Exploring “Environmental, Social and Governance (ESG) Reporting”

How to support the worldwide movement to stop climate change and help make our planet a better place? If you are working from behind a screen and your product is a fairly intangible set of financial statements, saving the world is not immediately obvious.

That was approximately my starting point when contemplating ways to contribute to the good cause. Without immediately dropping the proverbial pencil to join great initiatives such as The Ocean Cleanup or invent clever tools to reduce carbon footprint, as my technical skills are somewhat limited.

Closer to my natural habitat, I ran into an area of corporate reporting that is not directly related to financial performance, although it can have huge financial impact. This type of reporting focuses on how a company is doing in terms of sustainability of its products and processes, how it engages with its stakeholders, where it stands on staff diversity and many more Environmental, Social and Governance elements. These days, this is called ESG reporting but of course existed under other names for a long time already.

Reading into this a bit more, I started to appreciate the importance of ESG reporting in the endeavour to build a better world. That won’t be a surprise to many, but an eye-opener for a pure financial reporter like myself!

The importance of ESG reporting in the endeavour to build a better world.

“By polluting the oceans, not mitigating CO₂ emissions and destroying our biodiversity, we are killing our planet. Let us face it, there is no planet B.”

Emmanuel Macron, President of France

Most will agree that climate change is one of the most urgent threats to our planet today. Being an accountant, I like to work with tangible objectives and in the climate-change discussion, a very tangible objective was set in the Paris Agreement. This agreement, endorsed by 189 countries, sets a clear long-term target: to keep the increase in global average temperature to well below 2 °C above pre-industrial levels, and to pursue efforts to limit the increase to 1.5 °C, recognizing that this would substantially reduce the risks and impacts of climate change. This should be done by reducing emissions.

In my view, ESG reporting is all about companies making visible how they are doing on matters concerning environment and society, including reduction of damaging carbon emissions and contributing to the Paris’ objectives.

ESG reporting thus provides us not only with means to monitor behavioural change by companies, but with a tool to enforce that change as well! A tool? Yes, as long as we push our investment portfolio managers, ETF issuers and pension funds to invest our money in green companies only, they will keep the pressure on reporting entities to minimize carbon footprints and to account for that transparently.

A deeper dive into the world of ESG reporting

Reading into this world of ESG reporting, I started to realize there are a lot of similarities to my world of financial reporting. To name a few:

• Investors and analysts track ESG-related KPI’s of companies, just like they do financial KPI’s
• Companies are keen to share with its stakeholders the good work they do on various ESG elements, in periodically issued reports
• In order to do so, companies apply one (or multiple) ESG reporting standards, that are not unlike IFRS or USGAAP in principle
• Assurance over companies’ ESG reporting is required from third parties, to make that reporting reliable, comparable and usable

At the same time there is turbulence in the ESG reporting world, caused by a strong demand for reliable and comparable ESG data points fuelled by a global trend of ‘green’ investing. Many regional and local ESG reporting standards have been initiated over the last years, making a comparison between companies complex and producing reports confusing and cost-inefficient.

With my fresh Finance perspective I plan to dig further into the world of ESG reporting. Over the coming weeks I will share my findings with those of you that are interested to find out how ESG data is used by analysts and fund managers, what is driving companies to report on ESG and how they do that, and how the evolution to one global reporting standard is progressing.

My objective? To support the understanding and promote the use of ESG reporting in our combat to fight climate change and make the world a better place!