ESG Data: An Investor’s Crystal Ball to Successful Businesses?

On March 6, 2024, the U.S. Securities and Exchange Commission (“SEC”) passed a final rule requiring applicants to include climate-related disclosures within their registration statements and annual reports. (Deloitte). This rule includes initial public offerings (“IPOs”) and will go into effect for annual reports ending on December 31, 2025. Id. ESG reporting is a system that provides key information to stakeholders about business operations which relate to the “environmental, social and governance (ESG) areas of the business.” (Tom Krantz & Alexandra Jonker, IBM). This post discusses what ESG reporting is and why it is relevant, how companies have approached reporting on ESG matters, and the positives and negatives of ESG reporting.

ESG reporting covers a wide variety of topics. Environmental metrics include issues such as pollution and carbon emissions. Id. Social metrics cover issues including diversity and human rights, while governance metrics cover issues such as security and fraud. Id. The purpose of ESG reporting is to compare how a company’s ESG initiatives compete with industry targets. Id.

ESG reporting is relevant because businesses are under high pressure from stakeholders. Id. These stakeholders include “customers, employees, communities, the environment, and suppliers—in addition to shareholders.” (Ira Kay, et al., Harvard Law School). Global C-suite and senior executives equally play a significant role in this high-pressure environment. (Stuart, Jackson, Forbes). Stakeholder involvement is crucial because, through responses to ESG reporting, companies gather the perspectives of all the relevant groups and individuals. (Jenny Hutagaol, LinkedIn). These perspectives lead to trust, accountability, and stronger strategies. Id.

Specifically, stakeholders seek ESG metrics to determine whether companies are worthy investments and whether there are shared values between the stakeholder and the company. (Tom Krantz & Alexandra Jonker, IBM). Such shared values include climate change and Corporate Social Responsibility (“CSR”). Id. According to SEC Chair Gary Gensler, the final rule will benefit stakeholders by providing them with reliable and useful information, and “issuers with clear reporting requirements.” (Deloitte). 

As a result, stakeholders universally see ESG as a ticket to analyzing a company’s future. (PWC). It is no surprise then that “78% of CEOs globally say their companies have innovated new, climate-friendly products, services or technologies or have plans to do so soon.” Id. Companies are approaching reporting on ESG matters by preparing and adapting to the new changes. (Andy Marks, The Wall Street Journal). In fact, “[v]irtually all (99%) of respondents report they are preparing for potential increases in sustainability requirements and 77% are creating new roles and responsibilities as a result.” Id.

To determine a company's success, every company is given an ESG score. (Tom Krantz & Alexandra Jonker, IBM). Typically, higher scores are given to companies that have “more robust ESG reports” and lower scores are given to companies who do not “showcase their ESG performance.” Id. There are multiple frameworks, such as Benchmark ESG and Regulatory ESG, that assist companies in determining which ESG topics to focus on. Id.

Barron’s, a financial news outlet, found that companies think of ESG reporting favorably but equally agree that ESG reporting is difficult and “a big pain.” (Evie Liu, Barron’s). Moreover, a new survey revealed that 40% of ESG practitioners agreed quantifying factors such as diversity is a major challenge, while 39% have struggled to comply with ESG frameworks and standards. Id. The difficulties further stem from the fact that ESG reporting requires a lot of human resources that many companies do not have available. Id. Opponents also argue that ESG can lead to limited “investment options or reduce returns” for retirement investments. (Chris Carosa, Forbes). For Global C-suite and senior executives, the difficulties of ESG reporting are balancing the “short-term financial performance with long-term sustainability investment.” (Stuart Jackson, Forbes).

However, “the investment industry, investors, climate advocates and Democrats” are supportive of ESG reporting. (Chris Carosa, Forbes). Among the many reasons for this support is that individuals favor ESG reporting because of the risk management opportunity and the ability to use finance as a means to prevent climate disasters. Id. Research has suggested that relying on ESG data to form investment decisions “can lead to better investment outcomes.” Id. For example, companies that have relied on sustainability have outperformed companies who have not relied on sustainability “in terms of stock price and profitability.” Id.

Generally, the ESG reports completed have shown progress toward more sustainability. 51% of respondents expressed that the top three business benefits offered by ESG reporting are “greater efficiencies, reduced risk, and enhanced trust with stakeholders.” (Andy Marks, The Wall Street Journal). Likewise, brand reputation and enhancement, talent attraction, and retention are among the “top business outcome[s] respondents expect to see from enhanced ESG reporting.” Id. Overall, this demonstrates that ESG reporting affects public perceptions of these companies. Id.

In conclusion, businesses are rapidly making considerable strides, including advances in sustainability efforts and enhanced trust with stakeholders, due to ESG reporting. These strides beg the question of what price is to be paid for these successes. The answer is simple. The numerous advantages of ESG reporting easily surpass the challenges that come with ESG reporting. For those who wish to look into a crystal ball to see the future, ESG reporting might provide that glimpse into what lies ahead for a company.

As for the challenge of human resources, I recommend that companies develop ESG specific roles within their company. For companies that don’t have a robust human resource team, investing in a consultant is sufficient for accomplishing ESG reporting. (Veriforce). The balance concern that Global C-suite and senior executives express can be resolved by setting realistic goals. Likewise, having an ESG team that is highly organized and constantly communicates with each other will assist in resolving the balance concern. In the meantime, businesses should stay patient and driven because the benefits of ESG reporting will likely prove remarkable.