What is AN ESG REPORT & Why it is important
ESG stands for “Environmental, Social & Governance”. Companies usually disclose an annual report that gives information on these three spheres, that can be examined against benchmarks and targets. The purpose of these reports is to provide transparency over the company’s operations, to track progress and it’s also a form of risk management. The risks reported can cause material, financial and reputational damage to the business. Some examples of topics covered in the different areas are:
- Environmental: Climate change, greenhouse gas emissions (GHG), waste, and pollution.
- Social: Customer relations, employee wellbeing, supply chains, human rights, and work-life balance.
- Governance: Board management practices, succession planning, inclusion, diversity, compensation, regulatory compliance, security, and corruption.
ESG reporting is important for multiple reasons as well as brings benefits to the companies. For instance, by fostering transparency it also encourages accountability, and both are essential for collaboration and developing actionable solutions. Also, with the increasing awareness for responsibility and climate change, investors avoid companies that lack ESG reporting, with reduced transparency being a major concern. But it is not just investors, consumers are also demanding brands that take more responsibility. Lastly, regulatory forces are also applying pressure on companies to produce ESG reports. Hence, ESG reporting is becoming more and more a relevant and necessary practice for businesses to take seriously.
What is the role of companies in the climate change
The global pursuit of net-zero carbon emissions is a huge undertaking, and only possible with the help of businesses. The Carbon Majors Reports says that just 100 companies have been the source of more than 70% of the world’s greenhouse gas emissions since 1988. This reinforces that companies need to adjust their business models, their operations, and practices to respond to the climate crisis and reduce their negative impact on the environment. Their commitment to find better materials, ways of producing and ways of reducing waste is crucial to fight this crisis. The ESG reporting and other types of reports that are starting to appear play an important role in this path towards responsibility and becoming more sustainable. By doing this firms can track their progress and find new ways of operating. As mentioned before, the consumer & investor judgment on their performance in becoming more environmentally friendly is also of utmost importance, because firms are moved by money. Therefore, these public judgment and investor interest in supporting responsible businesses is a huge incentive for them to improve.
What is ESG Investing
“ESG investing” refers to a form of financial investing that prioritizes the impact of businesses on Environmental, Social, and Governance criteria, in addition to financial returns. Even though there is no general definition of good ESG practices, and ESG funds have their share of critics, several studies also show the beneficial impact of ESG investing upon climate and social sustainability goals. A study by The Economist, found that companies with ESG targets generally had a lower environmental impact than those without such goals.
ESG Investing as one of the sustainability trends of 2022
In 2020 investments in ESG funds more than doubled, reaching more than $51.1 billion. The growing interest in ESG has continued his year. Funds in Europe have reached more than $139 billion, growing by more than 18% over the same period last year. We expect growth in ESG investing to continue throughout 2022, and well beyond. Overall investments in ESG assets are projected to surpass $53 trillion by 2025.
Sustainable investment is here to stay, because the forces driving it are the demand for more responsible businesses. Thus, raising increasing investor interest, both from individual savers and from larger institutions.
Impact and challenges of ESG investing
ESG investing can have a positive or negative impact on climate change depending on how environmentally sustainable the investment is. If the investment focuses on companies that contribute to carbon dioxide pollution, then it will potentially contribute negatively towards reducing climate change. There are however still some challenges related to it, mostly when it concerns the creation of these ESG reports. It is sometimes hard to have good enough metrics to measure the risks related to climate transition, thus there is still some room for improvement on this field.
In conclusion, ESG is important because it has the power to save the environment and slowing climate change. ESG investing is a tool that we can use individually to reduce greenhouse gases, provide a living wage for everyone, and push for innovation which will lead to sustainability.
References:
https://www.pwc.com/sk/en/environmental-social-and-corporate-governance-esg/esg-reporting.html
https://hbswk.hbs.edu/item/whats-the-role-of-business-in-confronting-climate-change
https://www.adecesg.com/resources/blog/esg-investing-and-climate-change/
