The Fundamentals of ESG
In response to consumers demanding answers regarding corporate oil spills, unethical labour practices and emissions disputes, many organisations are changing their business models, restructuring their corporate structures, and devoting a significant amount of time, money, and resources to integrate sustainability into core strategies. Due to this investment, many now view environmental, social, and governance (ESG) reporting not as an onerous regulatory requirement, but rather as a tool to attract investors and funding.
The term has evolved to mean different things to various people, which has sped up its recent growth. Given the complexity of sustainability and the “green rush” of capital into the GreenTech sector, regulators have strengthened their scrutiny of banks and investment businesses making excessive claims without displaying action. These unfounded or false promises are known as greenwashing.
So, how effective is ESG in eradicating any premise of greenwashing?
What Is ESG?
Coined in the mid-2000s, ESG (Environmental, Social, Governance) is the disclosure of environmental, social and corporate governance data. As with all disclosures, its goal is to shine a light on a company’s ESG activities while improving investor transparency and encouraging other organizations to do the same. Reporting is a powerful tool for proving that your ESG efforts are real and genuine – not just greenwashing, hollow promises, or lip service.
It is a means to an end, leading to reduced climate risk, enhanced reputation, happier employees and reassured customers. It has become so commonplace, experts say that it is now rivalling ‘sustainability’ as the buzzword of choice for businesses looking to reduce their environmental impact, have a positive social impact, and prove they are responsibly managed.
While a mandatory standard does not yet exist, there are regional reporting frameworks, voluntary standards, and national legislation present that vary significantly. Frequently, organizations will include ESG reporting in their annual reports to highlight how sustainable the business is.
What Do ESG Reports Include?
ESG reports include both quantitative and qualitative data concerning its three key topics:
- Environmental: What is an organization doing to be a custodian of the environment?
- Social: What is an organization doing to better lives?
- Governance: What is an organization doing to combat corruption and guarantee the longevity of its investments?
Current ESG Regulations
The most advanced set of ESG rules are now found in the EU. These regulations were created to aid the EU in increasing sustainable investing and advancing the EU Green Deal, a promise made to combat climate change and environmental degradation. The EU’s ESG policy is built on two pillars: a rethinking of financial market incentives, corporate governance, and transparency into the positive and negative ESG implications of an organization’s actions and sustainability initiatives.
Other recognized frameworks include:
- Global Reporting Initiative (GRI) is the most referenced framework that businesses use to help disclose the positive and negative impacts their business has on the environment, the economy, and society. Its primary focus is on helping companies articulate their ESG impacts and how they manage the effects.
- The Sustainability Accounting Standards Board (SASB) is a group of standards that aids businesses in gathering and disseminating ESG data that impacts their business decisions and explains the financial impact of sustainability. It joined forces in 2020 with GRI to guide organizations on using the two standards together.
- Carbon Disclosure Project (CDP) is a global non-profit with the goal to develop standards for businesses to adopt when disclosing data on GHG emissions, water use, and forestry. This set of guidelines has aided businesses in disclosing their environmental protection and decarbonization activities, as well as those of local, state, and regional governments.
- Streamlined Energy and Carbon Reporting (SECR) is a framework created by the UK Government that helps organizations report on their annual carbon emissions and energy usage. The framework aims to streamline current carbon reporting frameworks for greater clarity and comparability while facilitating easier monitoring and carbon emissions reduction for businesses.
The ‘Greenwashing’ Backlash
The increase of ESG and sustainable funds has drawn scrutiny from investors and regulators, who are increasingly demanding evidence to back up ESG claims, identifying greenwashing as a risk.
“Just because a fund, or a company, is claiming to be sustainable or ESG-friendly, or climate-conscious, doesn’t necessarily make it so,” says Lee Reiners, Executive Director at the Global Financial Markets Center at Duke University School of Law.
In the absence of a mandatory, robust framework to measure non-financial factors, like ESG indicators, the quality and volume of reporting have differed from one company to another. This has led to an increased number of companies being taken to court for alleged selective or misleading assertions in their reporting.
Risks of greenwashing are also heightened by the lack of consistency over the completeness and accuracy of ESG data quality and the impact this has on disclosures. The absence of what constitutes an “ESG product” and a lack of verification of product claims has raised concerns over the credibility of ESG credentials. Some critics also believe the innovation of products with ESG or climate-friendly goals will be hampered by a lack of data.
Ultimately, the greatest way for any business to avoid being accused of greenwashing is to never engage in it. In this regard, it is essential that ESG reporting procedures are incorporated into a comprehensive system of company-wide sustainability governance, one that is actively supported at the senior management level and is completed by the introduction of concrete guidelines and metrics for monitoring and evaluating progress.
It’s safe to conclude sustainability has emerged as one of the reigning priorities in the mind of the investor, one that is closely aligned with the investor’s belief that a company will be profitable for the long term. With 80% of N100 firms across the globe now reporting on sustainability, a global framework for ESG is a question of when, not if.
If you are looking to scale your ESG company, then look no further. We can assist and advise with any growth plans and align with you on your mission for a sustainable future. Get in touch to find out how we can help here!