ESG Questions: How ESG Software Is Leading the Way

ESG reporting has ascended to prominence for enterprises due to a combination of factors. The modern investor, regulatory bodies, and informed consumers are increasingly veering towards sustainability and ethical business practices, making transparency in these areas a business imperative. Additionally, ESG reporting acts as a reputational safeguard, a channel for operational efficiency, and a magnet for both talent and capital. It encapsulates a company's ethos on tackling environmental challenges, social responsibility, and governance issues, all of which are pivotal in steering long-term resilience and sustainable business performance. This trend underscores the burgeoning alignment of business strategies with global sustainability goals, heralding a new era of conscientious business operations.

In this article we’ll cover all your questions about ESG reporting, real statistics from the top international accounting firms, and how AI will pave the way for the next level of sustainability with accurate, quantifiable data. 

Why has ESG reporting become increasingly important for enterprises today?

ESG-driven access to finance
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ESG reporting has become the cornerstone of socially conscious and climate-smart investors. According to Ernst & Young (EY), 89% of investors surveyed in the 2021 Institutional Investor Survey believed that ESG reporting should be obligatory against an international set of standards and 74% of finance leaders surveyed in the 2021 Corporate Reporting Survey desired the same. 

Without putting corporate sustainability at the forefront of your business strategy, getting access to capital is now limited. What is more, having ESG data that is measurable and tracked over time empowers investors to make informed decisions about the profitability of their investment and what the return would look like. It’s now an opportunity to invest in ESG and a risk not to. Companies with no ESG strategy are now getting left behind. 

ESG reporting tools are at the core of mandatory and voluntary reporting. It enables businesses to make strategies in the short- and long-term for topics such as profitable decarbonisation. Companies are now able to see what objectives they can change in the present moment to be able to financially sustain transitions to a more sustainable market. Using automation with integrations to input data fosters accuracy and in turn makes it simpler for companies to act on sustainability responsibly and for investors to have a confirmation of the ROI using reporting data to analyze.

Consumer trends demand sustainable goods and services
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Where money is concerned, consumer trends lead any market. A recent NielsenIQ and McKinsey joint study revealed that 78% of US consumers say a sustainable lifestyle is important to them and that 60% are willing to pay more for those goods. To quote their study, “Products making ESG-related claims averaged 28 percent cumulative growth over the past five-year period, versus 20 percent for products that made no such claims.”

This raises a question about greenwashing. As scandals surfaced of companies that were unwilling or unable to back up their eco-friendly labels, ESG reporting manifested itself at the forefront of ESG stakeholder proof. With reliable, accurate, and consistent data to back up sustainability claims, there is no denying that it isn’t the label that makes a company or product sustainable: it’s the data.

There is no need to outsource paperwork and records when ESG reporting managed software which is the most accurate tool available to manage ESG metrics. Entering data into ESG software will cut the time, energy, and expenses that were traditionally associated with ESG reporting. 

How does ESG reporting contribute to a company's long-term sustainability and profitability?

The S&P Global Sustainability Yearbook of 2023 highlighted 712 companies in its rankings. Many of those ranked as “Top 1% S&P Global ESG Score” and Yearbook criterion is capped at 10%. What these companies all have in common is their longevity, productivity, and financial reliability in their varied and international industries. 

ESG reporting serves as a bridge linking a company's sustainability initiatives to its long-term profitability. By disclosing ESG metrics, companies invite an internal review of their operational practices towards environmental, social, and governance principles. This often leads to enhanced operational efficiency, resource optimization, and innovation, all of which can reduce costs and improve profitability.

Moreover, ESG reporting strengthens stakeholder relations. Investors and consumers are increasingly inclined towards responsible businesses, and a transparent ESG report helps in building trust and loyalty among these groups. In addition, adherence to ESG standards can mitigate risks associated with regulatory penalties and reputational damage, which in turn, safeguards the company's profitability in the long run.

Lastly, aligning with global sustainability goals through ESG reporting can unveil new market opportunities, enabling companies to tap into emerging markets and consumer segments that value sustainability.

What are the key challenges companies face in ESG reporting, and how can they overcome them?

Navigating the realm of ESG reporting presents companies with a set of challenges, primarily revolving around accurate data collection, metric standardization, and adhering to evolving regulatory mandates. The task of gathering precise and comprehensive data was once daunting due to disparate data sources and the absence of standardized metrics. The regulatory landscape is also in flux, with different ESG reporting standards across various regions, adding to the complexity.

Engaging with stakeholders such as investors and employees to understand their ESG information needs can align reporting efforts more closely with stakeholder expectations. Continuous monitoring of the evolving regulatory requirements ensures compliance, while educating and training staff cultivates a culture of sustainability. 

Sustainability Reports claims in a 2022 survey, that 72% of senior executives polled didn’t feel confident in the data that was being reported.

Overcoming these hurdles calls for a multifaceted approach. Investing in AI-powered reporting tools ensures both accuracy and efficiency. Standardizing metrics by adopting internationally recognized ESG reporting frameworks like GRI or SASB fosters consistency and comparability in reporting. Leveraging Discloser, which is government-compliant with the most trusted and used reporting frameworks worldwide, utilizes AI as your partner to provide valuable guidance according to your data and streamlines the reporting process.

How do different stakeholders (investors, employees, communities) value ESG reporting?

Different stakeholders value ESG reporting for the insights it provides into a company's sustainability and ethical practices. 

Investors use ESG reporting as a tool to assess a company's long-term viability and risk management, offering a window into how well the company is poised to navigate future challenges. It reflects a company's commitment to not only financial performance but also to environmental stewardship, social responsibility, and good governance.
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Employees, on the other hand, see ESG reporting as a reflection of the company's values and its commitment to providing a positive, inclusive work environment. It often resonates with their own values, enhancing job satisfaction and retention. It’s a win-win for employers and employees when a company reports on its ESG data. The World Economic Forum says, “In the US, green jobs are expected to expand to nearly 24 million, comprising 14% of total US jobs by 2030.”

Communities and the broader society view ESG reporting as an indication of a company's commitment to social and environmental responsibility. It showcases the company’s efforts towards minimizing negative impacts and contributing positively to the community’s welfare.

Using Discloser to report on your ESG data makes it easier on stakeholders to make informed decisions about your company. 
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For a deeper dive on this topic, read our article on how The Impact of Stakeholders on ESG Practices in Private Enterprises.

How do material ESG issues affect ESG risk scores / ESG ratings?

An ESG risk rating or ESG risk score measures how well a company addresses risks and concerns related to environmental, social, and corporate governance issues in its day-to-day operations on a scale from 0 to 100 with 100 being the best. 70 is considered good while anything under 50 is considered poor. 

In 2022, The Harvard Law School Forum on Corporate Governance took a survey and they found that 88% of the investment professionals surveyed utilize third-party ESG ratings as part of their investment process.  

Issues are considered material if their presence or absence in a report are financial risks to the reporting company. Material issues are relevant to ESG risk ratings if the presence or absence of the issue causes substantial impact on the economic value of the company and its ROI. This is the reason ESG risk ratings are weighted so heavily to investors. 

There are many ESG data rating agencies and data providers such as S&P Global, Bloomberg ESG Data, Dow Jones Sustainability Indexes, and more. Here we’ll look at Sustainalytics’ ESG Risk Ratings which include 20 ESG material issues with 250 ESG indicators as an example of what the agencies are looking for in their reports. All of the rating agencies offer similarly named ESG material issues. 

What are the standard frameworks used in ESG reporting and how do they compare?

In the realm of ESG reporting, several standard frameworks assist companies in disclosing their environmental, social, and governance practices. Notably among these are the Task Force on Climate-related Financial Disclosures (TCFD), Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), ISO 14001, and the CDP (formerly Carbon Disclosure Project).

A Statista study shows reporting frameworks referenced in the stock exchange ESG guidance worldwide in 2023. The GRI framework was referenced by 96% of stock exchanges, although any international reporting framework is normally recognized by investors. In fact, most are built off of the 4 pillars of the TCFD. 

For a thorough comparison of these frameworks and how they can be leveraged for comprehensive ESG reporting, you may refer to our comparative table. 

For a more in-depth understanding and analysis, our article titled ESG Reporting Standards and Frameworks: Explained and Compared offers valuable insights.

To learn more about the frameworks integrated in Discloser, visit our frameworks page. 

What role do regulations play in shaping ESG reporting practices?

Regulations can help standardize ESG reporting frameworks and metrics, making it easier for investors and stakeholders to compare performance across companies. Compliance with ESG regulations helps companies manage risks associated with environmental and social issues, such as regulatory fines, reputational damage, and operational disruptions. Adhering to regulatory requirements demonstrates a company's commitment to responsible business practices, which can mitigate risks and improve long-term sustainability. These regulations vary by region and industry therefore making reporting practice more stringent or relaxed regarding those factors. 

Over time, regulations may be updated to reflect changing societal expectations and emerging sustainability challenges. As regulations become tighter or encompass new areas of concern, companies may adjust their ESG reporting practices accordingly, driving continuous improvement in sustainability performance.

Discloser is aligned with all government-compliant standards therefore making it simple for companies to choose the standard best for their business and using the platform to leverage the information given to generate the report.

How can companies measure the ROI of their ESG initiatives and reporting practices?

In a recent study by Kroll, an independent provider of global risk and financial advisory solutions, 13,000 publicly traded companies across various industries were surveyed and the results came in with ESG leading companies outperforming the others with annual returns of 12.9% vs 8.6% for the companies falling behind.

Companies can assess the financial impact of ESG initiatives by analyzing their effect on financial metrics such as revenue growth, cost reduction, profit margins, and shareholder returns. For example, initiatives aimed at improving energy efficiency or reducing waste may lead to cost savings, resulting in boosted financial performance.

Regarding brand reputation, this at times can be quantified by evaluating positive ESG performance leading to increased market share, higher sales, and premium pricing. How? Companies can measure the impact of their ESG efforts on brand value by conducting customer surveys, creating brand recognition studies, and making comparisons with industry peers.

Internally, companies can measure the ROI of ESG initiatives by tracking metrics such as employee turnover rates, absenteeism, job satisfaction scores, and productivity levels, if they are relative to the ESG efforts themselves.

Companies with strong ESG performance benefit from easier access to capital and lower borrowing costs due to reduced perceived risk and enhanced investor confidence. Monitoring changes in the cost of capital, credit ratings, and investor demand for ESG-linked financial products helps companies assess the financial benefits of their ESG efforts.

Discloser takes the information provided by the reporting company and uses AI to guide the process of reporting to meet government and investor standards. This mitigates the time, energy, and money of traditional reporting. 

How can companies ensure the accuracy and completeness of their ESG data?

From Deloitte’s TMT Predictions 2024, “Sales of software solutions that help companies track and report on environmental, social, and governance (ESG) metrics will likely surpass US$1 billion this year as EU and US reporting regulations—along with reporting requirements in Asia, Australia, and the United Kingdom—take effect and as more investments require ESG disclosures. Forecasts for ESG-reporting software estimate a compound annual growth rate of 19% to 30% over the next five years. Deloitte predicts the tipping point will be reached in 2024, with growth accelerating to over 30% and revenues climbing from under an estimated US$800 million in 2023 to just over US$1 billion in 2024.”

Now that the supply of precise and accurate data collection and ESG reporting software is meeting the demand, companies have little to worry about in regards to incomplete or incorrect reporting. The demand for ESG software has increased speedily these past few years because it is the most reliable way to get reporting done that is up to government standards. 

How can companies track their ESG performance against industry peers?

ESG scores and ESG reports are posted publicly in readily accessible places like company websites. Reviewing what peers are doing in your industry is helpful to see ongoing trends, risks, and opportunities to improve your processes. 

After setting viable targets and completing those efforts over time, it maps out the journey and you can compare that with your peers’ reports. 

What resources and expertise are required to develop a robust ESG reporting process?

PwC surveyed investors and what they had to say was, “A large majority, 79%, say the way a company manages ESG risks and opportunities is an important factor in their investment decision making.” With ESG being so heavily weighted, developing a robust reporting process with the correct tools is becoming more significant for the core of modern business.

It’s better to develop a robust reporting process when the strategy behind that reporting is robust. Reporting with ESG strategies in place with noteworthy targets being achieved is the key. This doesn’t happen without commitment from upper management and a team that is instrumental in the company’s efforts. 

Businesses should familiarize themselves with widely recognized ESG frameworks such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), etc. Choose the framework(s) that best align with your organization's goals and industry. With Discloser, businesses can choose any framework to report to. This makes the robust reporting process go smoother by accurately inputting information into an AI-driven reporting tool. 

Another important action to take is conducting a materiality assessment, which measures the relevance of how a certain issue affects a business entity, its success, and those potentially investing in it. This includes involving key stakeholders and evaluating what to include and disclude in the assessment based on factors that are relevant to that industry. This will be the foundation for goal-setting and determining what decisions need to be made regarding various ESG metrics.

How can companies align their ESG reporting strategy with global sustainability goals such as the UN Sustainable Development Goals (SDGs)?

In KPMG’s 2022 ‘Survey of Sustainability Reporting - Big Shifts, Small Steps, “The majority of companies [among the world’s leading 250 companies of which 96% report on ESG] report on SDGs, with 10 percent of companies reporting against all 17 SDGs. Three SDGs remain the most popular for companies: 8: Decent Work and Economic Growth; 12: Responsible Consumption and Production; and 13: Climate Action.”

Companies can begin by identifying which SDGs are most relevant to their company's operations, products, and services. Then, map their existing ESG metrics and initiatives to the corresponding SDGs. They can also prioritize the SDGs that are most material to their business and stakeholders by focusing on the areas where their company can make the most significant positive impact and where they have the most influence. Next, businesses can incorporate SDGs into their existing ESG reporting frameworks, such as the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB). This ensures that their reporting is aligned with global sustainability goals and provides a clear narrative of their contributions to the SDGs.

To establish specific targets and goals aligned with the SDGs, companies can use their data to track progress over time in an ESG reporting system like Discloser. These targets should be ambitious yet achievable and should reflect the company's commitment to advancing sustainable development. Many companies also find it valuable to collaborate with NGOs and entities in the communities in which they do operations. 

How can companies avoid greenwashing?

Companies can avoid greenwashing or accusations of it by having valuable data calculations that are reliable, accurate, and granular. This is the best way to know that companies are taking action on the targets they set and that their achievements go beyond putting a sustainable label on products. 

According to the PwC Consumer Intelligence Series of June 2, 2021, “83% of consumers think companies should be actively shaping ESG best practices.” The only way to back up ESG practice claims is with quantifiable data. When looking at statistics like in the diagram below, the level of importance on ESG is so high that data must be put at the forefront to avoid greenwashing or those accusations.

Final thoughts about ESG Questions

Developing a robust ESG strategy requires a multifaceted approach that incorporates resources, expertise, and a commitment to sustainability. By aligning ESG reporting strategies with global sustainability goals such as the UN SDGs, companies demonstrate their dedication to advancing sustainable development while also meeting the needs of stakeholders. By embracing ESG principles, companies position themselves as leaders in sustainability and drive positive change in the global economy and society.‍

Sign up for a trial with Discloser today and see firsthand how our platform streamlines ESG reporting while aligning with international sustainability goals, and drive meaningful impact. Don't miss this opportunity to revolutionize your approach to ESG.