What is ESG reporting?

Environmental, social and governance is a framework for evaluating the sustainability and ethical impact of a company or investment. It takes the holistic view that sustainability extends beyond only environmental issues. While the concept is often used in the context of investing, it applies to any industry whose stakeholders are interested in how sustainably a business is operating.

The origins of the acronym ESG (environmental, social and governance) can be traced to the formation of the UN Global Compact, a volunteer initiative based on CEO commitments to implement global sustainability principles. The first appearance of the term was in the 2004 report “Who Cares Wins”, which included guidelines and recommendations for how to integrate ESG initiatives in asset management.

ESG is a framework which serves as a tool to measure the following three impacts:

Environmental factors include pollution, greenhouse gas emissions, waste generation and energy efficiency. The goal of lowering emissions to achieve net zero by 2050 has made this a vital factor.

Social factors entail attitudes toward diversity, labour standards, and workplace health and safety. In extreme cases it can relate to child labour, forced labour and wider human rights issues.

Governance factors include how well a company is managed, from diversity and gender equality to a lack of corruption. Good governance includes how well capital is distributed and how external and minority shareholders are treated.

ESG regulations are the rules and guidelines that govern a company’s environmental, social and governance aspects. Their purpose is to hold organisations accountable for the sustainability of their products and services.

ESG reporting standards are the response to the call for consistency and comparability. They outline specific requirements for sustainability reporting, such as:

Specific metrics and indicators that organisations must measure and report on, for example, emissions, employee turnover rate, percentage of women in leadership, etc.

Methodologies and calculations that should be used to measure and quantify ESG performance. This ensures consistency in reporting across companies.

Formats and structures that businesses should use when presenting ESG disclosures, including specifying data categories and the level of detail for each metric.

Investors and financial institutions are increasingly taking companies’ ESG performance into account, and ESG reporting is the way organisations disclose their progress. Compliance increases business ethics and improves brand reputation. Businesses with higher ESG ratings build trust and enjoy greater access to funding.

The European Union (EU) is the world leader in establishing ESG regulations. EU rules require all companies of a certain size to disclose information on the social and environmental risks they face, and on how their activities impact people and the environment.

The EU Corporate Sustainability Reporting Directive (CSRD) took effect in January 2023 and companies had to start complying with these rules in 2024. CSRD strengthened reporting requirements and expanded them to a wider range of organisations. This gave stakeholders an even greater ability to evaluate the sustainability performance of companies.

ESG regulations can be confusing, but progress is being made to increase the accuracy and transparency of disclosure requirements. ESG has changed how investment decisions are made by many of the largest financial firms and asset managers, and specialists have entered the industry to support both net zero and carbon neutrality goals.

Businesses that operate internationally must stay up to date with the regulations of the countries in which they operate. Non-compliance can damage corporate reputations and lead to fines, but there are even greater repercussions. Inaction can speed climate change, making adherence to ESG initiatives crucial to society as a whole.