ESG reporting: Making the societal impacts of businesses transparent
date: 15/12/2016
The ambition of the Beyond GDP initiative is to promote measures of well-being by providing decision makers with relevant information on economic and socio-environmental aspects. Specific information on different dimensions is also required for business decisions at the company level. Therefore, Environmental, Social and Governance (ESG) or sustainability reporting by companies is relevant for the Beyond GDP agenda.
Over the years, a number of organisations promoting ESG reporting have been established and different approaches have been developed, such as guidelines for informed business decisions and indices of sustainable investment in capital markets.
The guidelines for the ESG reporting cover a variety of topics relevant for companies, from revenue, assets, and profits to human rights, labour, environment, and anti-corruption. Companies are offered relevant templates, training programs, and databases to assist them in fulfilling their reporting obligations. Each initiative targets different companies: the UN Global Compact and the Global Reporting Initiative (GRI) are addressed to all companies and non-businesses, whereas the OECD Guidelines for Multinational Enterprises are addressed specifically to multinational enterprises.
These initiatives also differ in other aspects. The UN Global Compact greatly values the disclosure of companies’ efforts to uphold human rights[1] but gives a great amount of freedom in the structure of reporting. The GRI is instead interested in the degree of stakeholder inclusiveness[2] and requirements to satisfy specific standards, which are more prescriptive than the OECD standards.
The recently established Corporate Reporting Dialogue (the Dialogue) offers these organizations a platform for discussion in order to reach greater coherence, consistency, and comparability. It also provides an overview of their purpose, scope, and content in a ‘Landscape Map’. The ISO 26000 introduced by the International Organization for Standardization (ISO) provides guidance on harmonized concepts, terms, and definitions for ESG reporting.
ESG indexes, such as the Dow Jones Sustainability Indices, the FTSE4Good Index Series, and the MSCI ESG Indexes, rank companies' performances on a wide variety of issues. This stimulates competition among companies to devote more attention to the impacts of their business practices and enables investors to take those practices into account in their investment decisions. Very often companies have to follow the reporting standards or principles of the Global Compact of the Global Reporting Initiative or other standards for an inclusion into the sustainability indices of the second group.
Figure 1: Organisational overview
In recent years, policies have been designed to strengthen transparency in business practices. The European Parliament and the Council of the European Union's Directive 2014/95/EU on disclosure of non-financial and diversity information requires companies with more than 500 employees to disclose their policies on environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity in the board of directors. Companies may rely on recognized international frameworks like the UN Global Compact, the GRI, the OECD Guidelines for Multinational Enterprises, and ISO 26000. Member-states are required to implement the laws, regulations, and administrative provisions in compliance with Directive 2014/95/EU by 6 December 2016. The European Commission's non-binding guidelines for reporting on non-financial information are expected to be published in spring 2017.
Furthermore, goal 12.6 of the UN Sustainable Development Goals encourages companies, especially large and multinational companies, to incorporate sustainability information in their reporting. The Sustainable Development Goals Fund was established in 2014 to help to achieve these goals by bringing together UN agencies, national governments, academia, civil society, and business in joint programmes aimed at supporting sustainable development. On 11 November 2016, the Sustainable Development Goals Fund in co-operation with its Private Sector Advisory Group and the UN Global Compact published the report Universality and the SDGs: A business perspective. This report analyses some of the main issues that businesses face if they want to integrate and implement the Sustainable Development Goals in their management practices.
It is also relevant for all ESG reporting initiatives to cover environmental and social impacts which do not have a strong link to future profits and in which investors might be less interested. Not taking into account the climate change implications of investment decisions now could lead to severe asset devaluations in carbon intensive industries in the future. Concerning other social and environmental impacts, this link to future profits might be less direct or relevant. Nevertheless, legislation should ensure that all environmental and social aspects are taken into account in ESG reporting and decision-making.