Why Transparency and context in ESG/Sustainability Reporting are essential for staying in business?
In today´s corporate landscape, transparency, context and therefore quality emerge as the cornerstones of trust, especially in the realm of Environmental, Social, and Governance (ESG) reporting, which is decisive to obtain good ESG ratings and then, better access to new markets. Our Global ESG Monitor was born from the necessity to understand the essence of a good sustainability report, and to simplify their elaboration for our stakeholders, given its growing relevance. But why is it so relevant? Here are three reasons why you may take ESG as vital to staying in business:
- ONLY HIGH-QUALITY SUSTAINABILITY / ESG REPORTS ARE ACCEPTED FROM STAKEHOLDERS
Effective ESG reporting could be the frontier between stay in business or simply get obsolete. For a start, is pivotal in a world where investors and consumers scrutinize more and more a company’s non-financial practices. Failing to provide transparent and high-quality information poses significant risks. Investors may shy away, end-customers seek ethical practices, and businesses in the supply chain may sever ties if critical data, such as accurate CO2 emissions, is lacking.
According to IR Magazine despite the existence of an “anti ESG-movement,” none of the surveyed asset managers state that they are moving away from a responsible investing mandate. No participants surveyed plan to stop incorporating ESG considerations into their own investment decisions or expect to stop offering ESG/sustainable investment products. A private report of Dynamo, says that many LPs and GPs surveyed (82%), considers “Extremely, very or somewhat important” ESG Ratings at the hour of investing. Bloomberg projects that Global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management. Conclusion: better don´t waste time and money and take ESG seriously.
- AVIOD THE RISK OF “GREENWASHING”
A simple mistake in business communications can cost a company billions of dollars. In the case of “greenwashing”, it could get worse. Greenwashing is a deceptive communication of ESG efforts that creates a false positive public image. Our experience reviewing more than 1300 reports from > 500 of the largest companies on our planet show us some matter of concerns including the massive misuse of terms like claims to be a “zero emissions”, “zero waste” or an “ethically sourced products” company, without substantive actions or clear policies to endorse those claims. We found it year by year, and it´s transversal from great to small companies.
According to InfluenceMap the risks associated with “greenwashing” multifaceted and extend across legal, financial, and reputational dimensions. The practice of “greenwashing” poses a threat to regulatory compliance, potentially resulting in legal repercussions. Financially, companies may face negative impacts, such as loss of investor trust and potential boycotts from environmentally conscious consumers due to reputational damage. The European Commission said that , when it comes to companies making green claims, 40% of claims lack substantiation, 50% of the 230 sustainability labels are unverified, and 53% of examined environmental claims are vague, misleading, or unsubstantiated. Conclusion: the risk of “greenwashing” is present anywhere. Avoid it.
- UNDERSTAND HOW ESG RATINGS WORK IS CRUCIAL FOR YOUR COSTS OF CAPITAL
ESG Ratings are not perfect. However their impact is huge and will most likely not shrink soon. ESG-Ratings are used to build new financial products but also to define risks. Therefore, fixed-income Investors as well as normal Credit Banks will look more and more on the Results and use them at least as one factor for their pricing; even so they have a lot of gaps. The OECD launched in 2022 a report which explains that while important progress has been made to develop ESG ratings, there´s a tremendous room for improvement. It mentions various shortcomings in analysis, some of them as basic as accessibility of data. Also states that high Environmental pillar (E-pillar) scores are not correlated with factors such as reduced greenhouse gas emissions, which could make them “not a useful tool” to assess or indicate a company’s current level of short-term reduction in CO2 emissions or investment in environmental R&D and renewable energy, which finally “could limit market participants’ use of it”. Therefore, only those companies who understand the logic of ESG Rating can take action to influence them in their interest.
We took those failures very seriously and developed GEM’s methodology which involves measuring quality and transparency by consulting diverse sources, including local legislation (German Code of Commerce for German Companies as example), standard setters (such as GRI, IFRS, ESRS, TCFD, WEF, etc.), inter government organizations e.g. the United Nations or the World Bank, and our own stakeholders’ feedback. Throughout GEM AssayTM, our efforts aim to provide them with relevant information for decision-making by evaluating companies’ effective adherence to existing standards instead of creating new ones at our own or taste (which is the main failure detected by OECD).
Some ESG terms are not easy to understand by business-related people. It´s natural. Nobody can be expert in all. Our final goal is to provide companies with guidance on how to improve their reporting and enhance their sustainability practices. Through our Challenger Reports, Benchmark Reports or CSRD/ESRS Readiness Reports we offer clear, easy-to-understand information for business leaders. This empowers them to effectively navigate and respond to the risks, opportunities, and impacts of their actions and make more effective ESG reports.
Conclusion: If you are reporting on your companies ESG progress, you might as well take it seriously if you want to stay in Business.
In case you are interested in making better ESG Reports, and influence your ESG Ratings, don´t hesitate to contact us.