ESG (Environmental, Social and Governance) criteria in business have gained a notoriety that few could have predicted when sustainability became a new dimension in organisations at the beginning of the 21st century.
John Elkington published the book ‘The Triple Bottom Line’ (1994) in which he referred to the fact that companies had to start being accountable not only for their economic impact, but also for their environmental and social impact: the so-called triple bottom line. In 1997, the Global Reporting Initiative (GRI), the world’s leading standard for sustainability reporting, was created, and in 1999 the UN launched the Global Compact, the largest voluntary Corporate Social Responsibility (CSR) initiative, which includes the Global Compact’s Ten Principles on human rights, labour, environment and anti-corruption.
Since then, the concept of ESG has grown in relevance alongside Sustainability, in this case through its use in the world of sustainable investment or SRI.
Sustainability data now makes up the ESG pillars of a company and has become increasingly important for directors as it represents a more stakeholder-centric approach to business, playing a key role in sustainable development in the public and private spheres.
An ESG score is compiled from data with the following metrics:
Sustainability data is collected quantitatively, where the indicator can be numerically measured (e.g., energy consumed, waste produced and percentage recycled) or qualitatively, where it is collected through surveys, customer comments, employee complaints and interests.
The ESG rating of a company is more important each year as the market for green investment is on track to double its record high of €235 billion in 2020, with €47 billion invested in ESG bond funds in the first five months of 2021 alone.
The drive towards sustainability and accountability has largely been led by investors. Legislation like the Non-Financial Reporting Directive (NFRD) enables investors, consumers, and other stakeholders to evaluate the non-financial performance of large companies, encouraging a more responsible approach to business.
More and more investors are adopting ESG criteria as a tool to evaluate potential investments alongside traditional financial analysis. Managers need to understand whether there are material risks or opportunities due to ESG factors that do not appear on a traditional balance sheet.
Reporting on corporate sustainability can be an intensive, time-consuming task, with the collection of large amounts of data from an extensive range of sources. The data a company collects for sustainability reporting is determined by industry regulations, location, other companies in the same value chain, organizational goals, frequency of collection, corporate philosophy, and communication with stakeholders.
Added to this is the fact that while some data that are numerically measured might be universal (a litre of water used, a kilowatt of electricity generated) these measurements also need additional information (whether the electricity comes from renewable energy or fossil fuels) to be correctly classified and reported.
In the interests of transparency, ESG reported data needs to be presented to stakeholders with supporting evidence, which must be collected simultaneously.
Most companies have established their data collection process over time, and it is always evolving. Newly issued regulatory recommendations or mandates are often unclear and complicated and companies are often just adapting to a current reporting system when regulations change. Many firms may be adapting to obligations and requirements months after new regulations are implemented.
The integration of sustainability and ESG criteria is not reserved for large companies, but is a differentiating factor for SMEs too. When starting your ESG management journey, here are some useful tips:
It is important to establish targets and strategies before beginning data acquisition and there are many reporting guidelines and standards available. The most commonly used Global Reporting Initiative (GRI) began as a guideline but now sets reporting standards. The international Task Force on Climate-related Financial Disclosures (TCFD) provides recommendations for more effective climate-related disclosures and is committed to transparency in the financial sector. The Sustainability Accounting Standards Board (SASB) identifies the ESG issues that are most pertinent to financial performance.
The motivation of company management is also essential in the development of ESG intelligence. A recent report from PricewaterhouseCoopers in the U.K. found that executive salaries had dropped by almost a fifth in some of the biggest companies, due to advice from investors that stakeholders needed to see that they too felt the impact of the pandemic. The importance of stakeholder engagement has become increasingly popular in the world of business leadership and considered critical to its success.
Demands for ESG data are growing all the time, and software solutions can help you achieve your goals through efficient sustainability data collection and management. It can also cut through the vast information provided by different frameworks to identify the best way to collect and consolidate data. Our tech solutions can also create comprehensive reports that clearly identify progress being made on sustainability goals: improving performance and making sustainability central to the decision-making process. More information is available here: https://aplanet.org/demo/
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