By 2025, over $53 trillion in global managed assets are estimated to fall under the Environmental, Social and Government (ESG) category. These numbers demonstrate that today’s investors are looking more critically at corporate environmental and social impacts, and that younger generations want to know they’re supporting businesses that share their values.
ESG reports help companies highlight the good work they’re doing and impress potential investors in the process. These reports also indicate a company’s health and the likelihood of long-term success in more ways than many people realize. With legislators considering a move to make ESG reporting a legal obligation and investors placing high value on this information already, it’s vital for every business leader to consider their company’s scores.
Ethics are Increasingly Important to Investors
In 2020, 85% of investors and 91% of banks considered ESG factors when making important decisions. For millennials, 49% state that they make decisions about investments based on ESG criteria. Although ethical investment concerns began in the 1960s, they’ve grown rapidly, especially as the Internet made it easier to learn about a company’s values and impact. For instance, a simple Google search will place plenty of positive and negative information about a business at a person’s fingertips.
However, ESG reporting isn’t just about making a good impression. These reports provide valuable insights into a company’s potential financial success.
ESG Reports are a Good Way to Measure Financial Risks
By detailing companies’ environmental, social and government practices, an ESG report provides investors with more than feel-good information. These reports are a strong measure of risk factors the business faces.
Some recent examples of companies facing severe consequences for actions with negative ESG impacts include:
- BP paid $29.2 billion in environmental fines
- Walmart paid $125 million for discriminating against a worker with disabilities
- Goldman Sachs paid $5.4 billion in anti-money laundering fines
A strong ESG report helps quell concerns about potential legal ramifications that can significantly impact a company’s financial health. These fines are bad enough, but the related press can do additional damage. No business wants to end up on a list of the worst companies for the environment or businesses with discriminatory practices.
Additionally, studies analyzing the relationship between positive ESG and financial performance indicate that companies with strong ESG reports tend to have more robust returns. Recent surveys show that 90% of institutional investors believe that including ESG investments in portfolios will positively impact performance.
Given the impressive connection between positive ESG reports and healthy companies, it’s no wonder investors are eager to access this data. Businesses should be ready to provide this information and improve their scores when necessary.
The Three Pillars of ESG & How to Improve Corporate Scores
The three criteria are broad topics that include many specific influences or business practices that can have far-reaching impacts. Businesses that want to achieve better ESG scores will need to focus on improving in each of the three categories.
Topics that fall into the environmental pillar may include negative impacts, like emissions or damage involved in raw material sourcing, as well as the efforts to offset any damage. Positive initiatives, including developing green buildings or cleantech, also have a place in this section to develop a complete picture of the business’s environmental impact.
Ways to Improve Scores
There is a strong focus on climate change-related impacts when it comes to the environmental pillar. Becoming carbon-neutral, reducing energy usage or identifying renewable energy alternatives are all ways to improve a score in this area.
The social pillar applies to how the company impacts the community or society at large. The manner in which the business treats its employees may fall under this umbrella, along with ways it impacts people in the supply chain and consumers.
Ways to Improve Scores
Building a diverse workforce that includes racial minorities and people with disabilities can help, especially if the business invests in those employees’ growth and success. Making accessibility a priority in the workplace and ensuring business events, meetings and marketing materials allow all employees and consumers to engage with them with equity will also prove useful. For instance, captioning live and recorded training and marketing videos will help companies become more inclusive and reach greater, diverse audiences.
The government pillar looks at corporate business practices, the board’s makeup, and company ethics. If a business’s C-suite boasts a diverse makeup and equitable pay arrangements, these factors should make their way into the government portion of the ESG report. This section can also discuss the company’s efforts to avoid corruption or unethical business practices.
Ways to Improve Scores
Self-accountability plays a major role in the governance category of ESG reports. Performing more frequent accounting audits is one possible way to improve this area. Businesses can take this a step further by ensuring their vendors, investors, board members and partners share their values.
The Future of ESG Reports and the Law
In 2021, the House passed the Corporate Governance Improvement and Investor Protection Act. The proposed law is now in the Senate. If passed, reporting on ESG factors will become law, and the Securities and Exchange Commission (SEC) will create standard measures for these reports. If the bill does not pass, it’s still possible that the SEC will make rules related to ESG reporting, although its authority to do so remains questionable.
Even in the absence of a legal mandate, ESG factors already influence investment decisions. Therefore, disclosing this information may be a practical necessity, even if it’s not a legal one.
Verbit offers accessibility solutions that improve corporate inclusivity efforts. Contact us to learn how our captioning, transcription and audio description services support many of today’s businesses and can help your company improve its ESG score.