ESG reporting – what it is, what its standards are, and why it’s important

As demand continues to grow for more sustainable investment opportunities, ESG reporting is now an accepted standard practice that investors use to target green investments that meet their environmentally friendly requirements.

OPEN AN ESG ACCOUNT

If you are considering investing in ESG funds, this type of reporting is invaluable, but how does ESG reporting work?

The key elements of ESG

The increasing desire for sustainable investments has made ESG reporting a standard practice to assess the impact businesses have worldwide on communities and the environment in which they live. This blog discusses how ESG reporting works.

The initials ESG stand for Environmental, Social and Governance. Let’s take a brief look at each of these elements, in turn, to better understand what they mean.

The Environmental aspect covers how businesses, as stewards of our planet,  employ energy and control its impact on our environment. It takes into account how a commercial enterprise makes use of the resources it uses across all elements.

The factors that the “E” considers in ESG reporting include things like the quality of our air and water, the use of biodiversity, a company’s carbon footprint, climate change and its waste management operation. Businesses that fail to report on these aspects run the risk of alienating prospective investors and therefore incurring financial risk.

The Social element considers how a business nurtures its employees and culture, and the effect on the wider community. This “S” takes into account aspects such as community relations, customer satisfaction, data protection, employee engagement, gender diversity, human rights, privacy, and labour standards.

The Governance aspect looks at internal systems of a business, practices, and procedures and how it mitigates potential violations. It takes into account any dialogue the company has with regulators, industry best practices, and transparency.

This “G” in ESG reporting focuses on any potential bribery and corruption, the composition of the company’s board of directors, their executive compensation, the internal controls the company exerts, the rights of shareholders, and the businesses attitude towards political lobbying and operating whistleblower programs.

The framework and standards of ESG reporting

Unfortunately, at the time of writing this blog, there is still a significant gap between the need for ESG information and its supply. This gap is caused by various factors, including:

• Lack of uniformity in ESG reporting standards
• Lack of mandatory ESG reporting regimes
• The significant costs of collecting and reporting ESG data

These factors interfere with the process of offering accurate, quality data that investors can use to make informed decisions regarding ESG investing. However, there are specialists that businesses can work with to help them develop and instil ESG focused strategies in their operations.

A summary of the key areas of ESG reporting

We will now take a look at the most important aspects of ESG reporting, starting with putting together a designated team responsible for creating the reporting framework, which needs to take into account things like:

• The standards of internal and external reporting
• Performance metrics
• Initiatives and targets

Another important area for ESG reporting is understanding the importance of the sustainability concerns that a company’s stakeholders have.

It is also essential to work with ESG experts who can provide the necessary data to outline a company’s ESG needs, and supply the appropriate insights and resources to facilitate reporting that complies with the standards that stakeholders in various industries expect.

Reporting needs to show how ESG performance stacks up with a business’s policies and strategy.

There needs to be a mechanism to constantly review ESG performance and compare it with stakeholders expectations and ongoing sustainability issues.

The future of ESG sustainability reporting

The EU demands that some large businesses disclose information concerning how they operate and manage social and environmental challenges. Directive 2014/95/EUDirective 2014/95/EU – otherwise known as the Non-Financial Reporting Directive (NFRD) – stipulates the rules on disclosure of non-financial and diversity information. This directive amends the previous Accounting Directive 2013/34/EU.

These ESG reporting rules apply to public interest companies employing more than 500 employees. These companies included banks, insurance companies, plus listed and other companies seen as being of interest to the public, and under directive 2014/95/EU, they have to divulge information relating to:

• Board diversity
• Bribery and anti-corruption
• Human rights
• The environment
• The treatment of employees and their social matters
• Human rights
• Board diversity

In other words, all things relating to ESG reporting best practice.

The status of ESG reporting in the UK

Following Brexit, the UK is no longer bound by this legislation, and if you ask, is ESG reporting mandatory here in our fair land? – it has to be admitted that the majority of ESG reporting detail is not. Certain metrics do come under the mandatory ESG regulation umbrella, including energy use, the gender pay gap, greenhouse gas reporting, and modern slavery.

The examples quoted above are not exhaustive, and ESG mandatory reporting will continue to grow in terms of its scope in the near future. As a result, many businesses are now adopting frameworks and implementing processes and systems voluntarily. These systems will, in time, prepare these companies for when comprehensive ESG reporting does become mandatorily here in the UK.

The ESG investment portfolios offered by Moneyfarm

The range of ESG investment funds available to UK investors has steadily increased in recent years. Last year, Bloomberg Intelligence predicted ESG assets will reach a total value of $53 trillion by the year 2025. A sample of the ESG portfolios built by Moneyfarm today includes:

• The ESG International Stock ETF (VSGX)
• The ESG US Corporate Bond ETF (VCEB)
• The ESG U.S. Stock ETF (ESGV)
• The Global ESG Select Stock Fund (VEIGX)
• The iShares MSCI USA ESG Select ETF (SUSA)

If you want to check out some of the ESG annual report documents published by the companies within the portfolios, chat with a member of the Moneyfarm ESG investment team, and they will point you in the right direction.

Final thoughts on the current state of ESG in the UK

Having read this blog, we hope we have answered the question of what is ESG reporting in a way that will help you as an investor to make informed future decisions when it comes to adjusting or creating new investment portfolios.

The ESG reporting meaning for investors is clear, and as they continue to adjust their focus as environmental issues come more to the fore, businesses will find their financial futures reliant on adopting ESG reporting best practices.