In 500 words or less, here is what ESG Reporting is and why you might want to make a report of your own.
Published March 28, 2023
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What ESG Reporting Is and What It's Not
ESG Reporting started as an opportunity to better address the financial impacts and risks that environmental, social, and governance issues might have on a company. Unfortunately, ESG Reporting has been co-opted to sell retail investors on a “feel good” investment opportunity rather than a risk management tool. When looking at some of the key items focused on in ESG reporting frameworks and rating metrics, the goals are always to assess the risk of non-financial factors on future financial performance. Below are examples from each category:
- Direct and indirect greenhouse gas emissions
- Resiliency against physical risk
- Management or impact of natural resources
- Employee engagement
- Diversity, Equity, and Inclusion metrics
- Relationships with stakeholders including clients, contractors, suppliers, and employees.
- Board structure and composition
- Executive compensation
- Political contributions and lobbying
- Bribery and corruption policies
Companies with high ESG ratings are not inherently more sustainable or good companies, but rather companies that are prepared to address future changes in environmental conditions, customer demands, or government regulations. Reporting on these items show that you are regularly reviewing information about these items and putting policies and actions into place to manage them.
Why You Might Want to Develop an ESG Report
- Opportunities for better financing – Investors looking for the best return and funding projects with high ESG metrics can show that there is reduced risk compared to other potential projects. Reduced risk equals lower rates.
- Attract engaged clients – Reducing their carbon footprint is top of mind for many millennial homebuyers. A new home as part of their personal carbon solution is very attractive to multiple demographics.
- Better manage future risk – Developing an ESG report requires a company to clearly focus on potential future non-financial-based risk factors. Being prepared to better address these items in the future puts you one step ahead.
- Meet SEC reporting requirements – With finalized SEC rulemaking on climate disclosure expected any day, being prepared to report on climate and ESG-related factors as part of the annual financial disclosures will be a requirement for publicly traded companies.