How ESG reporting can contribute to improved business performance

Stakeholders such as financiers, employees, customers, non-state actors among others are demanding more transparency on how businesses conduct themselves. These players are individually and collectively interested in evaluating a business’s impact on the planet. Environmental, Social, and Governance (ESG) reporting is providing insights that are beneficial to businesses in terms of creating value for stakeholders. In general terms, ESG reporting involves disclosing data that covers business operations in spheres of environment, social and corporate governance. It gives a clear picture of how a given business is performing in regard to these spheres. It is an important tool for screening investment as it helps businesses and investors avoid entities that pose a risk due to their performance in the three areas.

Understanding ESG

To appreciate the importance of ESG reporting to a business, let us start by dissecting it. The environmental component takes into consideration how corporate or businesses use energy and manage their environment as wardens of the earth. It generally considers how a company uses resources in the course of its operation. Among the issues that are considered include how the business is addressing aspects such as climate change, greenhouse gas emissions, balancing development and environmental protection, waste management, pollution, deforestation, and other related aspects. Businesses that fail to consider the environmental risks posed by their existence or operation are not just a threat to the wellbeing of the planet but also face serious financial risks. For instance, a data centre that does not take into consideration how its operations affect the environment and take measures to reduce the negative impacts as well as enhance the positive effects contributes to damages that threaten the survival of the planet. Data centres that have taken measures to reduce their power consumption through the adoption of technologies such as liquid immersion cooling score highly on the environment as well as in social and governance aspects. Subsequently, they attract investors as well as customers.

Social and governance aspects of ESG

The social aspect of ESG analysis looks at how a business responds to the needs of the communities and cultures in areas where it operates. It considers factors such as inclusivity, diversity, gender, customer needs, privacy, human rights, and labour standards, among others. On governance parameters, business internal systems are examined. It seeks to find out how a company’s leadership, structure, among other internal elements are responsive to the needs of all stakeholders.

While ESG reporting is largely voluntary, there has been a surge in the number of businesses adopting its principles. The businesses that have adopted it as part of their operations reap huge benefits. Research has shown that there is a correlation between ESG and performance. Companies that have shown strong commitment in ESG reporting tend to perform well in the three areas as well as record higher returns on investment and lower risks. For those that do not provide the reports, there is a clear demonstration of a lack of accountability and transparency. This only works against them as they are seen as risk ventures, the kind that investors overlook when considering potential investments.