Climate change and the environment are quickly becoming the number one priority for organizations worldwide, with the conclusion of 2021’s COP26 in Glasgow, Scotland. Both corporations and governments are striving to reach the goal of a net zero by 2045 and have put an incredible amount of effort into achieving this goal.
Because of this, ESG reporting is now an essential task in ensuring that your organization is following legislation and allowing investors to understand your organization’s forward-thinking goals and culture.
In this article, you’ll learn about the principle of ESG reporting, what it entails, and why it is crucial to implement it into your organization’s business reporting and overall strategy.
What is ESG reporting?
ESG stands for Environmental, Social, and Governance and is a reporting that seeks to improve the transparency of a company’s impact on the aforementioned points. Many organizations rely on third-party groups to give their business an ESG scoring. These scores are a key indicator of the business’s environmental, social, and governance (ESG) and can heavily impact their consumers’ and potential investors’ perspectives on the business.
How Do You Measure ESG?
Although the ESG report covers three major areas, several aspects of an organization are focused on within the structure of its mission statement.
What Are the 3 Pillars of ESG?
The three pillars of ESG are environmental, social, and governance. They are often referred to as the 3 Es of sustainability. We’ve broken down each of these pillars below.
1. Environmental
The environmental impact of the organization is strictly reviewed in the ESG report by looking at factors such as:
- Energy – The company’s usage of energy. This can include traditional aspects, such as travel and factories. But in more modern times, it also consists of the use of cloud servers and digital infrastructure.
- Pollution – The level of pollution from the organization in the local area and other parts of the world.
- Wildlife – The treatment of wildlife from either testing or destruction of natural habitat.
- Carbon Monoxide – The company’s output of carbon monoxide into the ozone layer.
These factors are constantly changing due to the ever-changing environmental and political environment. An example is if an organization begins using potentially harmful materials that impact the environment, it must have plans to deal with and mitigate the potential damage caused. Without this in place, investors and the public will view the company negatively and potentially stop purchasing or investing in the company.
2. Social
The social aspect of the ESG report refers to an organization’s activity regarding their internal practices and local involvement with non-profit organizations. Examples of social activities in the ESG report are:
- Diversity within their hiring process.
- Creating an inclusive environment for employees.
- How they impact their local community through charitable efforts.
Showing deep-rooted care for social responsibility and social issues positively impacts an organization’s reputation and hiring ability. Employees who feel valued and heard at work are more likely to remain with a company for a more extended period of time, which can positively impact the company’s reputation and hiring ability.
3. Governance
The governance aspect in ESG reporting refers to how well your organization is structured and run. This includes whether there is a secure chain of governance that assists in large-scale decision-making, the company’s standards and policies, information disclosure, compliance, auditing, and more. To ensure best practices and integrity, research will be done on board members to ensure no conflicts of interest that may harm the business or allude to any illegal collusion.
Why Is ESG Reporting Important?
As previously stated, a business’s social responsibility is becoming the prevalent factor in the eyes of both the consumer and investor.
ESG reporting has become an essential tool for the investment community because it provides them with information on companies’ environmental and social impact. The report helps them decide whether to invest in a company by looking at whether a company’s ESG report is credible enough for them to invest.
But aside from that, the benefits of ESG reporting can be broken down into three different pillars.
1. It gives organizations greater accountability
The ESG reporting gives critical decision-makers such as the board of directors or investors, a chance to be held accountable for their stance on ESG issues. This allows for actionable results, which will help positively impact the business.
Without accountability, ESG organizations have the potential to be outspoken about positive change however do not change behaviors to match this. Regarding ESG issues, this is referred to as “greenwashing,” which is seen as highly damaging.
2. It improves visibility and transparency across the board
The ESG reporting improve both transparency and traceability of an organization. For example, external stakeholders can review a company’s objectives regarding social issues such as gender-based wage inequalities. If issues like these are not dealt with correctly internally, it could potentially negatively affect the business’s values to potential investors.
Having an ESG report can give investors an insight into all of the actions you, as an organization, are making to improve as an organization and provide an accurate interpretation of your business as a whole.
3. It gives investors confidence in the business
ESG reports are a much-needed source for working with investors, giving them the confidence to invest in your business. Having an ESG report enables your business to collect all key information into one common source, making it easier for potential investors to understand your business practices and giving them confidence to invest in your company.
Companies that do not provide an ESG report risk showing a lack of transparency and may be overlooked by investors.
How to Get a Good ESG Score?
ESG reports created by third-party agencies are gaining popularity at organizations. These firms use industry practice and methodology knowledge to create something that genuinely encapsulates your organization’s maturity.
The three significant ESG aspects are looked at within the scoring criteria.
- Have clear goals set in place with roadmaps to achieving them.
- Develop precise measurement and execution frameworks to measure the impact of processes on the environment
- Make ESG reporting an integral part of all organizational processes and decision-making, and ensure that it is not an afterthought.
It is important to note that getting a high ESG score is not something that can be done overnight. It’ll require your organization to integrate ESG into your existing business strategy, align the business to regulatory and global frameworks, and understand where you are standing today in terms of ESG ratings. At HQTS we can perform a gap analysis in your ESG and disclose and recommend actionable plans to address the identified gaps in the ESG report.
What Is an ESG Audit?
An ESG audit typically means two things. Firstly, the ESG audit can be a process that identifies any potential risks of an organization in terms of the three pillars: environmental, social, and governance – before the company applies for an ESG report. In that way, the organization can take action on the points, gaps, and risks identified in the audit.
But the ESG audit can also be used to have a neutral partner that assesses the accuracy and integrity of ESG organization report disclosure. This is often done using the ISAE (International Standard on Assurance Engagements) auditing and assurance standards.
What Is ESG Reporting? And ESG Audits? [Guide 2022]
Reporting is becoming increasingly important for organizations to keep up to date with the modern world’s moral and ethical practices and expectations. The ESG rating process is relatively lengthy, and several criteria within the three pillars of environmental, social, and governance – involve a range of issues such as workers’ safety, energy efficiency, and the board’s independence.
An ESG audit can help businesses identify potential risks and gaps before the rating process. At the same time, it can be used by organizations or investors that want to objectively assess a company’s existing ESG reporting.
Do you need assistance with ESG Audits? With over 25 years of experience with quality control, HQTS can help you with ESG auditing using the ISAE (International Standard on Assurance Engagements). Contact us today for more information.
