What is ESG and why is it important?

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renata ulloa anthesis

Renata Ulloa

Consultant

Australia

ESG has gained significant importance as investors and stakeholders increasingly consider non-financial factors when making investment decisions. ESG factors help assess the overall sustainability and ethical performance of companies, which can have implications for their long-term success and reputation. Recent reports go so far as to suggest environmental, social and governance (ESG) issues are driving the biggest changes to financial reporting and disclosure standards in a generation.  

As the acronym ESG gets thrown around more and more, here we dig into what is ESG and why is it important, what frameworks and reporting options are there and how do you incorporate ESG into your business? 

What is ESG? 

ESG stands for Environmental, Social, and Governance. It is a concept that is used to evaluate the sustainability and ethical impact of companies and investments.  

  1. Environmental: Refers to factors related to a company’s impact on the natural environment. It includes considerations such as resource usage, pollution, climate change, waste management, energy efficiency and biodiversity impacts.  
  2. Social: The social aspect of ESG covers a company’s impact on people and society. It involves evaluating factors such as labour practices, employee relations, diversity, equity and inclusion, community engagement, customer satisfaction, and human rights.  
  3. Governance: Governance refers to the systems and structures that guide a company’s operations and decision-making processes. This includes board business model resilience, business ethics (e.g board composition, executive compensation, shareholder rights, transparency), climate related-risks, competitive behaviour, risk management and management of the legal and regulatory environment.  

Why is ESG important? 

ESG is important because it helps identify and manage risks, improve social responsibility, enhance long-term sustainability, meet stakeholder expectations, navigate and comply with regulations, and improve access to capital.  

By considering ESG factors, companies can mitigate potential risks, attract investors, reduce costs, and build a positive reputation. ESG also aligns with evolving consumer and societal expectations and regulatory trends, ensuring businesses operate responsibly and contribute to a sustainable future. 

What is the purpose of ESG reporting and what does it include? 

The purpose of ESG reporting is to provide stakeholders with relevant and reliable information to evaluate a company’s ESG performance, risks, and opportunities. It promotes transparency, accountability, and comparability among companies, allowing stakeholders to make informed decisions and assessments based on standardised metrics and disclosures.  

ESG reporting typically includes quantitative and qualitative data on a range of topics that might be focused on the E – such as greenhouse gas emissions, energy consumption, and water usage; the S – diversity and inclusion metrics, labour practices and community engagement; and the G – board composition, executive compensation, and ethical conduct.  

Reporting is increasingly being shared by leading companies as standalone sustainability reports, but can also be integrated into annual reports, or filings within regulatory frameworks. 

What are some common ESG reporting frameworks companies can report to? 

There are a variety of ESG frameworks that companies choose to report to. These standardised guidelines provide companies with a structured approach to assess, measure, and report their ESG performance and help companies identify and disclose relevant information on their most material ESG topics, allowing for comparability and consistency in reporting across different organisations.  

Some common reporting frameworks include: 

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  • Global Reporting Initiative (GRI): GRI is one of the most widely used ESG reporting frameworks. It provides a comprehensive set of indicators and reporting principles to guide organisations in reporting their sustainability performance. 
  • Sustainability Accounting Standards Board (SASB): SASB develops industry-specific sustainability accounting standards, enabling companies to identify, manage, and communicate financially material sustainability information to investors. These standards focus on environmental, social, and governance factors relevant to specific industries, helping companies determine which topics are most material to their industry.  
     
  • The International Sustainability Standards Board (ISSB) is an organisation established under the oversight of the IFRS Foundation. Its main objective is to develop standards that guide the finance sector in reporting sustainability-related risks, opportunities, and climate-related information. These standards aim to enhance transparency, comparability, and decision-making by providing consistent and reliable sustainability reporting guidelines. ISSB has now released its first two inaugural standards – IFRS S1 and IFRS S2. 
  • Task Force on Climate-related Financial Disclosures (TCFD): TCFD focuses specifically on climate-related risks and opportunities. It provides recommendations for disclosing climate-related information, helping companies assess and disclose the potential financial impacts of climate change on their business. 
  • United Nations Sustainable Development Goals (SDGs): The SDGs are a set of 17 goals adopted by the United Nations to address global challenges. Many companies align their ESG efforts with these goals and report their contributions towards achieving them. 

What are the main factors a company should include in an ESG strategy? 

An effective ESG strategy should consider several key factors to address the environmental, social, and governance dimensions. Here are the main factors your ESG strategy should include: 

  1. Materiality: Your starting point is materiality and to identify the ESG issues that are most relevant and impactful to your industry, business operations, and relevant stakeholders. This list may be long, and you should go through a process to prioritise the issues that have a significant influence on financial performance or pose significant risks and opportunities. 
  2. Stakeholder Engagement: Engage early with your key stakeholders, including investors, employees, customers, communities, and regulators. Seek their input, understand their expectations, and involve them in the development and implementation of your ESG strategy. Regularly communicate and provide updates on your progress to build trust and transparency. 
  3. Indicators, Metrics and Data Collection: Select and/or develop appropriate indicators, metrics and data collection mechanisms to monitor and measure your ESG performance across the material topics selected in the steps above.  
  4. Goal Setting: Establish clear and measurable short- and long-term goals and targets aligned with your organisation’s overall mission and ESG priorities. These goals should be ambitious yet achievable, allowing you to track progress and demonstrate improvement over time. 
  5. Integration: You must ensure you integrate ESG considerations into your core business operations, decision-making processes, and risk management strategies. Embed sustainability principles across departments and functions, ensuring that ESG factors are considered throughout the value chain. 
  6. Transparency: Transparency is essential as it involves providing clear and comprehensive information about your organisation’s sustainability efforts, performance, and impacts. Transparent reporting helps stakeholders understand the company’s ESG practices, goals, and progress, fostering trust, accountability, and informed decision-making and helps avoid claims of greenwashing. 
  7. Reporting: Use recognised frameworks or standards such as those mentioned above, to guide your reporting and ensure consistency and comparability. Regularly report on your ESG initiatives, progress, and impacts to relevant stakeholders. 
  8. Continuous Improvement: Continuously review and enhance your ESG strategy based on evolving best practices, emerging trends, and stakeholder feedback. Regularly assess risks and opportunities, update targets, and adapt your approach to address new challenges and opportunities. 

How to incorporate ESG into your business 

By considering and implementing the above factors, you can begin to develop a comprehensive and robust ESG strategy that aligns with your business objectives, meets stakeholder expectations, and contributes to long-term sustainability and success. 

Begin by assessing your current practices and developing a clear ESG strategy aligned with your objectives and appropriate business ambition. Engage stakeholders and communicate your commitment. Implement sustainable practices, promote diversity, and monitor performance. Foster a culture of sustainability and seek external collaborations for expertise. By following these steps, your business can effectively integrate ESG principles and drive positive impact. 

You must keep in mind from the outset – incorporating an ESG strategy into your business involves a holistic approach and buy-in throughout your stakeholder network.   

Some companies may also consider implementing a specific organisation wide change management project to ensure success. Effective change management involves a systematic approach to dealing with organisational change, in this case the transition from traditional BAU carbon-intensive business operations to more sustainable practices.   

Want to progress but need help with your ESG strategy? 

We work with organisations across all stages of the sustainability and ESG journey from assessing material issues to developing and implementing ESG strategies and writing world-class sustainability reports. Reach out to our team if you need guidance.