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Investors, customers, employees and now government agencies are showing increasing concern about environmental, social and governance (ESG) issues. Reports emerged in June 2021 that the Securities and Exchange Commission (SEC) is planning to make quarterly ESG reporting mandatory for all public companies. That news came hot on the heels of the creation of its new Climate and ESG Taskforce in March, with the express aim of clamping down on ESG-related misconduct. With President Biden revealing plans to make the entire power sector carbon neutral by 2025, oil and gas companies without ESG reporting are going to have to rapidly develop and implement strategies in order to prove to the administration that they are doing their part to lower emissions.
But as ESG is such a broad and multi-faceted topic, it isn’t just the energy sector that needs to quickly fulfil its obligations in this area. In fact, all companies have a responsibility to do so. Investors increasingly reward companies that place climate change, workplace safety and equal opportunity at the forefront of their businesses. Investment management firm Blackrock revealed that companies with highly developed and transparent ESG profiles outperformed their rivals in 2020. It says that these firms were able to build greater trust with stakeholders, in turn creating the conditions for long-term investment and the opportunity for sustainable growth.
ESG’s growing importance
ESG reporting originally grew out of demands for companies to reveal what they were doing to tackle environmental issues, whether limiting carbon emissions or putting in place policies to create a more sustainable business. Historically, reporting such information was seen as a ‘nice to have’ rather than a necessity. But with public awareness of the climate crisis growing and activist investors highlighting failures in social and governance policies, such as poor worker safety or the lack of diversity on boards and in the workplace, ESG has become more critical. It is now a cornerstone of businesses that understand future shareholders and what they demand from a modern-day public company.
Of course, implementing an ESG reporting process requires extra work. Therefore, it pays to understand what aspects you need to measure before starting.
- For oil and gas companies, that’s likely to mean revealing the impact on natural resources and how much CO2 is produced in the process.
- For those in a consumer-facing industry, it could mean collecting data on racial diversity within the business, utilizing training to ensure staff is sensitive to such issues, with the aim of making customers more comfortable, thereby building loyalty.
- For a bank or corporate entity, ESG reporting might focus on the makeup of the board, working towards making it more representative and including more women.
Leaders should consider up to five relevant ESG criteria within the business that can be measured and report on these, revealing as much detail as possible. Creating a process that enables the collection of environmental, social and other risks in a coherent, centralized way will help ensure that the ESG reports you produce are complete — and will also simplify the collection of that data and your ability to recognize and correct problems within your organization.
Benefits of ESG Reporting
This may seem onerous, but there are clear opportunities for those companies that take a proactive approach to ESG. Firstly, it can improve the bottom line and create sustainable growth, as Blackrock has shown. It can reveal where operational efficiencies can be made, helping cut back on waste while improving the overall performance of the business. It can also help to mitigate risk in the workplace. For example, companies in high-risk industries that implement an ESG program can use it to identify high-risk areas and put in place mitigation measures and staff training to prevent future incidents.
However, this can be difficult to do in companies where ESG data is managed in silos. A centralized ESG data system can do much of this work for you. With all ESG data in a single, secure, and integrated system, data visualizations and dashboards can be used to easily spot trends within your organization and highlight areas where there is room for improvement. ESG reports can be generated in just a few clicks, and different cuts of the same data can be spun up in seconds. A centralized system significantly reduces time spent on data collection and reporting. Simultaneously, it reduces duplication of work, improves reporting accuracy, and increases transparency into a company’s ESG program.
There’s also the chance to minimize pressure from activists, whether individuals or one of the growing bands of ESG-focused investment firms. By revealing ESG data and demonstrating a clear plan to make changes, companies can take advantage of the opportunity to develop relationships with activist investment firms, who can help improve on issues such as governance and social responsibility, attracting new investors in the process. Transparent ESG reporting can also set high standards that can help insulate companies against future intervention.
It’s not just about attracting and retaining shareholders, though. A clear ESG policy can help draw in the very best new talent. Those new to the workforce are looking to align themselves with and work for companies that espouse their values on environmental sustainability and inclusion. This has tangible benefits, with workers that believe in a company’s mission willing to work hard to create a business fit for the future.
What’s clear is that this cannot simply be a PR exercise. Companies that selectively report ESG data leave themselves open to accusations of “greenwashing,” so it pays to be honest and open about any challenges and have a plan to make changes as rapidly as possible.
With many investors now focused on company values and not just quick returns, this is the ideal time to start aggressively implementing an ESG data strategy. The future success of your company could depend on it.