ESG and Its Importance in Business

The need for transparency on sustainable and socially responsible systems in advance, as well as companies, are responsible to their multiple stakeholders like investors, customers, employees, and nongovernmental organizations NGOs that want to evaluate a company’s impact on the world. Environmental, Social, and Governance analysis and reporting can provide present perspicacity and help create a long-term advantage for stakeholders. It can significantly influence the financial metrics of a company and better apprise investment choices[1]. Most of the institutional investors investing only in companies that provide ESG performance reporting. So, Environmental, Social, and Governance (ESG) have gained increasing attention over the past few years. ESG has considerations related to analysts and investors, customers, and employees, and has grown to be a key topic of discussion in the Board.

In more details, ESG consists of three words/aspects, the first is Environmental 'E' which means the environmental principal studies companies' behavior in the usage of energy and runs their environmental impact. it considers how a company handles resources across the board. it takes factors considered are energy performance, climate change, biodiversity, Greenhouse gases emissions,  deforestation, air and water quality, and waste management. Companies that do not examine these environmental risks may suffer unexpected financial risks and investor inspection. The second is Social 'S' which means the social model studies how a company encourages its people and culture, and how that has ripple impacts on the community. it takes factors considered are inclusivity, employee engagement, gender and diversity, data protection, human rights, customer satisfaction, community relations, privacy,  labor standards. The third is Governance 'G' which considers a company’s internal system of controls, practices, how an organization stays ahead of violations, and the company procedures. It guarantees transparency and industry best practices and includes conversations with regulators. it takes factors considered are the company’s leadership, board composition, audit committee structure, internal controls, executive compensation, and shareholder rights, lobbying, political contributions, bribery and corruption, and whistleblower programs.

ESG helps to achieve the quality of the relationship between internal and external shareholders in a company, which may dictate the company's ability to manage risks and opportunities. as well, effective stakeholder management also supports crisis response and business continuity planning. in other words, ESG makes good business sense between stakeholder welfare and corporate profitability. As a result, there are many companies that combine their ESG reporting in their annual reporting to show how sustainability is embedded in their business, which has affected a massive surge in ESG reporting in the past few years. In addition to increasing global regulations regarding corporate ESG data reporting and still it is voluntary in most countries all over the world. Companies that have an influential ESG performance have demonstrated higher earnings on their investments, lower risks, and better resiliency when in a crisis.

ESG has a significant positive influence on fundamental business issues related to the long-term success of any company across industries include:

• enhance corporate reputation and enhance customer and investor acquisition. where increase stakeholder trust equals better corporate reputation.
• corporate risk reduction and reduction disruptions and losses also mitigate risk to the enterprise.
• corporate opportunity management and greater workforce productivity and organization resilience. also, supports the identification of new markets, customers, and products and services.
• diversity in culture and intrinsic value and identification of new markets and customers, products and services, and revenue streams.
• Increase organizational resiliency, anticipates, and adapts to technological, customer, and regulatory changes.
• Increase workforce productivity, Engage, and empowers employees, increase retention, and attract the best talent.

The transparency in ESG reports will be a key focus for companies in 2021 and ahead. Where investors are frequently thinking about ESG issues to improve manage investment risks. There are many expectations of increasing the ESG-mandated assets in the United States to comprise 50% of all professionally maintained investments by 2025 according to The Deloitte Center for Financial Services[2]. ESG performance enhancements and reports show investors how a company decreases risks and produces sustainable long-term financial profits. Furthermore, companies that do not present these reports show a lack of transparency and concerned investors may overlook them as potential investments.

Although the demand for ESG reporting was increased,  there are lies a significant knowledge gap between ESG information and supply (the demand and supply) this gap is constrained by many factors e.g., diversifying ESG reporting standards and frameworks, nonmandatory reporting regimes, and steep costs to collect and report data. These can impede the efforts to advance higher-quality data to investors to notify their decisions. as a result,  companies can work with experts to develop and include ESG strategies into their overall review. Furthermore, preparing an ESG report may be challenging, as it must meet the specifications of the reporting standards. As well, organizations need to identify how to communicate related information and what ESG topics and indicators to report[3].

Reference.

[1] Sphera, What Is ESG Reporting, and Why Is It Important? https://sphera.com/glossary/what-is-esg-reporting-and-why-is-it-important/

[2] Advancing environmental, social, and governance investing, https://www2.deloitte.com/us/en/insights/industry/financial-services/esg-investing-performance.html

[3] ESG reporting, Boards can lead the way on ESG. We share the why, what, and how of effectively overseeing ESG, https://www.pwc.com/sk/en/environmental-social-and-corporate-governance-esg/esg-reporting.html