Issues such as climate change, emissions, pollution, social inequality, discrimination at work and many others have been plaguing the world for a long time now. Then why is there a sudden surge of organisations striving to act upon, control the impact of these issues and also make related disclosures in their reports?
The answer hinges on two parameters: One, corporations or organisations contribute a large share to world economies. Two, stakeholders are more aware about issues related to the environment, society and governance and want to be associated with companies that align closely with their personal values and priorities. Investors, today, are not shying away from asking pertinent questions about companies’ non-financial performance and their contribution towards social and environmental good, resulting in the emergence of 'ethical investing'. Employees are also prioritising organisations that do much more than the mandatory CSR investments.
And, while there are regulatory pressures for better disclosures, organisations are increasingly realising that being transparent about their non-financial performance is the right thing to do and a good business move.
One of the ways in which organisations are communicating their non-financial performance is by following the ESG and sustainability reporting approach.
What's the difference?
Both forms of reporting are rapidly evolving forms of stakeholder communication. In fact, they can be considered as two sides of the same coin.
The primary difference is: Sustainability can mean different things to different organisations depending on the sector and geography in which they operate. ESG is about reporting along the specific criteria of E-environment, S-social and G-governance.
Frameworks that aid reporting
To support organisations in creating impactful ESG and sustainability reports, a wide range of ESG and sustainability frameworks are in place. They are constantly evolving to suit the needs of companies and stakeholders. Here are some of them:
- The Global Reporting Initiative (GRI)
- The Sustainability Accounting Standards Board (SASB)
- International Integrated Reporting Council (IIRC)
- The Workforce Disclosure Initiative (WDI)
- The Task Force on Climate-related Financial Disclosures (TCFD)
- The Climate Disclosure Standards Board (CDSB)
- The CDP (formerly the Carbon Disclosure Project)
Organisations generally follow one or more of these frameworks while reporting their ESG and/or sustainability performance.
Key highlights from the world of ESG and sustainability reporting
Source: KPMG
Trends expected to dominate the ESG and sustainability reporting landscape
1. The quality and quantity of ESG data will improve
The credibility of sustainability reports has been a challenge, with investors often voicing out their concerns of being unable to take investment decisions and advice accurately based on companies’ sustainability reports. As the demand for more transparent and highly accurate data increases, so will the efforts towards it.
2. Certain themes will emerge as dominant among disclosure requirements
3. Businesses will start controlling and reporting on their scope 3 emissions
Scope 3 emissions are indirect emissions that occur across the value chain of an organisation. They are the result of activities from assets not owned or controlled by the reporting organisation. Business travel, employee commute, wastewater treatment and transportation and distribution contribute to an organisation’s scope 3 emissions. Due to a growing awareness of businesses’ indirect emissions that occur within their value chains, businesses are now strictly committing to scope 3 emission reduction and are also reporting the measures undertaken. Reporting on scope 3 emissions will help them stay on top of competition and respond effectively to the disclosure pressures posed by regulators and investors.
4. Focus will shift to growing threats to nature and biodiversity
Several companies and countries have committed to becoming net zero by 2030. As a result, sustainable and green bonds are expected to witness a boom as carbon-intensive companies issue debt to raise capital and use the proceeds for carbon-reduction activities.
5. Governance disclosures must promote transparency, trust, diversity and integrity
Transparency is an element of good governance and organisations have begun realising and reporting it. Businesses are now focusing on providing benefits to stakeholders rather than only on deriving profits from shareholders. Organisations will be expected to pay attention to excessive executive compensation, corporate ethics, Board quality and effectiveness as an increasing number of stakeholders continue to question the very foundation of organisations' governance framework.
The year 2020 proved to be a hard lesson for the world. The lesson only reinforces the long-ignored necessity to build and follow a sustainable approach centered strongly around the ESG principles. Organisations still have a long way to go in becoming truly sustainable, but ESG and sustainability reporting will serve as enablers towards that ambition.
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