Get answers to your most pressing questions about ESG and sustainability reporting from a subject matter expert.
We often hear that companies should produce their sustainability report for their stakeholders – but does this mean all stakeholders?
Stakeholders are those who can affect or be affected by the company’s activities.
Companies should report to those stakeholders who need the information in making decisions to interact with the company that affect its access to capital, its financial prospects, and its license to operate.
However, we do not advocate companies cater to certain stakeholders’ information needs while ignoring others. Some stakeholders will require a proper sustainability report containing comparable (standardized) and reliable (audited) material information about the company’s most important issues. Other stakeholders will best be served through other means of communications.
What distinguishes a reporting exercise from a communications exercise is that it is typically:
Reporting is not a standalone exercise or an end in itself. It’s a mechanism for accountability that is part of an effective management program.
ESG is an acronym best used as an adjective to describe topics, issues, risks, and performance of an environmental (E), social (S), or governance (G) nature.
The term “ESG” to designate environmental, social, and governance issues was first coined by a small team* at the United Nation Environment Programme Finance Initiative (UNEP FI) working in Geneva, Switzerland in 2004. It first appeared in the June 2004 report The Materiality of Social, Environmental and Corporate Governance Issues to Equity Pricing, which provided strong independent support for the thesis “that effective management of [ESG] issues will contribute to growing shareholder value [and] that they should be taken into account in fundamental financial analysis and thus investment considerations”. The term ESG was then further popularized in the October 2004 report Who Cares Wins. And the rest is history, as they say.
You can read more about it here.
(*) Paul Clements-Hunt, Jacob Malthouse, Trevor Bowden, Philip Walker, James Gifford, and Ken Maguire
From a company perspective, ESG issues are business issues that happen to be characterized as environmental, social, or governance in nature.
While the issues that matter will evolve over time as a result of societal shifts (think wearing seatbelts or smoking), most ESG issues are not new. What’s new is the explicit focus that investors, large customers, consumers, local communities, governments, and employees are placing on these issues and how much more they want to know about whether and how companies are managing them.
Not all ESG issues are material to all companies. Each company must do the work of identifying its most material ESG issues.
A material issue is one that substantively affects the company’s ability to create, preserve, or erode value over the short, medium and long term. (adapted from the IFRS Integrated Reporting Framework)
What you value, or how you define value, can vary depending on your perspective and intention.
Companies must always make the determination of what issues are material to them.
Material information is any information about the business and affairs of a company that could reasonably be expected to influence decisions that users of company reports make on the basis of those reports, which include financial statements and sustainability-related disclosures. (adapted from IFRS S1)
Users of company reports include (i) primary users of general purpose financial reporting, such as existing and potential investors, lenders and other creditors including asset managers, credit institutions, and insurance companies, and (ii) other users, such as the company’s business partners, trade unions and social partners, civil society and non-governmental organizations, governments, analysts and academics. (adapted from ESRS 1)
Value creation is a two-step process.
First, companies need to address their material ESG or sustainability-related issues to better manage risks and seize opportunities in a way that improves their operating and financial performance and minimizes their negative impacts.
Second, capital providers take this into account in establishing the forecast models and discount rates that determine market value and in making decisions that affect the company’s access to and cost of capital. Other stakeholders take this into account in making decisions that affect the company’s financial prospects, such as buying its products and services, or insuring its activities.
However, this second step doesn’t just happen. For capital providers and other stakeholders to take a company’s sustainability-related performance into account when making their decisions, companies must proactively tell them what their material ESG issues are and how they are managing them. That’s what reporting is for.
To put it bluntly, we are in the throes of a polycrisis, and the very conditions necessary to human life are threatening to disappear. (Sounds alarmist? It should.)
A web of systemic issues threatens our wellbeing, from global warming to nature and biodiversity loss, pollution, and pervasive social inequalities. We are collectively becoming aware that these issues we face are not only global in nature, but interconnected and concurrent. Interconnected, because we can’t really isolate the economic, social, and environmental dimensions of human activity. And concurrent, because we can’t hope to address these dimensions one at a time, or one after the other.
We are also collectively becoming aware that we are responsible for the situation we’re in today. This is not someone else’s problem, nor is it a particular constituent’s sole responsibility, nor will it fix itself. In other words, by our decisions and actions, governments, capital providers, companies, and consumers are contributing to climate change, biodiversity loss, pollution, wealth inequalities and growing social unrest, human rights violations, and discrimination.
If we do nothing, we are, collectively, running into a wall. Sustainability requires a system change, an ecosystem model that allows us to meet the needs of all people within the means of the planet, now and in the future. Global solutions are needed to which all constituents participate, including companies.
Corporate stakeholders are changing their expectations of how companies must manage and report on their sustainability practices, creating a paradigm shift at all levels of the organization, from governance to strategy, risk management, performance measurement, and reporting.
In the face of the systemic polycrisis we are facing, companies must play their part as responsible citizens, if for no other reason than to avoid their own ecosystem collapse.
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