ESG Disclosure: What is It and Why Does It Matter So Much to You?

August 22, 2022

ESG Disclosure: What is It and Why Does It Matter So Much to You?

Over 90% of the S&P 500 companies publish their sustainability reports every year. This represents a huge growth from about 20% that made their environmental, social, and governance (ESG) disclosure in 2011. The trend is growing rapidly as more stock markets, governments, and global organisations call for responsible business/ corporate operations. With all stakeholders, including customers and investors, strongly calling for the embracement of corporate sustainability, your company cannot be left behind. 

This post takes a closer look at ESG disclosure / reporting to determine what it is and why it matters so much for your company/ business. We will also highlight the main requirements of ESG sustainability reporting for companies.  

What is ESG Disclosure?

When the idea of sustainability was born in the 1960s, it was largely considered a method of protecting the environment only. To most businesses or companies of the time, they could only be considered sustainable when they focused on the environmental-related factors like climate, pollution, and forestry.  However, this model was changed in 1992 during the UN Conference on Environment and Development (UNCED). According to UNCED, the environment cannot be separated from development, but must be holistic in its approach, including disclosure.

Apart from the environment, sustainability will also factor in the people (social) and governance. ESG disclosure is the reporting of a company’s environmental, social and governance information so that all stakeholders, from customers to investors targeting public or private companies, can see and make informed choices. 

We must say that ESG largely focuses on the corporates because they have a bigger footprint in almost all areas, from resource harvesting to waste released into the environment. However, this does not exclude individuals and small enterprises or companies. Everyone is required to understand the risks of unsustainable living and irresponsible business operations. Then, look at areas that require change and follow expert guidance on the best practices for business or investment operations.

So, if you want your company to be successful, it is time to embrace ESG disclosure and ensure it is done in line with the recommended standards or guidance. So, start by looking at some of the proposed models by the international ESG reporting frameworks. The proposed actions might also come from experts, your management, or stakeholders. Remember that ESG reporting comes with a lot of benefits for the management and other stakeholders. 

Why Does ESG Matter for Your Company?

Below are some of the primary reasons why your company should adopt sustainability and provide accurate ESG disclosures.

  • It is a Major Requirement in Almost All Sectors 

The most important reason for embracing environmental, social and governance (ESG) disclosure is compliance with financial or capital market regulations. If your company is targeting to list in top capital markets, it is only possible if you embrace ESG sustainability disclosure. Good examples include Hong Kong Stock Exchange (HKEX) and New York Stock Exchange (NYSE) that require responsible operations for all listed businesses. This implies that if your company does not have a good plan to address things like climate change, better financial & governance management, and follow the latest standards for sustainability disclosures, it will be impossible to get funds or financing via most capital markets. 

Even individual investment funds are also extra careful and only want to be associated with the sustainable companies. Investors in every fund are becoming more specific by indicating that their funds should not be directed at areas that can accelerate climate change or harm the planet. The funds want to ensure that the required impact is achieved for the selected investors. So, failing to adopt sustainable operations could mean that you lose a huge opportunity to raise funds for your company. 

Governments are also making it mandatory for companies and businesses to adopt ESG reporting/ disclosures. For example, the EU has implemented Taxonomy legislation that provides for mandatory ESG disclosure of companies in the giant block.  This legislation also provides outlines for sustainable corporate management, including ESG reporting for companies in the EU. Even for companies that are outside the EU, such as Asia-Pacific, Taxonomy is being used to help define local legislation for governance, financial and climate change. 

  • You Win More Customers for Your Company 

As we highlighted already, more customers are looking for companies of fund management that are sustainable and responsible for all their operations. This means that even if your company has a very good product or service, it alone might not be enough to win investors or customers' support.  

In addition, customers want to know whether you have used the best practices in production and in protecting the environment. So, do you have a clear ESG sustainability reporting or disclosures for your company? With a sustainable company and ESG disclosure, your brand is assured of a better image and winning more customers. 

  • Helps to Keep the Cost of Running Your Company Low 

Good environmental, social and governance (ESG) performance can help to lower the cost of running your company. Studies have established that adopting the right ESG strategies can help to increase profits by as much as 60%. Sustainable practices might include cutting down waste, improving efficiency, reducing expenses and growing profitability for your company. Even the costs that are involved in the management or implementing your company's ESG plans, including shifting to renewable energy and sustainable reporting efforts, will be negligible in the long term. 

  • Gives You the Satisfaction that You are Helping Address Global Challenges 

Whether you are working on cutting down waste or reducing the carbon footprint, the ultimate impact is that the company is part of the global effort towards addressing the challenges facing the planet today. This gives you a special sense of satisfaction knowing that your company is doing the right thing. Indeed, we have already been warned by scientists on different areas, such as the risks of global warming. If businesses do not adopt sustainable corporate operations, the risks of losing biological diversity also looms. 

Remember that these actions are critical to help the current generation enjoy maximum benefits without exhausting the resources for future generations. For example, a real estate company might opt to renovate old buildings to extend the resources used in them. Make sure to also create accurate ESG reports every financial year for stakeholders to see and appreciate the efforts. 

  • Helps to Grow Future Planning of the Company 

A good ESG reporting has to follow a specific framework, such as GRI and TCFD,  that explain not only the process and data to be gathered, but also the nature of the ESG report and future projections. This means that when implementing ESG disclosure strategies, companies are able to look ahead, identify specific challenges, and prepare for them. This makes planning for the success of a company and disclosures more effective. This is what most investors want to know when selecting the companies to invest in. 

  • Strengthening Your Brand Locally and Globally 

When you adopt ESG and sustainability disclosures, it becomes pretty easy to get noted by investment enthusiasts, customers and interested partners. These will come in handy in a number of ways, including boosting your company’s financial status, reducing the risks for growth, and improving its brand image. When more clients and people interested in corporate investing see your company disclosures, they become reliable ambassadors for the brand. This might be all that you will need to grow sales, raise more  funds from public activities, and get accredited by international standards bodies. 

Requirements for ESG Disclosure 

Now that we have highlighted the main benefits that come from ESG disclosure or reporting, the next question is, “how will you implement it ?” Here are the main steps that you need to follow: 

  • Carry out a comprehensive review of your company to identify the main challenges and opportunities. You might also want to start by seeking the help of advisors for guidance on the best strategy, including the main steps to follow. 
  • Work with stakeholders to understand their preferences for ESG reporting. They will tell you what factors or topics that you should give precedence. For example, they might tell you to start with topics and factors that promote sustainability and strengthen the brand image to the public for success. 
  • Carry our materiality assessment. This means that suggestions by the public or stakeholders are reviewed to only pick the best option. If you are working with advisors or experts, they will also tell you the required steps for the assessment and sustainability reporting. The advisors can also demonstrate how to maintain accuracy and create reports that will win more funds through direct or indirect investments.
  • Craft a comprehensive ESG strategy for your company. This should identify specific areas of action, key performance indicators, and the persons responsible for its implementation. For example, what will you use to determine if a parameter like carbon footprint is being reduced as expected? Performance indicators should be proposed early enough and used to guide the entire process.
  • Gather information from the strategy that you are implementing for ESG disclosure. This is very important in your ESG disclosure journey because the data you gather will determine the nature of the report you ultimately produce. Ensure to work with an appropriate ESG framework for guidance on how to create the targeted reports and gauge progress on the proposed goals.
  • Prepare your ESG report and publish it for the public band stakeholders to see. Remember that the ESG disclosure will form the basis for the next reporting phase. In many instances, managers use the reports to determine the required targets, assess the funds needed for the new ESG phase, and implementation logistics. 

This post has highlighted some of the main benefits that come from embracing sustainability and ESG disclosure in your company. Remember that the report you generate for stakeholders should be accurate and verifiable to avoid getting labelled greenwashed. Therefore, you should make sure to have the best ESG sustainability software for your company. Contact us at Diginex.com for some of the best apps, from diginexESG and diginexCLIMATE, and expert or professional advisers to your company. 

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