ESG reporting refers to the disclosure of information in three areas of a company’s operations: environmental, social and corporate governance. An ESG report provides a snapshot of the business’s impact in these three areas for investors.
The demand for transparency on sustainable and socially responsible practices is on the rise. Requirements have drastically increased in recent years, and as regulations evolve it is crucial to gather the data in a clear, effective and comprehensive report.
Here, we take a deep dive into everything you need to know about ESG reporting.
What is ESG Reporting?
An ESG report is a report that is published by a company or organization in an effort to share their environmental, social and governance impacts. In one high-level document, they can offer a variety of necessary information that discloses both the risks and opportunities it faces in an honest and straightforward way.
In addition to financial factors, investors use ESG data to help vet their investments, and regulators use it to determine compliance. This type of reporting is useful for investors, giving them a clear understanding of the financial risks surrounding a company’s environmental, social, and governmental performance.
A company can also use ESG reporting to demonstrate that they are making a good-faith effort to reach their goals in these three key areas and that they are not simply greenwashing.
Often, the terms “ESG” and “sustainability” are used interchangeably, but there is a subtle difference. Sustainability is a larger umbrella term that encompasses a wide array of green concepts, while ESG is generally preferred by investors and the capital markets. What began as sustainability efforts has evolved into specific ESG practices, performance, reporting and relevance to capital opportunities.
Emphasis on all three pillars affects how companies measure and disclose their performance with analysis that can be summarized into both quantitative and qualitative data.
Environmental
This environmental area of the report evaluates the impact of the built environment on the natural environment. Factors may include:
- Environmental due diligence
- Climate risk assessments and resiliency planning
- Solar feasibility studies
- Site mitigation assessments
- Carbon footprint evaluations
- Renewable energy planning and permitting
- Energy and water audits/benchmarking
- EV charging program management
Social
The social piece of the report examines the impact on the people and the broader community. Factors may include:
- Indoor air quality assessments
- Assessments for asbestos, lead, radon and mold
- Environmental health and safety compliance audits
Governance
Governance explores how the company shows compliance and transparency of their corporate operations. Factors may include:
- Corporate sustainability planning
- Environmental Management System (EMS) implementation
- ADA compliance assessments
- Regulatory compliance audits
What is an ESG Score?
An ESG score is the objective measurement that grades a company or organization on its ability to meet its ESG commitments. The score is assigned by a third-party provider and is calculated by a particular set of metrics, depending on which rating platform the provider uses.
The scoring systems may be specific to an industry, or they may take into account factors that are broadly meaningful across industries, like climate change, diversity, human rights, etc. The rating platforms determine the criteria for each measurement and assess the company’s performance against them.
Some notable ESG rating agencies are:
- Sustainalytics ESG Risk Ratings
- MSCI ESG Ratings
- Bloomberg ESG Disclosures Scores
- FTSE Russell’s ESG Ratings
- ISS (Institutional Shareholder Services)
- S&P Global ESG Scores
- Dow Jones Sustainability Index Family
The final score is typically a sum-product of the ratings. A good ESG rating indicates that an organization or company is managing its environment, social and governance risks well relative to its peers. A poor ESG rating, on the other hand, suggests that the company has higher unmanaged exposure to ESG risks.
Why is ESG Reporting Important?
It presents opportunities for success.
Corporate ESG reporting is still voluntary in many countries, but global regulations are growing. Companies with an eye toward the future are including these criteria in their overall business strategy as well as their annual reporting.
ESG data can inform an organization’s portfolio, maturity toward sustainability and their driving force for achieving ESG success. This could include investor, employee and regional pressures to demonstrate a commitment to sustainability; regulatory requirements to achieve net-zero emissions by 2050; or insurance companies and investors seeking to limit liability to sea level rise and extreme weather.
It provides transparency and accountability.
The demand is growing for transparency and accountability to investors, customers, employees and the community at large. ESG reporting provides crucial insight into a company’s actions on sustainability and social equity. It allows them to take credit for their part in building a cleaner and safer world. It also holds them accountable so they do not hide information that may paint them in a negative light.
It highlights financial impact.
ESG reporting can influence the financial metrics of a company and allow for better informed investment decisions. Stakeholders are able to see the long-term value, and a strong ESG performance can lead to higher returns on investments.
It evaluates risk management.
ESG also provides critical non-financial data that helps indicate things like brand value, growth potential, risks and better resiliency during a crisis.
It aids in decision making.
Clear and comprehensive information allows stakeholders to make effective decisions about investments, purchases and business relationships.
It assures legal compliance.
Again, ESG reporting is voluntary in most countries, but in places like the EU there are laws requiring an annual report of non-financial and diversity information from companies with over 500 employees.
What are ESG Regulations?
Because ESG regulations vary by country and are constantly evolving, it is crucial to stay informed, especially if you do business internationally. Non-compliance can be costly both to a company’s finances and their reputation. The EU currently has the most established regulations, but the US isn’t far behind.
EU Regulations
- The EU Green Deal: This is the EU’s overarching promise to combat climate change.
- The Sustainable Finance Disclosure Regulation (SFDR): The SFDR has been in effect since March 2021. Its intent is to increase clarity and transparency about the sustainability risks of products and services in financial markets.
- Taxonomy Regulation: In effect since January 2022, this classification system provides companies, investors and policymakers with a shared understanding of environmentally sustainable activities.
- Corporate Sustainability Reporting Directive: This is not yet in effect but is proposed to be adopted by the end of 2022. It supports the EU Green Deal by requiring a more detailed disclosure of the extent to which a company’s activities are sustainable.
- Supply Chain Directive: Proposed but not yet in effect, the EU Parliament is recommending that mandatory human rights, as well as environmental and governance due diligence, be implemented across a company’s value chain in order to combat human trafficking.
- Green Bond Standard: Also proposed but not yet in effect, this program introduces a voluntary framework for how companies and public authorities can use green bonds to raise funds on capital markets.
US Regulations
The US is the world’s second-most major market for sustainable finance. There are currently no federal mandates for ESG disclosures, but there are widely accepted standards, and the SEC requires all public companies to disclose information that investors may need to know about, which includes ESG-related data.
- SASB Standards: The SASB is a nonprofit founded in 2011 to establish a common language about finance and sustainability for investors and businesses. In effect since 2018, its standards are a set of ESG-related issues relevant to financial performance for 77 industries that help companies disclose sustainability-related information to investors.
- Nasdaq Board Diversity Listing Rules – 5605(f) and 5606: In effect since August 2021, these rules require board diversity disclosures for listed companies. The companies must report either a minimum of two diverse board members or present a public disclosure of why they have not met the minimum.
- GRI Standards: On track to go into effect on January 2023, the GRI are an easy-to-use modular set of standards related to ESG topics such as human rights and environmental due diligence. They apply to public or private organizations of any size.
- Enhanced Climate Risk Disclosure Requirements: Proposed but not yet in effect, SEC chair Gary Gensler has signaled a commitment to mandatory climate-related disclosure rules for public companies, including enough detail for investors to obtain consistent, “decision-useful” information on the climate risk of companies they may invest in.
- Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights: This is a Department of Labor proposal, not yet in effect, that would expressly permit ESG considerations when selecting investments or exercising shareholder voting rights on behalf of ERISA (Employee Retirement Income Security Act) plan participants.
Types of ESG Frameworks
Companies present their ESG data in a way that makes the most sense for them and their stakeholders. However, using an established ESG framework is highly recommended. Here are a few key ESG Reporting Frameworks:
Global Reporting Initiative (GRI)
The GRI helps companies disclose both the positive and negative impact their business has on the environment, the economy and society. Its focus is on helping companies communicate their ESG impacts and how they manage these impacts.
The Sustainability Accounting Standards Board (SASB)
SASB helps companies collect and share ESG data that affect the firm’s business decisions and explain the financial impact of sustainability. GRI and SASB joined forces in 2020 and have since published a guide to help organizations understand how they can use the two standards together. GRI is known for its high-level scope, while SASB gives companies industry-specific guidelines using a financial lens.
GRESB
The GRESB (formerly the Global Real Estate Sustainability Benchmark) is the global standard for portfolio-level ESG reporting in the real estate sector. It is an independent, investor-led organization committed to assessing the ESG performance of real estate assets around the world.
As a member-based organization, GRESB provides quantitative insight into ESG performance against peers. They collect, validate, score and independently benchmark ESG data to provide a clear and unbiased benchmark in which investors and managers can evaluate a given fund.
United Nations Global Compact (UNGC)
UNGC is a voluntary initiative based on CEO commitments to implement universal sustainability principles. It provides a way for companies to support and advance the UN’s Sustainable Development Goals, which have been adopted by all UN member states.
The Task Force on Climate-related Financial Disclosures (TCFD)
TCFD provides principles-based recommendations for managing and reporting focused primarily on financial risk disclosures associated with the climate.
Carbon Disclosure Project (CDP)
This international nonprofit focuses on creating standards that companies can use to disclose information pertaining to GHG emissions, water use and forestry. It helps companies as well as city, state and regional government organizations disclose decarbonization and environmental protection efforts.
International Sustainability Standards Board (ISSB)
The ISSB merges many ESG disclosure standards into one source.
EPA’s Energy Star Portfolio Manager
This interactive tool allows you to track and assess energy and water consumption across your building portfolio.
Companies may also consider seeking green building certifications through frameworks such as:
- LEED (Leadership in Energy and Environmental Design)
- Energy Star Certification
- BREEAM (Building Research Establishment’s Environmental Assessment Method)
- Green Globes
- Living Building Challenge
- National Green Building Standard
- GreenGuard
- WELL Building Standard
Create an Action Plan for ESG Reporting
Sustainability is top of mind for the majority of commercial real estate owners, lenders, investors and other stakeholders. With deepening climate concerns and a push to be responsible real estate owners, the demand for ESG reporting is only going to grow. In order to meet and exceed those ESG expectations, an organization needs to build a plan that ties into their capital planning, incorporating net-zero goals, climate resiliency, sustainability targets and any other goals they want to achieve.
If you need a game plan for incorporating ESG into your property portfolio with budgets, attainable goals and timelines, AEI can help. Reach out to speak with one of our consultants today.