Introduction

Environmental, Social, and Governance (ESG) reporting has become increasingly essential as the world moves toward greater environmental friendliness. Since the United Nations Global Compact (UNGC) Corporate Social Responsibility initiative in 2000 (UNGC, 2020), incorporating ESG practices into firms has evolved beyond a mere investment metric to include compliance and risk management issues (Hay, 2023). The term “triple bottom line” is used in the accounting world to comment on the sustainability of a business or civilization; it depends on three pillars: people, planet, and profit (Kenton, 2023).

However, corporate companies have found it complicated to report non-financial disclosures like ESG due to the vast reporting frameworks and standards (Hannay-1, 2023). Moreover, these types of metrics are not always easily quantifiable. While many steps have been taken to ensure some level of reporting from companies, these are usually restricted to countries or unions like the European Union (EU). A universal standard of ESG reporting is not yet clear but will become crucial to ensure a level playing field in the corporate sector. ESG and Corporate Social Responsibility (CSR) are often interchangeable (Hay, 2023).

Understanding ESG Metrics

What exactly is meant by “ESG”? Each of the three areas of ESG has specific metrics that a company or firm can measure (Nickel, 2024; Quantive, 2024).

Environmental Metrics

  • Greenhouse Gas (GHG) Emissions
  • Energy Consumption
  • Nature Usage
  • Environmental Policies
  • Water Consumption
  • Waste Output
  • Air Pollution
  • Climate Change
  • Biodiversity
  • Deforestation
  • Raw Material and Fossil Fuel Depletion

Social Metrics

  • Comparative Living Wages
  • Diversity, Equity, and Inclusion Percentage
  • Gender Pay Gap
  • Employee Engagement
  • Reskilling/Training
  • Health and Safety
  • Human Rights
  • Charity
  • Wealth Generation
  • Compliance with Labour Laws
  • Impact and Contribution to Affected Communities
  • Customer Privacy and Data Security

Governance Metrics

  • Executive Pay Ratio
  • Quality of the Governing Body
  • Ethics and Anti-Corruption Policy
  • Tax Paid
  • Ecosystem ESG Compliance of Business Partners
  • Board Composition and Diversity
  • Regulatory Compliance
  • Risk Management Practices
  • Stakeholder Participation Opportunities

There are specific methods to measure each ESG metric (refer to Quantive, 2024).

Global Trends Toward Mandatory ESG Reporting

A global increase towards mandatory reporting has been observed (Hay, 2023). Countries or unions like the EU, United States (US), China, Russia, Germany, Netherlands, Italy, Denmark, Malaysia, and South Africa already require some level of ESG reporting from corporate companies (Rezaee et al., 2023).

  • Mandatory Reporting: In place in the EU and large corporations associated with the EU since 2017 (Rezaee et al., 2023), and in China, Denmark, Malaysia, and South Africa (Ioannou & Serafeim, 2019).
  • Voluntary Reporting: In place in the US (Rezaee et al., 2023).

The focus in the EU and related countries has been more on the environmental and social aspects of corporate companies, whereas in the US, the focus has been on the governance aspect. Generally, the attention scale of the three spheres of ESG is more focused on the environment, followed by the social sphere, and lastly the governance sphere (Hay, 2023). The reporting outputs, performance, and improvement are much higher in places like the EU where mandatory reporting is in place (Rezaee et al., 2023).

Soft Law and Voluntary Requirements

Soft or voluntary law requirements have been established by entities such as:

  • Organisation for Economic Co-operation and Development (OECD) (Hay, 2023; OECD; 2011, 2016, 2018 and 2023):
    • Provides sector-specific guidelines.
    • Offers general guidance for businesses on:
      • Public disclosure of material matters.
      • Human rights.
      • Employment and industrial relations.
      • Environment.
      • Combating bribery, bribe solicitation, and extortion.
      • Competition.
      • Taxation.
  • United Nations (UN) Guiding Principles (2011):
    • Guides on assessing actual and potential human rights impacts.
    • Integrates and acts on findings.
    • Tracks responses.
    • Communicates how impacts are addressed.
  • UN General Assembly Sustainable Development Goals (SDGs; 2015):
    • Introduced 17 SDGs addressing all three areas of ESG.

Hard Law and Mandatory Requirements

Hard or mandatory law requirements are mostly intertwined with EU laws. ESG is often used in conjunction with the term “sustainability” (Hay, 2023). The hard law requirements include:

  • Non-Financial Reporting Directive (NFRD; 2014):
    • Guides on environmental, social, human rights, anti-corruption, and bribery-related risks.
    • Focuses on impacts, measures, and policies on “large-interest” entities.
  • Corporate Sustainability Reporting Directive (CSRD; 2022):
    • Mandatory for companies with over 500 employees.
  • Sustainable Finance Disclosure Regulation (SFDR; 2019):
    • Requires financial market participants to disclose sustainability risks in investment decisions.
  • 2020 Taxonomy Regulation:
    • Categorizes environmentally sustainable investments in economic activities.
    • Identifies sustainable activities and assets.
    • Channels capital flow.
    • Contributes to:
      • Climate change mitigation.
      • Climate change adaptation.
      • Sustainable use and protection of water and marine resources.
      • Transition to a circular economy.
      • Pollution prevention and control.
      • Protection and restoration of biodiversity and ecosystems.
  • Corporate Sustainability Due Diligence and Amending Directive (CSDDD; 2019, 2022):
    • Focuses on human rights issues like forced and child labour, inadequate workplace health and safety, and exploitation of workers.
    • Addresses environmental issues such as GHG emissions, pollution, biodiversity loss, and ecosystem degradation.
    • Applies to large EU companies and companies in “high impact” sectors like textiles, agriculture, food products, and extraction of mineral resources (CSDDD, 2022).

Standards, Frameworks, and Ratings

What is the difference between standards, frameworks, and ratings (Hannay-2, 2023)?

Standards

Agreements on certain quality requirements from reporting companies or firms are referred to as reporting standards (Hannay-2, 2023). They clarify criteria or metrics and usually require:

  • Public interest focus.
  • Independence.
  • Due process.
  • Public consultation.

This ensures that the information is relatively standard and comparable.

Examples of Reporting Standards:

  • Global Reporting Initiative (GRI):
    • Most widely used.
    • Provides guidance but not specific metrics or data.
  • Sustainability Accounting Standards Board (SASB):
    • Industry-specific.
    • Typically more detailed than the GRI.
  • International Sustainability Standards Board (ISSB):
    • Still under development.
    • Aims to be a comprehensive list of global ESG disclosure standards.
  • European Financial Reporting Advisory Group (EFRAG):
    • Released the European Sustainability Reporting Standards (ESRS).
    • Forms the basis of the EU’s CSRD.
    • Applies to over fifty thousand companies starting in the 2024 financial year.
  • International Organisation for Standardization (ISO):
    • Reporting standards for management and services, environmental sustainability, energy, safety, security, and risks (see https://www.iso.org/home.html).

Frameworks

Frameworks guide how to structure the information that needs to be reported (Hannay-2, 2023).

Examples of Frameworks:

  • Carbon Disclosure Project (CDP):
    • Non-profit organization.
    • Provides a framework to collect climate-related data.
    • Used by over nine thousand companies.
  • GRI Reporting Framework:
    • Used by over ten thousand companies worldwide.
    • Covers a wider range of issues than the CDP.
  • Task Force on Climate-related Financial Disclosures (TCFD):
    • Not necessarily a reporting framework but is widely used for climate-related risks.
    • Developed by international financial regulators.
  • International Integrated Reporting Council (IIRC):
    • Established in 2010.
    • Provides in-depth guidance reflecting a wide range of factors for reporting entities (Anderson, 2024).

Standards and frameworks are usually complementary.

Ratings

Ratings pertain to the assessment of the quality of sustainability practices at a company or organization, ultimately assisting investors and stakeholders.

ESG Rating Agencies (Hannay-2, 2023):

  • Morgan Stanley Capital International (MSCI)
  • Sustainalytics
  • RobecoSAM

The Financial Conduct Authority (FCA) is working towards making sure that ratings are consistent and reliable (Hannay-2, 2023).

Benefits of ESG Reporting

A positive correlation between ESG disclosures and:

  • Cost of Capital
  • Quality of Reported Earnings
  • Market Performance
  • Firm Value

is observed (Santamaria et al., 2021). Moreover, ESG reporting serves as a communication tool between firms and their stakeholders and shareholders by:

  • Improving transparency.
  • Monitoring the management of firms more effectively (Rezaee, 2016).

Stakeholders have the opportunity to form independent and informed views on the firm’s sustainable performance in economic, environmental, social, ethical, and governance activities (Rezaee et al., 2023). Lastly, ESG reporting encourages firms to maximize their value to benefit all stakeholders (Rezaee & Fogarty, 2019).

Challenges and Opportunities

Reporting on non-financial disclosures should not be viewed as merely ticking off a list but as an opportunity for good business practice and setting new standards. However, a thorough understanding of regulations, standards, and frameworks is necessary, along with (Hannay-1, 2023):

  • Additional In-House Skills
  • Investment of Time, Resources, and Technology
  • Assessment of the Business’s Supply Chain or Partnerships’ ESG Compliance

How Data Symphony Can Help

Navigating the complexities of ESG reporting can be daunting. We can help provide specialists to assist companies with their practical ESG reporting requirements and streamline their ESG reporting processes. With expertise in global standards, frameworks, and regulations, we provide the tools and guidance necessary to meet your ESG reporting obligations efficiently and effectively.

 

References

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Commission Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, COM (2002) 71 final (Feb. 23, 2022) [Proposed CSDDD].

Directive 2014/95/EU of the European Parliament of 22 October 2014 Amending Directive 2013/34/EU as Regards Disclosure of Non-Financial and Diversity Information by Large Undertakings and Groups, 2014 O.J. (L 330) 1, 2 (recital 6) [NFRD].

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