The significance of environmental, social, and governance (ESG) reporting can no longer be ignored. Once associated with public companies, ESG reporting has become increasingly relevant across industries and businesses.
Embracing ESG reporting as a strategic tool not only aligns businesses with societal expectations but also paves the way for continued company growth and long-term success.
This article explores:
- What is ESG?
- How are private companies impacted by ESG?
- What are the benefits of proactive ESG reporting?
- How to get started with ESG reporting
What Is ESG?
ESG categories—environmental, social, and governance—help your organization assess various criteria that measure a company's performance, impact, and position in a market that is increasingly focused on sustainability.
As global attitudes towards sustainability and corporate responsibility shift, private companies are realizing that embracing ESG practices can help drive an organization’s competitive advantage, strengthen operations, and mitigate risk. Stakeholders, including investors, customers, and employees, are demanding greater transparency and accountability from businesses, pushing them to integrate ESG considerations into their operations.
How Are Private Companies Impacted by ESG?
More ESG regulations seem to be focused on both public and private companies, such as the California Climate Corporate Accountability Act, Senate Bill (SB) 253. Illinois, New York, and the state of Washington are proposing similar acts (House Bill 4268, Assembly Bill A4123A, and SB-6092, respectively, that include public and private entities.
ESG initiatives impact private companies in a variety of ways.
Stakeholder Engagement
Stakeholders, including investors, customers, suppliers, and employees are increasingly valuing companies based on their ESG performance.
Investors
Investors are more likely to allocate funds to companies with strong ESG practices on the assumption that companies with high ESG ratings ultimately outperform their peers. This is particularly important for private companies that are in participating in investment funding rounds.
Customers
Customers are actively seeking out products and services from companies that prioritize sustainability and social responsibility, leading to increased brand loyalty and market share.
Suppliers
Suppliers are also aligning themselves with companies that demonstrate strong ESG performance, as they want to be associated with ethical and responsible partners.
Employees
Employees are increasingly attracted to companies that prioritize ESG as it reflects a positive work environment and a sense of purpose beyond profit.
Request for Proposals
More and more private companies are being asked about their ESG programs and reporting, including commitments to organizations like Carbon Disclosure Project (CDP) and Science Based Targets Initiative (SBTI), when responding to requests for proposals (RFPs).
Having robust ESG programs and transparent ESG reporting have become a necessity to secure work and win contracts. Clients and customers are increasingly prioritizing sustainability and social responsibility in their procurement decisions, and they expect their suppliers to align with their values.
Private companies that can demonstrate strong ESG performance and provide evidence of their commitments are more likely to stand out in competitive bidding processes, gaining a competitive advantage and increasing their chances of winning work.
Regulatory Compliance
Private companies are increasingly impacted by the evolving regulatory landscape surrounding ESG reporting and compliance. Governments and regulatory bodies worldwide are recognizing the importance of ESG factors and implementing stricter guidelines and reporting requirements.
For instance, in the context of greenhouse gas (GHG) emissions for certain ESG regulations, companies are not only expected to report their direct emissions (Scope 1) and emissions from purchased electricity (Scope 2), but also their indirect emissions from their value chains (Scope 3). This means that companies must assess and disclose the environmental impacts of their suppliers, customers, and other stakeholders within their value chains—which can include smaller private companies.
Failure to comply with these regulations can result in financial penalties and reputational damage. Private companies are increasingly investing in robust ESG reporting systems, supply chain transparency, and sustainability initiatives to ensure compliance and mitigate risks.
What Are the Benefits of Proactive ESG Reporting and Strategy?
Creating and implementing an ESG strategy and reporting on progress could provide several benefits that range from identifying risk to increasing capital.
ESG reporting can help your organization to:
Identify Risks and Opportunities
Integrating ESG factors into business operations and risk management practices allows organizations to identify risk and opportunities that are not typically captured in traditional financial analysis.
ESG reporting provides a lens in which organizations tell a complete picture of the risk and opportunities that could impact their organization from a reputational, operational, and regulatory compliance standpoint.
Companies can safeguard their operations and protect their bottom line by understanding and addressing these risks. It’s important for private companies to have a comprehensive understanding of their risk environment, as this information can help them become early adopters of solutions or gain access to funds that will enable them to be industry leaders.
Improve Access to Capital
ESG metrics have become key indicators of a company’s long-term sustainability and responsible business practices. Investors are increasingly integrating ESG considerations into their investment decisions, recognizing the potential financial risks associated with companies that neglect environmental, social, and governance impacts. ESG reporting is a way to improve access to capital by appealing to more investors.
To showcase ESG efforts, private companies should consider good governance practices to signal to investors and instill confidence, trust, and security, ultimately enhancing their ability to access capital by supporting the “G” in ESG while taking their business to the next level.
By demonstrating a commitment to sustainability and social responsibility, companies can attract socially conscious customers and differentiate themselves from competitors increasing their revenue streams.
Increase Operational Efficiency
Companies can identify opportunities to optimize resource usage, reduce waste, and improve energy efficiency by integrating ESG considerations into their operations. This proactive approach can lead to cost savings, streamlined processes, and increased productivity.
Focusing on ESG strategy has improved worker productivity and engagement while attracting and retaining top talent, as employees increasingly seek to work for companies that prioritize sustainability and social responsibility.
Support Innovation and a Competitive Edge
ESG reporting encourages companies to think creatively and find sustainable solutions to societal and environmental challenges, which can lead to the development of unique and differentiated offerings.
Integrating ESG considerations into decision-making processes can help companies enhance their brand reputation, identify new business opportunities, drive innovation, and gain a competitive edge in the market.
How to Get Started with ESG Reporting
Here’s an overview of getting started with ESG reporting in a list of steps.
Conduct a Materiality Assessment
Understand what your ESG focus areas should be.
Conduct an ESG Scan
Understand what’s already happening at your organization and create an ESG team or committee to steer ESG strategy. Ensure alignment at the board level to support resource allocation and support of company’s strategic objectives.
Align with an ESG Reporting Framework
Align with relevant ESG reporting standards to support your organization in reporting relevant information from an industry-specific and industry agnostic perspective.
Develop and Report on Progress
Based on focus areas and results of your ESG scan, develop ESG key performance indicators (KPI) in accordance with the selected ESG reporting framework. Set clear, measurable ESG KPIs aligned with the company’s strategic objectives. Implement data collection processes based on defined KPIs to report on progress.
Adjust and Improve
Based on KPI progress, you should adjust ESG strategy and initiatives to improve ESG performance.
We’re Here to Help
For guidance on developing and implementing an ESG strategy for your company, contact your Moss Adams professional.