The past few months have brought into sharp relief an area of business and investment that has been steadily growing in importance.
Organisations of all sizes are experiencing increasing pressure from regulation and shifting consumer expectations to measure and improve on environmental, social and governance (ESG) performance. The term ESG is broader than just sustainable business practices, or corporate social responsibility, and builds on the convergence of a range societal issues that have led consumers and investors to focus more closely on the actions and practices of the businesses they interact with, and how their impact is measured and reported.
But how can businesses improve their ESG impact and reporting, and why is it important?
What is driving the emergence of ESG reporting?
The 26th UN Climate Change Conference of the Parties (COP26) was recently hosted in Glasgow and has acted as the perfect stage for discussions concerning the ‘E’ in ESG on a global scale. From an environmental perspective, over half of Australia’s 80 top-emitting ASX200 companies have announced their respective net-zero or carbon-neutral goals, with some committing to purchasing 100 per cent renewable electricity by 2025. This opportunity for the world’s biggest businesses to demonstrate their own progress also puts pressure on smaller businesses to commit to change.
Increasingly consumers and community stakeholders are placing pressure on organisations to behave in a way that mitigates ESG risks. Some countries and economic powerhouses like the UK or the EU are enforcing reporting and disclosure of ESG factors through regulation and mandatory reporting guidelines. Locally, most super funds are pressuring their investees to report and disclose their ESG factors.
As such investors, local and state government and larger businesses are being driven to look more closely at their activities, supply chain processes and related assets through an ESG lens.
This trickles down to impact the Australian middle market through contract obligations with larger clients, tender selection criteria and market dynamics such as asset valuation. Another key driver comes from direct consumer or interest group activities, such as social media movements and community activism. There are risks to clients in not being ESG-aware. But when well-managed and reported these risks can become opportunities.
What are the potential risks if businesses don’t act on ESG?
Risks that could be associated with mismanaged ESG considerations and reporting include:
- Lost opportunities for contract renewal or gaining new work
- Risk of lower company valuations
- Constrained lending/funding and higher cost of capital
- Higher insurance premiums
- Loss of clients
Less measurable but just as real is the blow to a business’ reputation that can come with bad press and social media criticism, as well as a reduced opportunity to attract and retain good talent.
Opportunities to look out for
While COP26 putting a spotlight on ESG outcomes can highlight some pain points for a business it also presents opportunities. Particularly for businesses able to transition faster than their competitors, deliver services or goods that support a low-carbon future, or demonstrate a commitment to ESG through transparent governance processes and robust reporting.
Besides differentiating a business from the competition, the first mover advantage can lead to capitalising on a megatrend expected to shape economies and business activity for decades to come.
There are a range of templates that have been established by Pitcher Partners and Baker Tilly to provide a framework for effective ESG reporting. It can be done as standalone ESG reporting or as part of an annual reporting exercise.
Looking to the future, in an exciting development during COP26 we have seen a major step to globally aligned ESG reporting. The International Financial Reporting Standards (IFRS) Foundation Trustees announced the creation of the International Sustainability Standards Board (ISSB). Companies and stakeholders have historically struggled with the myriad of sustainability standards, frameworks and metrics and the ISSB ideals will provide the foundation for the consistent and global environmental (and hopefully by extension social and governance) reporting standards of the future.
But even as we wait for the associated frameworks and standards to take shape, the return on investment of proactively measuring, reporting on and improving ESG performance will continue to grow.
To learn more about how to identify your ESG risks and measure your ESG performance effectively, contact your Pitcher Partners specialist.