What is this thing called ESG?
So you've seen job postings with the title of ESG Reporting Analyst and you have no idea what that even means. Or maybe you're familiar with the term but would like a brush-up on the ideas. This week we're going to get to the bottom of what ESG really means, why it's become so popular over the past few years, and what ESG disclosure/reporting really is.
ESG = Environmental, Social, and Governance
In the corporate context, ESG - which stands for Environment, Social, and Governance - has become embedded in the name of reports and initiatives which revolve around a companies ability to interact with these categories sustainably. So what exactly do these categories entail?
Environmental topics include energy use, pollution and greenhouse gas emissions, waste, natural resource use, and sometimes even the treatment of animals. If it's outside, and a company impacts it, it should be in their environmental section.
Common examples of these include a companies progress in reclaiming land that was used for resource extraction, or possibly how the company plans to decrease its waste to landfills in the coming years.
The social side of things gives us a look at how a business treats its relationships with its various stakeholders. Does a company donate money to local communities in which it operates? Is there a volunteer program where employees are given paid days to support a local organization? How does the company approach health and safety at the workplace? Does a company care about diversity and inclusivity?
If it relates to the relationship between a company and its stakeholders - it belongs here.
When we talk about governance - we want to know how a company is run. The hope is that by getting companies to tell us how they are operating, investors and other stakeholders can confirm that the organizations are operating within the bounds of the law.
A company should discuss how its executive is compensated, the makeup of its board of directors, as well as the type and amount of political donations the organization makes. This isn't an exhaustive list but should give you a good idea of what this category is about.
Why did ESG become so popular all of a sudden?
Pressure and Facts. The reason that ESG has become such an important factor over the past few years is :
1. Because of the pressure that consumers have been putting on companies to become sustainable. If the majority of your consumers are wanting change, you change because the alternative is that they go and buy a service or product elsewhere.
2. Reports have found that companies that are sustainable perform better financially than companies that are not. As all executives and boards in publicly traded companies have a financial duty to their shareholders, it was intuitive for companies to grab a hold of this information. If you see a report that says doing "x" will make you more money, you bet your bottom dollar that you've caught the attention of every capitalist on the internet.
What is ESG reporting?
As investors realized the value in sustainability, and how one company may outperform another financially due to their sustainable practices, investors wanted these companies to disclose the information so they could choose who to invest their money into. But if each company made their own ESG report with different metrics - how could an investor compare the two companies.
INTRODUCE ESG REPORTING FRAMEWORKS
The idea is fairly simple. A framework outlines standardized questions that any company, at their own will, may decide to answer such that they can be compared to other companies. Some frameworks, give companies scores based on their answers, while other frameworks just provide an easier way to compare how different companies respond to the same question. From these frameworks, investors may be able to make more informed decisions about a companies ability to operate in a sustainable fashion. The hope is that just as two companies may be able to be evaluated against each other in financial metrics, the same two companies should be able to be evaluated from a sustainability lens.
Currently, some of the most well known and well-used frameworks include:
As it's a new and emerging space, there are a plethora of frameworks that are all trying to find their way to the top spot and become an industry standard. Which one is the best? Well, that's up to you, and everyone else to decide.
My Take on ESG.
ESG reporting is great. The more companies that partake in it, the more pressure to get better scores, and disclose more information. At the end of the day, this means that companies will be competing with each other to be the most sustainable. A competition I'm excited to see continue.
While it's great, there's still some room for improvement. The entire goal of creating frameworks was to standardize the wild west of ESG and sustainability reporting.
Unfortunately, due to the number of frameworks that have appeared over the years not all companies fill out all frameworks. This means that sometimes it's still hard to directly compare two companies on ESG metrics.
Another problem is the lack of standardization in how companies report their ESG metrics. While some frameworks provide the responses of all companies on their own website, other frameworks only require a company to reference a metric number when they discuss it in their reporting. This means that it may be difficult to find where a company responds to a specific standard in a framework.
My last pet - peeve (promise this is it) is how sustainability reports are named. You see, most reports are released in the first few months of the new year and discuss how the company performed in the previous year. For reference, most reports follow a naming convention of . . .
Year "Company Name" Sustainability Report
Unfortunately, some companies use the year of the data that the report has in it, while other companies use the year that the report was released in. This means that as a reader you need to identify that reports released in 2021 and with 2020 data from two different companies may be discussing data from the same year even though they are named differently.
I would encourage you to go to the "investors" or "reporting" section of a company you know well and look into their reporting practices. How do they name their reports? What information is included in their reports? What programs do they disclosure their metrics to? Did they use any of the frameworks mentioned above?
If you have any questions or comments about the topic feel free to send me a message or leave a comment below.
Have a great week!
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