Environment Social and Governance (ESG) is a tool that is used to measure sustainability and the ethical impact of investments. https://jpt.spe.org/environmental-social-and-governance-abcs-esg?gclid=EAIaIQobChMIoMSGuZSYgAMV8AcGAB2IOgECEAAYASAAEgIPDvD_BwE It is a management, decision-making, and assessment tool that helps to measure and track performance while identifying risks and opportunities. Whenever an investor seeks to make an investment, they often have a list of predetermined criteria. On a list like that, financial considerations make up the majority of the elements. Environment, Social, and Governance (ESG) helps investors to consider non-financial factors as part of their analysis process to identify risks and opportunities for growth.
ESG is a three part concept. The Environmental aspect involves conservation of the natural world. It comprises of issues of climate change and carbon emissions, air and water pollution, biodiversity, deforestation, energy efficiency and waste management. The Social aspect takes into consideration people and their relations and therefore includes, gender and diversity, human rights, labor standards, protection and privacy, and community relations. The Governance aspect involves the standards for running organizations including issues of bribery and corruption, lobbying, political contributions and board composition.
Environment Social and Governance (ESG), is an emerging issue in several regions of the world, including Kenya. Several organizations are embracing ESG practices, not only for the benefits but also because in the current market trends, ESG practice and communication are essential. The Global Risk Report 2023 by the World Economic Forum gives very interesting statistics for investors and organizations. The report identifies that the next decade will be characterized by environmental and societal crises, driven by underlying geopolitical and economic trends. “Cost of-living crisis” is ranked as the most severe global risk over the next two years, peaking in the short term. Biodiversity loss and ecosystem collapse is viewed in the report as one of the fastest deteriorating global risks over the next decade, and six environmental risks feature in the top 10 risks over the next 10 years. https://www3.weforum.org/docs/WEF_Global_Risks_Report_2023.pdf?_gl=1*xyg8uh*_up*MQ..&gclid=EAIaIQobChMIx-jQxKSYgAMVs6JaBR33OQXVEAAYAiAAEgK-_fD_BwE . This is one of the reasons organizations and investors are embracing ESG practice and reporting at a high rate.
Why is ESG Reporting Important for Your Organization?
Transparency and Accountability
Organizations are able to establish open and honest communication with their stakeholders by reporting on their ESG practices including their best efforts and their climate change initiatives. As a result of the current global threat of climate change, the majority of efforts are focused on climate action and initiatives. ESG reporting gives your company the chance to highlight the environmental impact reduction efforts you are making as a company. ESG practice and reporting is also an opportunity for you to demonstrate to the world that you are also making attempts to minimize or balance the impact that your activities have on the environment if your business or organization’s operations result in any type of environmental pollution or degradation.
Investor Confidence
Climate change risks are more prominent and costly than they have ever been. Therefore, investors do not only consider financial risks they are likely to incur in their investments but also non-financial risks. It should go without saying that any type of funding or investment requires data, and appropriate data at that. Even when we make daily, individual investments, we always want to be certain that the investment will ultimately produce the results we anticipate. ESG reports provide that kind of data for investors. They want to be able to visualize the kind of risks they are likely to face and to even take targeted steps towards mitigation of those risks. With a rightly done ESG report, an organization is able to win the confidence of an investor especially when the organization focuses on reporting issues with a significant impact on their business’s long-term sustainability. Moreover, connecting ESG performance to your organization’s financial outcomes would demonstrate how material your ESG factors are and would place you on a higher pedestal.
Brand Love
With the increasing awareness on matters of climate change and climate action, sustainability, and sustainability initiatives, there has been a gradual change in consumer behavior, especially among millennials and generation Z. Consumers want to interact with, engage with, and buy from brands and organizations that align with their beliefs and interests in sustainability. Communicating your ESG practices would definitely improve your sales and, eventually, your profits as an organization.
Opportunity for Growth
ESG reports are usually published annually and shared publicly on organizations’ websites. Making your ESG report public gives your organization the opportunity to receive feedback and positive criticism from relevant analytics. There has been an emergence of rating agencies who rate organizations’ ESG reports and give scores. This information is provided to investors or to organizations. An organization can take advantage of the feedback and see it as an opportunity for growth.
In conclusion, although ESG reporting is currently voluntary in a majority of countries in the world, it is very important to showcase your best practice, your commitment to creating a sustainable world and to driving positive change.