Not reporting on ESG is risky business
Corporate sustainability reporting – although still unregulated – is evolving. A growing percentage of investors are demanding comparable metrics around material issues, which means CSR is only going to take you so far. It is time to pay attention to ESG.
In the sustainability reporting world, CSR stands for Corporate Social Responsibility and ESG is short for Environmental, Social and Governance. While sometimes used interchangeably, CSR and ESG are actually quite different lenses on corporate behavior. CSR is focused on the kind of accountability that is relevant to socially conscious customers, employees, NGOs and other audiences. ESG criteria are a set of standards that investors use to evaluate a company’s creation of value and ability to mitigate risk.
In this overview, we’ll explore those differences and the reasons many companies are moving from traditional CSR/sustainability reporting to ESG reporting.
The key distinctions between CSR and ESG are summarized below:
Notice in particular the difference in audiences for CSR and ESG approaches: CSR is directed at consumers, employees, communities and NGOs while ESG primarily targets investors.
The driving force behind ESG reporting – investors
In 2016, the Harvard Business Review observed that “The preponderance of evidence shows that sustainability is going mainstream…companies that proactively make sustainability core to business strategy will drive innovation and engender enthusiasm and loyalty from employees, customers, suppliers, communities and investors.” That prediction has proven correct. In fact, companies that have not taken steps to demonstrate their sustainability strategies have put themselves at risk.
According to a recent HBR article, “investors are increasingly conscious of the social and environmental consequences of the decisions that governments and companies make. They can be quick to punish companies for child labor practices, human rights abuses, negative environmental impact, poor governance, and a lack of gender equality.”
At the same time, a report by the Society for Corporate Governance says ESG risks can impact the worth of intangible assets that make up more than 80% of company value. According to Donnelley Financial Solutions, corporate, legal, investor relations, human resources and sustainability teams are converging around the need to provide qualitative and quantitative ESG data. This data helps companies manage sustainable growth and provides the market with the metrics necessary to fully understand the risks that investors face when these issues are not adequately addressed.
The need for this kind of disclosure is quickly gaining traction. In 2017, McKinsey estimated that more than $22 trillion in assets under management globally are now invested according to ESG principles. And Morgan Stanley estimates that 84% of global investors are pursuing or considering pursuing ESG integration in their investment process. In response, ESG reporting has increased by more than four times since 2011 among S&P 500 companies, according to the Governance & Accountability Institute.
While there are compelling reasons to move to ESG reporting, the process can be overwhelming. Therefore, we at MerchantCantos believe an effective approach is to begin adding ESG disclosure information to current reporting.
Your company can do this by considering the following ESG action items:
- Request your ESG report from MSCI and Sustainalytics and audit it for accuracy
- Don’t wait for your peers to report on ESG – there is high value in being first
- Ensure your IR and CSR teams are aligned
- Select the areas to report on that are material to your industry and company – and that you will continue to report on
- Incorporate ESG into your company narrative, earnings and investor presentations
- Continue to revisit and align your ESG reporting to Standard Setters and Research Agencies