization, if you're not already banking in the cost of carbon, you're going into the future grossly underprepared.
ESG refers to the set of criteria that investors, stakeholders, and regulators use to evaluate a company's social and environmental impact[s], as well as its governance practices. Sustainability reporting refers to the practice of measuring and disclosing a company's sustainability performance and impacts on society and the environment. One cannot successfully exist without the other.
The new regulations reflect an understanding that investors have a growing concern about the potential impacts of climate-related risks to business and are asking for more information to make better-informed investment decisions. They are intended to enhance and standardize climate-risk impact reporting and disclosures to offer transparency to address investor needs. Essentially, corporations need to start putting their money where their mouths are; a strong, supported, and fully onboarded ESG plan, will make sustainability reporting that much easier.
With that, here are some of BSI Consulting’s best practice suggestions for ESG and sustainability reporting:
- Identify material ESG issues: Identify any ESG issues that are material to business operations and stakeholders. Materiality assessment involves identifying ESG issues that have a significant impact on the company's long-term financial performance and the well-being of its stakeholders
- Follow reporting standards: Follow established ESG reporting standards such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Task Force on Climate-related Financial Disclosures (TCFD). These standards provide guidance on what to report, how to report, and what metrics to use
- Engage stakeholders: Engage with stakeholders to identify any sustainability concerns and expectations. Stakeholder engagement can help companies identify material ESG issues and develop strategies to address them
- Use relevant metrics: Use relevant ESG metrics to measure performance and progress. Metrics should align with the company's material ESG issues and reporting standards
- Ensure accuracy and transparency: Ensure that ESG and sustainability reporting is accurate, complete, and transparent. Companies should disclose methodologies, assumptions, and limitations, and ensure that reports are independently verified
Following the suggestions above will positively impact both your organization’s bottom line, but also your overall company culture. ESG and sustainability reporting can:
- Enhance reputation brand value: It demonstrates a company's commitment to sustainability and can improve its relationships with stakeholders, including customers, employees, investors, and regulators
- Attract investors: Helps companies attract investors who prioritize sustainability and social responsibility. According to a report by the Global Sustainable Investment Alliance, sustainable investing assets grew by 15% to $35.3 trillion in 2020
- Identify risks and opportunities: Identifies risks and opportunities related to ESG issues. For example, climate change can create physical risks such as extreme weather events and regulatory risks such as carbon pricing. It can also create opportunities for companies that offer solutions to address climate change, such as renewable energy
- Improve performance: Improves sustainability performance by setting targets, measuring progress, and identifying areas for improvement
- Ensure compliance: Ensures compliance with regulatory requirements and standards. For example, the European Union requires companies to disclose their ESG performance under the Non-Financial Reporting Directive
On the contrary, if an organization does not adopt a corporate ESG program or follow through with sustainability reporting, there can be several negative consequences that can impact the organization in both the short and long term. Some of those consequences include:
- Reputational damage: If an organization is not seen as taking these issues seriously or is perceived as being unconcerned about environmental and social issues, it can damage the organization's reputation and erode stakeholder trust
- Legal and regulatory risks: Like the SEC, many other jurisdictions around the world have introduced laws and regulations that require companies to report on their sustainability practices and performance. Failure to comply with these regulations can result in costly legal penalties and fines
- Financial risks: Investors and lenders are becoming more focused on ESG factors when making investment decisions. Organizations that without clear reporting may be perceived as higher risk, impacting their ability to secure financing or attract investors
- Operational risks: Organizations may face operational risks, such as supply chain disruptions or increased costs associated with waste disposal, pollution control, and compliance
- Lost business opportunities: Organizations may miss out on business opportunities that require a commitment to sustainability. This can include contracts with environmentally conscious clients or partnership opportunities
- Decreased employee morale: Employees are increasingly looking for organizations that are committed to sustainability and ESG practices. Failure to prioritize these issues can lead to decreased employee morale and engagement, which can impact productivity and the organization's ability to attract and retain top talent
Meeting the new regulations while answering the expectations of stakeholders is going to be a hefty lift for many companies and is not something to be ignored. Failing to adopt a corporate ESG program or follow through with sustainability reporting must become a top priority to ensure long-term success and sustainability.
About the Author
Ryan Lynch is BSI Americas Professional Services’ Practice Director of Sustainability, and works with organizations across multiple regions and industries to design creative solutions to drive organizational improvement, improve upon social/environmental impacts, and mitigate and remedy risks. Mr. Lynch leads BSI’s strategy to align our standards, services, technology, and global resources to the UN Sustainable Development Goals. His professional background is deepest in designed and implementing Sustainable Supply Chain programs for multinational brands; and he has conducted trainings & Code of Conduct audits in factories & farms throughout the U.S., China, Philippines, India, Pakistan, Nepal, Mauritius, Vietnam, Taiwan, El Salvador, Honduras, Guatemala & Turkey. He also leads BSI’s strategy related to combating forced labor and migrant labor abuse through the development of innovative services and skills development approaches he delivers to global brands, their suppliers, and recruitment agencies supporting global supply chains.
Ryan has served on the Forced Labor Working Group for US Customs & Border Protection, and the Advisory Boards for the UN International Organization for Migration’s International Recruitment Integrity System and for the Rutgers University Center for Innovation Education’s Design Thinking Program.