What is Environment, Social, Governance (ESG)?

What is ESG reporting?

ESG has seen a meteoric rise in prominence for investors, employees, and businesses alike. But what is ESG and why does it matter to a business’s performance? ESG is an acronym that stands for Environmental, Social, and Governance. It is a framework used to measure a business's non-financial performance in environmental, social and governance categories. ESG was coined in 2004 by former UN Secretary-General Kofi Annan, resulting in 2005 with the first study, “Who cares Wins” developed jointly with the world’s largest institutional investors.

Why is ESG important for businesses?

‍Across the EU and the UK, key ESG reporting regulations, such as the Corporate Sustainability Reporting Directive (CSRD), covering more than 75% of European companies’ turnover. ESG has become an important way for investors, consumers, and potential employees to access the attractiveness and sustainability of a business. 

"ESG is likely to play a bigger role in how companies are assessed, not only by investors but by consumers and stakeholders", explains Nathan Bonnisseau, Co-Founder at Plan A. "The numbers reflect a growing awareness that companies must manage their environmental impact in innovative ways to remain successful. Sustainability is the new ideal, and the development of sophisticated methods of evaluating ESG activities and effect, is the key to attaining it," he adds. Plan A has an extensive suite of reporting templates and tools to bring your business’s ESG reporting to the next level.

How does ESG add value to businesses?

ESG has become an integral part of assessing a company’s value. It has been demonstrated that companies performing well on ESG practices have higher financial growth and optimisation, lower volatility, higher employee productivity, reduced regulatory and legal interventions (fines and sanctions), top-line growth, and cost reductions. On the other hand, companies that performed poorly on ESG noticed a higher cost of capital, higher volatility due to controversies and other incidences such as labour strikes, fraud accounting and other governance irregularities. 

 There are clear advantages to optimising ESG performance, such as:

• High ESG performance makes your company more attractive to VCs and other private equity investors.
• Integrating ESG gives you a clear competitive advantage. Studies have found that 88% of companies that adhered to social and environmental standards showed better operational development. 
• ESG optimisation allows you to get ahead of the curve and be prepared for upcoming reporting and regulation requirements.
• ESG reporting gives you clarity on your business’s impact and allows you to avoid greenwashing and the negative PR that can come from it. It is no longer acceptable to make unsubstantiated sustainability claims, and businesses risk their reputations if they do not have an integrated ESG strategy.
• High ESG scores allow you to attract and retain the best talent. 67% of millennials expect the companies they work for to be purpose-driven and their jobs to have a societal impact.

What is ESG measuring?

ESG stands for Environmental, Social and Governance and is an important, if still emerging, framework for measuring a company’s non-financial performance. Before the onset of ESG reporting, financial reporting and capital dominated how investors measure company performance. But in an era marked by climate change, investors, consumers, employees, and business owners alike are looking for more comprehensive and inclusive ways of measuring a company’s performance and impact. 

What are the three pillars of ESG?

E: Environmental 

The Environmental pillar considers the impact a business has on the planet. Top of mind in this category is a company’s record on climate, its greenhouse gas emissions and overall carbon footprint. Measures such as accurate and up-to-date carbon accounting, reporting, and decarbonisation plans are critical in this area. 

But the E in ESG does not stop at a company’s climate impacts. Other considerations to measure and account for are water pollution, water use, and air pollution. In addition, business report on land use practices that affect deforestation and biodiversity in this category. Finally, a company’s recycling policy and whether or not it has a circular economic model also impact its score. 

The E in ESG is the most complex to gather data on, particularly as up to 90% of a company’s emissions can be attributed to Scope 3 emissions, which can be challenging to report. 

Want to learn how Plan A helps you report and reduce your Scope 3 emissions? Read about our Supplier Module here.

S: Social

The Social pillar in ESG reports on a company’s human impact, from its employees and consumers to the communities within which a company operates. Employee and labour practices, health and safety standards, mental health, customer success, and community relations are all reported in this category. Companies also report on issues of equity, including gender and diversity inclusion. Customer success, including product liabilities “regarding the safety and quality of their product,” is also considered. 

G: Governance

Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Investors want to know if they can trust the company and what kind of decisions are taken behind closed doors. Some factors that could impact an organisation’s Governance score are the makeup of the board of directors, executive compensation guidelines, political contributions and lobbying, and hiring and onboarding best practices.

Who is looking at ESG scores?

The rise of ESG reflects a growing appetite among investors, consumers, employees, and business owners for a more sustainable and ethical way of doing business. The ever-increasing interest in measuring and ranking ESG by firms and investors reflects the perspective that environmental, social, and governance dimensions should be factored in when considering business success. 

What is ESG reporting software?

ESG software is a powerful tool that allows businesses to enter data, track performance, and generate reports on their non-financial performance. Some data points that could be included in ESG reporting are greenhouse gas emissions, waste production, water usage, governance structure, employee satisfaction, board representation, and diversity, equity and inclusion. 

What are the benefits of using ESG reporting software?

ESG software enables businesses to pull reports, track their performance, and set targets. ESG software also provides a measure of quality assurance and is an important part of standardising ESG reporting across sectors. Finally, ESG software provides businesses with essential insight and empowers them to make the most effective and data-driven decisions to become more sustainable. 

Plan A has streamlined ESG reporting tools  to help optimise your business’s performance and get you ahead of the pack on ESG. Plan A’s new ESG template Builder template builder allows you to create and send questionnaires to report ESG-related and non-financial dimensions. As a result, any Sustainability Manager can now cover all internal and external ESG reporting needs, adapting to any framework in a few clicks. Find out more today.  

What are challenges to ESG reporting that businesses should consider?

Investors increasingly view ESG scores as essential signifiers of a company's robustness and sustainability. While ESG becomes an increasingly important measure of company performance, there are several caveats and challenges this emerging field must consider. To live up to its promise, ESG will need to increase transparency and accountability in data collection and reporting and scale up knowledge and capacity within businesses. 

1. Lack of capacity 

First, there is the question of businesses' capacity and ability to keep up with reporting requirements. Studies have found that many companies are unprepared to gather and report their ESG data. For instance, more than half of businesses are housing their ESG data in spreadsheets instead of using ESG reporting software. 

2. Lack of data collection standards

Second, a lack of clarity around what data needs to be collected and reported makes it difficult to compare scores across and within sectors. "This is the biggest challenge facing sustainable investing: there is no clear-cut criteria about what makes a company ESG investable," explains Dora Blanchet, team leader at the European Securities and Markets Authority. "That is another reason why we so definitely need the data quality,". "As long as you don't have robust methodologies, there is no policing of what is qualifying as ESG investment," she added. 

This lack of clarity and transparency around ESG reporting can lead to accusations of greenwashing, which is increasingly a liability for businesses. You can optimise your non-financial reporting with Plan A and report ESG with confidence.

How does the EU support standards in ESG reporting?

‍The EU has been ramping up reporting regulations and frameworks to add teeth to ESG reporting, making it much harder for businesses to get away with unsubstantiated and misleading claims about sustainability. For instance, the EU is soon set to tighten ESG disclosure requirements for large businesses.

According to a press release by the European Council, the EU has agreed on plans to mandate large businesses to disclose more information relating to their environmental, social and governance (ESG) plans and performance from January 2024 onwards. Companies will need to disclose the impacts of their activities and supply chains on people and the environment. 

This is fantastic news for consumers and the planet. Greenwashing distracts from the work that needs to be done and gives consumers a false sense of security that their choices are indeed earth-friendly. According to Bruno Le Maire, the new mandate on ESG reporting “is excellent news for all European consumers. They will now be better informed about the impact of business on human rights and the environment.” 

The global economy has a long way to go regarding accountability, but this new mandate is a step in the right direction. 

What is the future of ESG?

Underlying the new focus on ESG reports is the understanding that more factors than financial performance affect a company’s performance and sustainability. Consumers partly drive the increasing importance of ESG, 80% of which “agree that a business must play a role in addressing societal issues; they want a company to take actions which increase profits, improve social conditions, and make the world a better place.” 

Investor preference is also driving the rise of ESG. Indeed, studies have shown that 49% of millennial millionaires make their investments based on social factors. 

And finally, corporations are interested in optimising ESG performance to stay ahead of regulations and competitors. Studies have found that some 63% of sustainable funds performed in the top half of their respective categories in 2018.

ESG is increasingly the model for non-financial reporting and regulations, such as the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and as well as the entity-level disclosure for reporting on the EU's Sustainable Finance Related Disclosure (SFRD).  

The rapid rise in ESG reporting requirements has been a challenge for many businesses. A survey of business leaders from the US and UK found that “more than 90% see ESG issues as a financial imperative but that 79% are unprepared to meet the proposed reporting requirements.” To help our customers meet new reporting requirements, Plan A has an ever-growing template database which includes the NFRD and SFRD.

Is ESG reporting right for my business?

High ESG performance makes your company more attractive to VCs and other private equity investors.

• Integrating ESG gives you a clear competitive advantage. 
• ESG optimisation allows you to get ahead of the curve and be prepared for upcoming reporting and regulation requirements.
• ESG reporting gives you clarity on your business’s impact and allows you to avoid greenwashing and the negative PR that can come from it. 
• High ESG scores allow you to attract and retain the best talent. 
• Business with high ESG performances are more competitive.‍

We hope this overview of ESG has been helpful and inspired you to either integrate these criteria into your business practices or take your existing ESG practices to a new level. Plan A is dedicated to helping companies optimise their ESG performance, reduce their negative impact on the planet, and decarbonise their operations.

Book a free demo with Plan A today and start your path towards ESG excellence.