The measurement and reporting of environmental, social and governance impacts as factors affecting investment decisions continues to accelerate rapidly. Here’s an overview of what this trend means for businesses.
Measuring and reporting Environmental, Social, and Governance (ESG) metrics has become increasingly popular for companies of all sizes, especially over the past few years. In fact, according to S&P Global Market Intelligence, nearly 92% of the largest companies in the U.S. published a sustainability report, up from 75% in 2014 and only 20% in 2011. While this trend has been accelerating over the past decade, it was further pushed by the COVID pandemic, exposing negative environmental and social impacts that were hiding in plain sight. However, the biggest reason that the value and significance of ESG reporting has come to the forefront is likely due to their growing importance in financial markets: since 2020, global sustainability benchmarks have outperformed traditional market benchmarks and ESG funds have achieved record inflows.
Below are five major aspects of why ESG reporting has become such a valuable and significant focal point.
Measuring Impact
ESG metrics show each company’s commitment and actions with regard to social responsibility efforts and environmental performance. Beyond improving brand image; it allows companies to assess their impact with measurable goals and actions that are published, viewed, and often officially audited by third-party organizations. In turn, knowing what kind of impact a company is having on the environment and social issues can improve a company’s investment profile.
Organizational priorities are set from the top down: according to KPMG, 71% of CEOs believe it is their personal responsibility to ensure that organizational ESG policies reflect the values of customers. However, there is currently a lot of room for improvement in this space, as only 50% of companies surveyed believe their environmental performance is very effective, and only 39% and 37% give themselves high marks for governance and social issues, respectively. Measuring impacts is the best way to assess performance and is crucial for implementing policies and practices that can lead to real improvements.
Rating Agencies
ESG rating agencies are organizations that examine ESG policies to evaluate companies’ performance with regard to environmental sustainability, social impacts, and governance practices. Rating agencies score companies using diverse criteria, and these ESG scores can be used to identify companies with strong performance in each of these areas, independently and relative to other organizations.
Some of the factors rating agencies take into consideration are:
Investment risk
Financial strength & stability
Social responsibility
Environmental sustainability
Assessment and measurement of ESG metrics by rating agencies often forms the basis of informal and shareholder investor engagement with companies on environmental, social, and governance matters. Many rating providers encourage input and engagement with their subject companies to improve or correct data. However, despite their overall purpose being similar, ratings methodologies, scope, and coverage vary greatly among providers. There are various ESG rating systems, and each agency has its own way of doing things. Some are more ESG performance-based, while others are more ESG risk-based. Currently, leading rating agencies include Bloomberg, MSCI, DJSI, ISS-Ethix, Sustainalytics, Thomson Reuters, RobecoSAM, CDP Global Environmental Information Research Center, FTSE Russell, and Corporate Knights Global 100, among others.
Investors
Ratings from any of these organizations are often taken into account by investors to determine in which companies to invest, based on audited sustainability data, reliable indicators of long-term financial stability.
Universities, pension funds, hedge funds, and other institutional investors searching for sustainable business performance are now increasingly considering ESG ratings. According to Index Industry, 85% of asset managers say ESG is a high priority for their companies.
Positive ESG scores had a positive impact on equity returns 63% of the time according to a study conducted by McKinsey. Social and sustainability bonds (products designed to funnel investments into ESG projects) reached a new global record of over $700 billion in issuances in 2021, almost double the 2019 total of $358 billion. ESG-mandated assets are projected to make up more than $35 trillion by 2025, roughly half of all professionally managed investments.
Consumers
Investors are driving the reporting and disclosures – but consumers are driving the push for sustainability and social action. Nearly 90% of consumers will be more loyal to a company that supports social or environmental issues. On the other hand, more than 75% of consumers say they will stop buying from companies that abuse the environment, employees, or their communities. This is not surprising, as “eco-friendly” and “social justice” marketing has visibly increased in recent years; it is now uncommon for any B2C products or services to not have some form of environmental or social emphasis.
Whether promoting sustainably sourced food in restaurants or improved working conditions for employees in brand-name clothing factories, these ESG improvements are driven chiefly by consumer demand for more environmentally and socially conscious products and services. Reporting the extent to which these areas are addressed positively impacts companies’ bottom lines – provided that the claims are backed by relevant ESG metrics and that the companies are transparent in their disclosures.
Stakeholders
All stakeholders – from employees to advisors to members of communities in regions where companies operate – benefit from ESG reporting. ESG strategies not only positively impact the environment and local communities: they can also affect operating profits by as much as 60%, according to McKinsey. Furthermore, organizations with the highest employee satisfaction had ESG scores 14% higher than the global average, likely due to these companies’ strong environmental policies, social commitments, and good governance practices.
One of the best ways for companies to ensure stakeholder benefits from an ESG strategy perspective is to adopt relevant United Nations Sustainable Development Goals (UN SDGs). According to S&P, more than half of revenues from the 500 largest U.S. companies – and just under half of revenues from the 1,200 largest global companies – come from business activities that support one or more relevant UN SDGs, not just ESG disclosures in general. Putting the SDGs (which comprise the leading ESG framework for large companies) at the center of the world’s economic strategy could unlock up to $12 trillion a year in opportunities and generate around 380 million jobs.
Proper ESG reporting reveals metrics and areas for companies to improve upon within their respective organizations, including which SDGs are relevant for each business and should be addressed. This means that as companies continue to adopt reporting practices and disclose data, more emphasis will be placed on realizing the potential that the SDGs can unlock – including opportunities and jobs that will be created – adding even more value and significance to the practice of ESG reporting.
If your company is seeking guidance on ESG issues and interested in optimizing its ESG ratings and impact, Global Imprint is here to help. Just reach out to us with your interests and concerns and we’ll get right in touch.