The importance of environmental social governance (ESG) in corporate reporting is growing relentlessly. Regulators and investors have a clear goal of embedding sustainability risks with firm inclusion of ESG factors in reporting requirements and risk management. This is leading to growing requirements that are impacting a wide range of practices and functions across the enterprise. We’ll show you where the journey is headed, what reporting will become the new normal, which aspects will gain significant momentum in the future, what you should be aware of, and how you can benefit.
Sustainability: Too big to allow it to fail
The climate crisis and resource management that does not focus on sustainability lead to a multitude of financial and material risks.
- For example, 20-30 percent of the market value of publicly traded companies depends on burning fossil fuels at no social cost.
- Balance sheet values of at least $267 billion will become “stranded assets” globally if the Paris Agreement’s goal of curbing global warming to 1.5°C is not met.
- The cost of extreme weather events such as storms, droughts and floods will cost 500 of the world’s largest companies alone around 500 billion euros in climate damage over the next five years.
How clearly investors and the financial world have these risks in mind is exemplified by a quote from Larry Fink’s “2022 Letter to CEOs“:
We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients. That requires understanding how companies are adjusting their businesses for the massive changes the economy is undergoing. As part of that focus, we are asking companies to set short-, medium-, and long-term targets for greenhouse gas reductions. These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders.” (Larry Fink; Blackrock)
Social factors in the focus
In addition, social factors are increasingly influencing the performance of investments. Reputational risks are increasing. They are the result of violations or negligence of ethical standards, product safety requirements or the avoidance of product-related environmental and health risks.
For investors, but also for business partners, the question is therefore increasingly whether and to what extent they can assess the risk level of a company in this respect. Is management adequately prepared for these “social risks”? And has it taken the right steps to adjust the business strategy?
Regulators exert pressure and want transparency
The European Union has set itself the goal of promoting transparency and long-termism on the capital market. This includes that all economic actors disclose sustainability risks. This includes relevant management approaches as well as the impact of decisions on sustainability factors such as CO2 emissions or water consumption. The pressure emanating from this objective is also resolutely directed at investors and private equity.
ESG as the new standard with far-reaching consequences
The EU’s objectives also include clear plans for ESG. Environmental, social and governance factors are to be anchored as a standard in risk management. The new demands of regulators, together with the growing demand for sustainable investments, will have a profound impact on the playing field. Practices and functions from data use to investment decisions, risk management, controlling, reporting, back office and marketing will be affected.
Consequences for companies in the packaging industry
A new Corporate Sustainability Reporting Directive, Climate Reporting and Human Rights Due Diligence Directive: The near future brings a number of new requirements around environmental, social, and governance factors.
- CSRD: Back in 2014, the EU published a “Non-Financial Reporting Directive” (NFRD). It obliges large, listed companies to publish regular reports on the social and environmental impact of their activities. In Germany, the directive was translated into national law by the CSR Directive Implementation Act (CSR-RUG). The NFRD is currently being revised to become the CSRD (Corporate Sustainability Reporting Directive). The CSRD is to be adopted in October 2022 and come into force in 2024, with the reporting year 2023. The indicators of the EU taxonomy will then also be queried as part of the CSRD.
- Climate reporting: Climate reporting in accordance with the Carbon Disclosure Project (CDP) and/or the recommendations of The Task Force on Climate-related Financial Disclosures (TCFD) will soon become the new normal.
- Social & Governance: The S (Social) and G (Governance) parts of ESG have been somewhat neglected by regulators until now. However, it is becoming clear that this will change in the future. The topics of employee involvement, working conditions in the supply chain, and the exclusion of child and forced labor are rapidly and increasingly coming to the fore. The implementation of the Due Diligence Act (Supply Chain Act) in Germany, which will be passed in July 2021, and the EU’s planned Human Rights Due Diligence Directive will significantly drive developments.
The future of ESG reporting
The importance of ESG reporting is reflected not least in the large number and variety of different instruments. However, understanding and complying with the many different guidelines can become confusing for companies. Especially because the reporting standards have not only become more numerous, but also more sophisticated and elaborate.
In the face of this ever-increasing complexity, the challenge can be twofold. First, the most appropriate disclosure frameworks and standards must be identified. Then, it’s a matter of figuring out how best to use them to communicate the company’s ESG profile to stakeholders.
In order to improve the situation, the key reporting organizations presented a memorandum of understanding on “Working Together Towards Comprehensive Corporate Reporting” in 2020. In this paper, CDP, Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) commit to facilitate interoperability of frameworks and standards.
Benefits of ESG reporting
On the one hand, ESG reporting is becoming mandatory for companies. On the other hand, integrating ESG reporting into internal and external communication plans can be a powerful tool for companies to gain competitive advantage. Leading companies from various industries have already recognized this.
These are advantages that grow with time – because Millenials play a central role in this. They are very “ESG-conscious,” are gaining an increasing foothold in the global economy and society and are thus becoming an important factor. This is true not only when deciding for or against an employer, but also when making purchasing decisions, investments and media activities. The generation of Millenials attaches importance to ESG factors and also demands quality and consistency of information.
Starting in 2024, all types of companies will have to report on their ESG and climate activities in some form of consistent manner. It is therefore time to prepare for this. As the various requirements evolve dynamically and the stages of reporting are complex, time-consuming, and must also be of high quality, we recommend three basic measures. They apply whether your company is new to ESG reporting or not.
Building basic understanding
Precisely because the number of frameworks is constantly growing, you should know the basics of the tools. You should know how to add value to your reporting process and thereby stand out from your competitors and score points with stakeholders. Ratings and indices can make you more attractive and bring you closer to potential investors and markets.
It can also be rewarding to look at the ESG reporting of other successful companies. Who are the top performers in your segment? How did their ESG report put them in that position? What in your ESG report can be improved to give you a better rating? With these guiding questions in mind, it’s worth a read.
Telling the ESG story
ESG reports are already a strong differentiator in the marketplace. Consider what story your ESG report is currently telling stakeholders and what story it might be able to tell better. Review your story for opportunities that could turn into strengths for your future ESG reports. Know and define your ESG story and, in turn, your competitive advantage.
Connecting ESG reporting with core business strategy
What role does your company play in the world? Does your company’s board of directors make ESG-conscious decisions? Does your company strive to reduce its carbon footprint? Are you engaged in your location? Are you communicative and engaged in your supply chain?
Apart from attracting stakeholder investment and competitive positioning, your ESG report also reflects your company’s intentions towards the environment and society. It thus sets an immediate precedent. Make sure it is positive.