ESG Reporting: An Outlook
Even though ESG Reporting is not yet mandatory in all countries, an increasing number of companies disclose this information voluntarily since they’ve recognized the importance of communicating their business strategy and the impact their business has on our planet. In fact, since July 2020 about 90% of the companies in the S&P 500 have already created annual ESG Reports and made it a standard.
Reporting standards are a useful tool for businesses, so they know how to structure, measure and communicate the ESG information they want to disclose to the public. It is hereby recommended for businesses to base their reporting on recognized standards and frameworks to facilitate the transparency and consistency of the reporting process.
During the past years, a variety of ESG Reporting guidelines has been developed, including frameworks, national and international legislation, and voluntary standards. Some frameworks are industry-specific, while others are specific to climate change, for example, the Task Force on Climate-related Financial Disclosures (TCFD). However, all these guidelines have different requirements and are therefore difficult to compare. Thus, the calls for a unified standard are getting increasingly louder.
In Europe, one of the most commonly used reporting standards stems from the Global Reporting Initiative (GRI), representing the global best practices regarding the disclosure of sustainability information.
The new proposal for the Corporate Sustainability Reporting Directive (CSRD) by the European Commission, under which more companies will be required to report on ESG-related topics, will also be of high relevance to ESG Reporting.
EU Commission: New Regulations
“[..] Greenwashing is over. With this text, Europe is at the forefront of the international race to standards, setting high standards in line with our environmental and social ambitions.”
Bruno le Maire, Minister for economic affairs, finance, and industrial and digital sovereignty
At present, organizations are still quite flexible regarding the disclosure of ESG information, which means that they might highlight or downplay different aspects while reporting that they consider being the most beneficial for their business and the purpose behind their report. Nonetheless, from 2023 onwards, more companies will actually be obliged to publish sustainability information.
In April 2021, the EU Commission presented a new proposal for a Corporate Sustainability Reporting Directive (CSRD), which would be an EU sustainability reporting standard improving the existing requirements of the current Non-Financial Reporting Directive (NFRD). Under this new directive, up to 50.000 large public-interest European companies, as well as all listed companies on EU regulated markets, will be required to report on ESG-related factors, as compared to only 11.000 companies under the current NFRD.
This concerns 15,000 companies in Germany alone.
A large company is defined as meeting two out of three of the following criteria:
> 250 employees
> 40 million € turnover
> 20 million € balance sheet total
In addition to the current policy, there will be a reporting requirement on:
- “Double Materiality”
(Double materiality means that businesses must not only disclose how sustainability issues can affect the company (“impacts inward”) but also how the company impacts society and the environment (“impacts outward”). For businesses that have historically assessed only risks to their business rather than their impacts on the world, the CSRD implies a fundamental shift in measurement and reporting)
- Other forward-looking information, including targets and progress
- Information on intangible assets
- Reporting in accordance with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation
From What Date Will the Rules Apply?
The application of the regulation will take place in three stages:
- 1 January 2024 for companies already subject to the non-financial reporting directive
- 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive
- 1 January 2026 for listed SMEs, small and non-complex credit institutions, and captive insurance undertakings
According to Jaap Gerkes and Daniel van Drooge from Protiviti, a global consulting firm in the Netherlands, the draft of CSRD represents a new era in sustainability reporting:
“Compared to the current ‘nice to have’ situation, a much larger group of organizations will be required to report on ESG metrics under the new directive, following defined reporting standards and requiring an assurance report by an external auditor. […] There is a lot to be done in a short time. So, don’t find yourself into a squeeze next year and get started now.”
ESG Investing: How Investors Drive ESG
All these benefits aside, one major reason ESG has taken off in the last few years has to do with investors. Investors have become increasingly interested in ESG issues. In response, many major banks and investment firms– including JP Morgan, Wells Fargo, and Blackrock– have incorporated ESG investing criteria into their processes and products. ESG Reporting is important since it enables companies to be more transparent about the opportunities and risks they face and to show investors how they manage to manage and reduce risks. A lack of transparency might lead to investors not actually considering a company for investments, since they might see the non-disclosure of performance in those three areas posing a higher financial risk, and thus avoid it.
Is ESG Worth It?
Once considered a niche market for the largest global companies, ESG has moved into the mainstream and been adopted by smaller, privately-owned companies as well. With more than nine out of ten publicly traded companies adopting ESG, it’s one of the biggest trends in the business world today. ESG offers numerous benefits, including reduced business risks, better financial performance, and higher returns on investment. And, given the fact that ESG Reporting mandates have grown by 74% in the last four years, it’s safe to say that ESG is here to stay. However, much work is still needed to ensure that companies are ready for the ESG revolution. Done right, it requires a significant investment of money and resources.
ESG is much more extensive than corporate giving, but corporate giving will always be a big part of CSR, and our advice is to better do it right from the beginning– if you want to establish your individual corporate giving strategy, feel free to reach out to us
Information and extracts have been taken from the following sources: