ESG REPORTING – A CRUCIAL ASPECT OF CORPORATE RESPONSIBILITY AND SUSTAINABILITY

 ESG Reporting

Environmental, Social and Governance (‘ESG’ for short) reporting is the disclosure of non-financial information related to a company's performance and impact on environmental, social, and governance factors. This report contains three essential parts-

• Environmental – This part deals with a company's effects on the natural world. This covers things like their carbon emissions, how much energy they use, how they manage waste, what resources they consume, and any programs they have to tackle climate change or safeguard plant and animal species.  This part aims to achieve net zero emissions, drive circularity, minimize Green House Gas (‘GHG’ for short) emissions and resource depletion and partner with suppliers who follow the same practices internally.
• Social – This part looks at how a company treats its employees, customers, suppliers, and the communities where it does business. It examines things like whether the company respects human rights, has good labour practices, makes safe products, promotes diversity and inclusion, and gives back to local communities. Under this part, the goal for enterprises is to partner with suppliers that contribute to improve social equality, irrespective of the size of the business — small, minority owned or other socially relevant criteria.
• Governance - The governance piece of ESG is all about how a company is run behind the scenes. It covers stuff like the makeup of the board of directors, how much the executives get paid, whether they have good risk management practices, if they operate ethically and avoid shady business dealings, how open and honest they are, and if they take their responsibilities to employees, customers, and investors seriously.

ESG reporting allows internal and external stakeholders to measure organizational performance and progress across sustainability initiatives and diversity and inclusion areas.  ESG reporting is increasingly becoming a critical component of corporate responsibility. Organizations — whether global or local in any geography — as a result of such reporting, have been able to demonstrate their commitment to sustainability, ethical practices, and long-term value creation for all stakeholders, including customers.

Framework

More and more people want companies to be open and take responsibility, the expectation is that ESG reporting is going to become a core part of how companies report their performance and make big decisions moving forward. Some of the prominent ESG reporting frameworks include:

• Global Reporting Initiative (GRI) Standards;
• Sustainability Accounting Standards Board (SASB) Standards;
• Task Force on Climate-related Financial Disclosures (TCFD);
• United Nations Global Compact (UNGC);
• International Integrated Reporting Council (IIRC) Framework.

All the aforementioned frameworks offer enterprises the necessary guidance on reporting principles, performance indicators, and best practices, enabling companies to align their ESG reporting practices with industry standards and stakeholder expectations.

ESG Score

ESG scores and ratings are calculated based on a variety of factors, including a company's ESG disclosures, policies, initiatives, and performance metrics. The specific methodologies and weightings used to calculate these scores may vary between different rating agencies, but they generally assess a company's ESG risks, opportunities, and overall management of ESG issues. Some of the well-known ESG scores and ratings vendors are Bloomberg ESG Data, Fitch Ratings, MSCI, Refinitiv, and S&P Global Corporate Sustainability Assessment. Typically, the scores range from 0 to 100, where a score of less than 50 is considered poor and a score of more than 70 is considered good. Alternatively, there are many ESG ratings vendors that provide letter scores that may denote leader, average or laggard.

Report mandatory?

For many businesses worldwide, ESG reporting is now mandatory. As of January 1, 2025, the European Union’s Corporate Sustainability Reporting Directive (‘CSRD’ for short) applies to companies with more than 250 employees, a revenue of €50 million, and total assets of more than €25 million. Both public and private companies are included if they meet these three criteria. This applies across all industries, but for non-EU companies, the revenue requirement is €150 million (not €50 million).

In October 2023, California also passed laws that require the disclosure of climate-related risk. Starting in 2026, per California’s Climate Corporate Data Accountability Act, companies that dobusinessinCalifornia with revenues greater than $1 billion must report their emissions from all scopes annually. Also, companies doing business in California with revenues greater than $500 million must report climate-related financial risk and measures to reduce that risk, according to the Climate-Related Financial Risk Act.

This reporting is mandatory in India for the top 1,000 listed companies by market capitalization, under the Securities and Exchange Board of India's (‘SEBI’ for short), Business Responsibility and Sustainability Reporting (‘BRSR’ for short) framework, starting from the 2022-23 financial year. This framework requires detailed disclosure on sustainability aspects like carbon emissions, human rights, and governance, moving beyond voluntary guidelines to enforce standardized, verifiable data to attract investment and align with global standards.

Corporate responsibility

Corporate responsibility or Corporate Social Responsibility (CSR) is a business approach where companies integrate social, environmental, and ethical concerns into their operations and stakeholder interactions, going beyond just profit to positively impact society, the planet, and their own long-term success. It's about being a good ‘corporate citizen’ by managing economic, legal, ethical, and philanthropic duties for sustainable development and stakeholder value.

Corporate responsibility is about the impact an organisation makes on society, the environment and the economy. Having an effective Corporate Responsibility programme contributes positively to all stakeholders as well as adding value for the organisation itself, and ensures it operates in a sustainable way. It is related to, but can be distinguished from, environmental, social and governance policy, which is more about how investors see the company.

Factors and mechanisms influencing corporate responsibility include legal and voluntary measures, partnerships with external agencies, and social and environmental reporting. The factsheet also outlines current debates on corporate responsibility, examining both its proponents and opponents. It ends with guidelines for introducing a corporate responsibility strategy which applies especially to employers and people professionals.

Corporate reporting

The corporate reporting landscape has become a mosaic of mandatory and voluntary disclosures under various frameworks and standard-setting initiatives – primarily focused on value creation, sustainability, and environmental, social and governance factors. Stakeholders find it difficult to rationalize the information being provided and to understand the linkage to financial information.

Sustainability

When it comes to sustainability and ESG strategies, organizations have advanced from using compostable straws to embedding sustainability into their business practices, processes, product development, operations, and strategy. Many organizations are rejigging their business models, re-organizing corporate structures, and spending substantial time, money and resources to embed sustainability into core strategies. As a result of this investment, many have come to see environmental, social, and governance reporting, not as a regulatory burden, but as a tool to attract investors and financing. Of course, companies want to do good and be ethical and responsible. But they also want to shine in the eyes of public, stand above the competition, and attract investors and financing. Reporting ESG performance in ESG reports is a way to make this happen. Before anyone can begin to prepare their processes for ESG compliance, we must build our understanding of ESG, how it different from sustainability and CSR efforts, and what it means to investors and for today’s CFOs.

Sustainability refers to a company’s relationship to the environment, where ESG extends that relationship to social responsibility and corruption. ESG is an external investment framework, or a form of metrics, that helps companies communicate their initiatives and investors assess the company’s performance and risk. On the other hand, sustainability is seen as an internal framework that guides the organization’s capital investments. In other words, sustainability is the motivation, ESG is the reported outcome.

Sustainability report in India         

The evolution of sustainability report in India is as detailed below-

• 2009 - The Ministry of Corporate Affairs issues the ‘Voluntary Guidelines on Corporate Social Responsibility’.
• 2011 - MCA issues the ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011’ and provides framework for reporting.
• 2012 - The Securities and Exchange Board of India mandates the top 100 listed companies by market capitalization to file business responsibility report (‘BRR’ for short).
• 2016 - The requirement for filing BRR is extended to the top 500 listed companies by market capitalization.
• 2017 - A SEBI circular advises that integrated reporting may be adopted on a voluntary basis from FY2018 by the top 500 companies required to prepare BRR.
• March 2019: The updated NVGs is released as the ‘National Guidelines for Responsible Business Conduct’.
• December 2019 - SEBI extends BRR requirements to the top 1000 listed companies by market capitalization from 2020.
• 2021 - The Business Responsibility and Sustainability Reporting framework is introduced to the top 1000 companies by market capitalization to voluntarily. This becomes mandatory from FY2023.
• 2023 - SEBI introduces BRSR core, which applies to the top 150 listed companies by market capitalization from FY2024.

A sustainability report is a report published by companies on the environmental, social and governance impacts of their activities. It enables addressees and users to understand more clearly the impacts of a company’s business activities on the environment and society and to assess the risks and opportunities companies face, or which are offered to them. It is a communication tool that plays an important role in convincing sceptical observers that the company’s actions are sincere.

The growing importance of sustainability reports is due to the fact that investors and other stakeholders are calling on companies to disclose more information about their sustainability activities and environmental, social, and governance strategies.

Benefits of ESG reporting

ESG reporting offers numerous benefits for organizations committed to sustainability and responsible business practices. The key benefits include the following-

1. It helps companies to comply with evolving regulatory requirements and reporting standards by which companies can avoid regulatory penalties, litigation risks, and reputational damage associated with non-compliance.
2. It provides with valuable insights into how the company is performing in key areas like environmental impact, social responsibility, and governance practices. Armed with this data, the company can make informed decisions that not only benefit the bottom line but also contribute to a more sustainable future.
3. Forward-thinking investors are drawn to companies that demonstrate a commitment to sustainability and responsible business practices. The ESG report not only makes a company a more attractive investment opportunity but also lays the foundation for long-term success and resilience in the future.
4. ESG reporting can help businesses protect and enhance their brand. By publicly disclosing the ESG performance, demonstrate transparency and accountability, earning the trust and loyalty of the customers, employees, and communities.
5. ESG reporting helps companies to identify and address potential risks that could harm its reputation or financial performance. For example, by disclosing efforts to ensure ethical supply chains and fair labour practices, one can mitigate the risk of human rights abuses and signal to stakeholders that you prioritize social responsibility. Avoiding controversies associated with environmental degradation, labour exploitation, or governance scandals is not just about protecting your bottom line – it's about upholding ethical standards and doing what's right for society and the planet.
6.  ESG reporting can be a powerful catalyst for innovation.

The ESG report is about unlocking the full potential of your business, driving positive change, and building a better world for future generations.

Challenges of ESG reporting

ESG reporting presents several challenges that companies must navigate to ensure the effectiveness and credibility of their sustainability efforts.

1. Understanding complex environmental metrics, such as carbon emissions, water usage, and biodiversity impact, requires specialized knowledge and expertise. Moreover, collecting accurate and reliable environmental data across diverse operations can be daunting.
2. Inaccurate or incomplete data can undermine the credibility of ESG reports and lead to skepticism from stakeholders.
3. Greenwashing, or the misleading portrayal of environmental initiatives, poses a significant challenge for companies engaging in ESG reporting.
4. Keeping pace with regulatory changes and understanding their implications for reporting obligations can be challenging for companies operating in multiple jurisdictions.
5. Meeting the diverse expectations of stakeholders, including investors, customers, employees, and communities, presents a significant challenge for companies engaged in ESG reporting. Stakeholders may have varying priorities and preferences regarding sustainability issues, making it challenging to prioritize initiatives and allocate resources effectively.

Though these challenges may be daunting, adhering to ESG standards and disclosure guidelines isn't merely an option—it's crucial for maintaining investor relevance and showcasing a dedication to sustainable practices.

Best practices for ESG reporting

1. Building an ESG data foundation - Integrating internal and supply chain data, leveraging technology and data analytics tools, and establishing robust data governance processes to ensure data accuracy, completeness, and reliability.
2. Achieving accuracy and consistency in ESG disclosures - Standardizing reporting methodologies, aligning ESG metrics with industry standards and guidelines, and conducting regular audits and validations to verify the accuracy and reliability of ESG data.
3. Engaging stakeholders with credibleESG reports - Adopting a stakeholder-centric approach to ESG reporting, soliciting feedback from stakeholders, and incorporating their input into ESG disclosures to ensure relevance, transparency, and accountability.

Future of ESG reporting

the future of ESG reporting is characterized by evolving regulatory landscapes, growing investor scrutiny, and advancements in digital transparency and accountability.

Key trends shaping the future of ESG reporting include:

• Predicting trends: An ever-evolving global ESG regulatory landscape: Regulatory developments, such as the adoption of international sustainability standards and enhanced climate-related disclosures, will shape the future of ESG reporting, driving greater transparency, consistency, and comparability in ESG disclosures.

• The growing influence of ESG reporting on corporate policy: ESG considerations are increasingly integrated into corporate decision-making processes, influencing strategic priorities, risk management practices, and stakeholder engagement strategies. As investors and consumers demand greater transparency and accountability, companies are embracing ESG reporting as a means of demonstrating their commitment to sustainability and responsible business practices, driving positive change, and shaping corporate policies worldwide.

• ESG reporting in the age of digital transparency and accountability: Advancements in technology, including ESG reporting software, data analytics tools, digital platforms and AI, are revolutionizing the way companies collect, analyse, and disclose ESG data. By leveraging digital technologies, companies can enhance transparency, accountability, and efficiency in ESG reporting practices, providing stakeholders with real-time access to reliable and actionable ESG information.

Conclusion

ESG reporting is valuable not only because it enables enterprises to identify risks and opportunities which may impact their long-term performance, but also it can help to improve transparency and enhance brand image of enterprises. By reporting on enterprise ESG efforts, companies can mitigate impacts from potential ESG risks, reduce waste and increase cost savings, and also ensure they are in compliance with regulatory requirements — enabling more effective strategic decision-making.

References:

1. https://www.wolterskluwer.com/en/expert-insights/the-abcs-of-esg-reporting.
2. www.google.com.
3. https://www.cipd.org/uk/knowledge/factsheets/corporate-responsibility-factsheet/.
4. https://www.ifac.org/what-we-do/speak-out-global-voice/points-view/enhancing-corporate-reporting. \
5. https://www.pwc.com/sk/en/environmental-social-and-corporate-governance-esg/esg-reporting.html.
6. https://www.sap.com/resources/esg-reporting-guide#the-benefits-of-esg-reporting.