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Elevating Business’ Success: How ESG Reporting Drives Companies' Outperformance

Updated: Jun 14

Introduction


The rise of ESG regulations, discussed in my article: ESG Regulation and Policies and Their Implications for Companies has led to the development of a regulatory framework that establishes guidelines for organisations to follow in terms of ESG reporting and disclosure.

 

There are different key frameworks and initiatives that establish guidelines for ESG reporting and disclosure, including:

 

1.     Global Reporting Initiative (GRI)

2.     Sustainability Accounting Standards Board (SASB)

3.     Task Force on Climate-related Financial Disclosures (TCFD)

4.     European Sustainability Reporting Standards (ESRS)

 

These frameworks and standards have distinct focuses, purposes, and characteristics. The key differences between these frameworks are:

 

Global Reporting Initiative (GRI):

 

  • Focus: Comprehensive framework that covers a wide range of sustainability topics, including environmental, social, and economic aspects.

  • Geographic Scope: Globally recognised framework with broad applicability across various sectors and organisations worldwide.

  • Main Target-group: Encourages organisations to engage with stakeholders in the reporting process.

  • Industry Specific: No

 

Sustainability Accounting Standards Board (SASB):

 

  • Focus: Focuses specifically on financial material sustainability issues. It provides industry-specific standards for reporting on ESG topics that are financially material to industries.


  • Geographic Scope: Globally recognised framework with broad applicability across various sectors and organisations worldwide.


  • Main Target group: The primary audience is investors, and its standards are designed to provide decision-useful information for investors to assess the ESG performance and risks of companies.


  • Industry Specific: Tailored to different industries, recognising that materiality varies by sector.


Task Force on Climate-related Financial Disclosures (TCFD):

 

  • Focus: The primary focus is on climate change and its financial impacts, making it highly relevant for organisations exposed to climate-related risks. Encourages the integration of climate-related information into mainstream financial reports.


  • Geographic Scope: Globally recognised framework with broad applicability across various sectors and organisations worldwide.


  • Main Target-group: Organisations seeking to communicate climate-related information to investors and financial markets.


  • Industry Specific: No

 

European Sustainability Reporting Standards (ESRS):

 

  • Focus: Focuses on the harmonisation of sustainability reporting practices within the EU and enhances the consistency and comparability of sustainability data.


  • Geographic Scope: Specific to the European Union and is developed to align with the EU's sustainability reporting requirements. ESRS is closely linked to EU regulations and directives, making it relevant for organisations operating within the EU.


  • Main Target-group: Large European public interest entities already subject to NFRD, Large companies not already subject to the NFRD, and Smaller organisations.


  • Industry Specific: No

 

In summary, these frameworks serve different purposes and cater to different organisations. GRI is known for its comprehensive and globally applicable approach, SASB focuses on financially material ESG issues for investors, TCFD specializes in climate-related financial disclosures, and ESRS is tailored to EU-specific regulatory requirements.

 

Regardless of the framework that is most suitable for each organisation context, organisations need to continue to make urgent progress with ESG reporting in a way that supports their short-term and long-term objectives.

 

A robust sustainability and ESG reporting ecosystem will help organisations not only measure progress on executing their ESG strategy but also support organisations in driving value while mobilising capital markets to help support innovative and much-needed solutions to the many societal issues we face.

 

 

Major Trends in ESG Reporting

The KPMG’s 2022 ‘Survey of Sustainability Reporting - Big Shifts, Small Steps has identified the five major trends in sustainability and ESG reporting:

 

1. Sustainability reporting grows incrementally with movement towards the use of standards framed by stakeholder materiality assessments

The rates of sustainability and ESG reporting among the world’s leading 250 companies are at an impressive 96 percent. Reporting rates are expected to grow as new regulation on non-financial reporting is introduced, namely The Corporate Sustainability Reporting Directive (CSRD) from the European Union (EU).

 

While there is still a need for global consistency in ESG reporting, existing standards have increased in usage. The GRI remains the most dominant standard used around the world, though some regions have a clear preference for SASB or local stock exchange guidelines. For the first time, the survey looked at how many companies carry out materiality assessments, finding that around three-quarters across both the N100 and G250 use materiality assessments.

 

2. Increased reporting on climate-related risks and carbon reduction targets, in line with TCFD

 

The survey found that nearly three-quarters of companies report their carbon targets, although 20 percent do not disclose any link to an external target (such as a 1.5˚C scenario). The number of companies reporting against TCFD has nearly doubled, leading to more consistent and comparable climate disclosure.

 

3. Growing awareness of biodiversity risk 

 

Despite growing awareness of biodiversity loss as a critical issue, less than half of companies recognise this loss as a risk to the business. On the positive side, most sectors now acknowledge this risk, even many of those that can be considered low risk. The launch of the TNFD and CSRD frameworks is expected to drive up reporting in the immediate years.

 

4. UN SDG reporting prioritises quantity over quality 

 

The majority of companies report on SDGs, with 10 percent of companies reporting against all 17 SDGs. Three SDGs remain the most popular for companies: 8: Decent Work and Economic Growth; 12: Responsible Consumption and Production; and 13: Climate Action.

 

5. Climate risk reporting leads, followed by social and governance risks

 

Since 2017, there has been a marked improvement in the number of companies that acknowledge climate change as a risk to their business. However, less than half of companies report on social and governance risks to their business. In general, the description of these risks is overwhelmingly narrative-driven and does not quantify the financial impact of these risks on companies or on society.

 

Sustainability continues to become a priority for company leadership but there is room for improvement. Only one-third of companies in the N100 have a dedicated member of their board or leadership team responsible for sustainability matters. Compensation conditions related to sustainability outcomes for leadership teams are prevalent for only 40 percent of G250 companies.

 


Ways ESG Reporting Drives Companies' Outperformance

 

 

1. Attracting Responsible Capital

 

One of the most significant advantages of robust ESG reporting is its ability to attract responsible capital. Institutional investors and asset managers are increasingly incorporating ESG criteria into their investment decisions. They recognise that sustainable practices often lead to long-term value creation, making ESG-focused companies an attractive proposition for their portfolios.

 

 

2. Mitigating Risks and Reducing Surprises

 

Transparent ESG reporting helps companies identify and mitigate risks proactively. By assessing and disclosing environmental and social risks, organisations can take steps to address them before they escalate into costly crises. This risk reduction not only safeguards the bottom line but also enhances a company's resilience in a fast-changing world.

 

3. Operational Efficiency and Cost Savings

 

Many sustainability initiatives aimed at achieving ESG goals also lead to operational efficiencies and cost savings. For instance, energy-efficient practices can reduce utility costs, while a diverse and inclusive workforce often translates to higher employee retention and productivity. These operational improvements contribute to higher profitability over time.

 

4. Enhancing Reputation and Customer Loyalty

 

ESG reporting fosters transparency and trust. Companies that openly communicate their sustainability efforts are more likely to earn the trust and loyalty of their customers and stakeholders. A positive reputation can drive customer loyalty and bolster brand value, translating into a competitive advantage.

 

5. Outperforming Benchmarks

 

Studies have consistently shown that ESG-focused companies often outperform their industry benchmarks in the long run. In KPMG’s 2022 ‘Survey of Sustainability Reporting’, 45% of CEOs affirmed that ESG reporting helps to improve their company’s financial performance.

 

ESG Reporting: A Strategic Imperative


In conclusion, ESG reporting isn't just a trend; it's a strategic imperative.

The inclusion of ESGs and their reporting has become critical for companies for their long-term success, as more and more companies’ stakeholders are demanding a commitment to sustainability.

 

Companies that embrace ESG reporting are better positioned for long-term success. They attract responsible capital, mitigate risks, improve operational efficiency, enhance their reputation, and, importantly, outperform their peers.

Embracing ESG reporting isn't just about compliance; it's about seizing opportunities for growth and impact.

 

Is your company on board with the ESG reporting journey? If yes, what have been the challenges? How does your company overcome them? What are the main outcomes of it for your company?

 

 


References

Domingues, L. (2023). ESG Regulation and Policies and Their Implications for Companies. 

 

KPMG’s 2022 ‘Survey of Sustainability Reporting - Big Shifts, Small Steps #




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