ESG Reporting

Short for “environmental, social and governance”, ESG represents a more stakeholder centric approach to doing business. Generally, people refer to this as Sustainability Reporting, which leads to a common misunderstanding in the finance community. Most finance professionals associate the term with environmental reporting, disclosing CO2 footprint and similar indicators. But there is another, better fitting meaning to Sustainability: the ability to continue for a long time.

On the one hand it is about the impact the company has on society at large, including topics such as business ethics, pollution, equal pay and data privacy. On the other hand, it is about the impact the environment and society have on the company, including topics such as resource scarcity, ageing population, global warming, corruption, and laws & legislations. Companies need to understand how these two perspectives impact its ability to create value over time, what risks and opportunities need managing, and how capital should be allocated considering the trade off between short term profitability and long term viability.

According to research done by Gartner, 85% of investors considered ESG factors in their investments in 2020. Overall, investors consider ESG investments safer and more stable bets. Companies that improve their ESG performance will also tend to have a reduced compliance burden, see higher levels of employee satisfaction, and find talent more easily, in addition to being a less likely target for shareholder activism. Also, companies can expect a lower cost of capital due to a lower risk profile. Next to these benefits, there is also a compliance element: the European Commission adopted a proposal for ESG reporting to become mandatory as from 2023 onwards.