Developed by the U.S. Securities and Exchange Commission (SEC), the Environmental, Social, and Governance (ESG) criteria is used to gauge a company’s sustainability and conduct risks. The data points that determine an organization’s sustainability are then documented in reports that are now considered mandatory. ESG reporting isn’t necessarily new, however, making these reports mandatory is!
These mandatory ESG reports are intended to convey information to prospective investors on how a company’s operations and missions are affecting society and the world as a whole.
In turn, this offers a glimpse into whether a company’s values and actions align with the investor’s own priorities and interests. That’s an important consideration because you don’t want to put your money behind a business that continues to pollute with gas-powered vehicle emissions or ignores calls for improved energy efficiency.
The SEC’s Division of Enforcement also announced on March 4, 2021, that it would be creating a 22-member task force to monitor compliance on climate and ESG-related issues.
What is ESG? How Is It Used?
The U.S. Securities and Exchange Commission (SEC) developed the Environmental, Social, and Governance (ESG). ESG factors are used to evaluate businesses on how effectively they are addressing sustainability and risk in their operations.
With these three ESG factors in mind, investors can review reports and evaluate companies in an attempt to identify the most sustainable organizations — businesses they may wish to invest in and support.
ESG risks are an increasingly critical consideration for sustainability investors. Companies are now starting to become subject to mandatory reporting. This has given rise to the development of ESG software platforms that allow companies to track, document, and report key metrics that impact their score in each of the three areas.
Individual investors can also leverage ESG software systems, such as RepRisk, to access ESG data and reports on the companies that they’ve invested in. Users can monitor individual companies or their entire portfolio, underscoring the importance of ESG and ESG reporting.
ESG and Environmental Factors
The ESG’s environmental factors are related to a company’s impact on greenhouse gas emissions, waste management, energy efficiency, pollution, climate change, and “environmental opportunities.”
These environmental factors are a key component of the SEC’s ESG formula due to the intense focus on climate change, greenhouse gas emissions, and energy efficiency, among others. In fact, the focus on these issues has influenced the development of laws and regulations that remain in place today. Think oil pipelines and refineries, Exxon Valdez-related boating/ocean regulations, the atomic energy act (ACA), the Clean Water Act (CWA), and the Clean Air Act (CAA.)
When considering ESG environmental factors, companies are required to indicate how their operations have affected the environment and global sustainability as a whole. For example, a company that manufactures windmills may be keen to demonstrate their manufacturing plant’s efficiency, while also highlighting the organization’s commitment to addressing concerns over wind farm locations. This leads us to our next point on social factors.
ESG and Social Factors
Social factors are an increasingly important part of the ESG formula. Forced labor, illegal child labor, underpaid wages, dangerous work environments — are all examples of social impacts that may result in a poor ESG social score.
Investors will also look for organizations with a positive relationship with the local community. This social factor is important because a business that is at odds with the surrounding community is far less likely to succeed long term due to the tensions that can arise. A good example of this is Boston’s Rainbow Swash controversy on an LNG storage tank:
“The mural was criticized as purportedly featuring a profile of Vietnamese Leader Ho Chi Minh’s face in its blue stripe. Kent [the artist] was a peace activist, and some believe she was protesting the Vietnam War, but Kent herself always denied embedding such a profile,” according to Wikipedia.
The controversial painting remains visible today, as the LNG company refused to have the area painted over. This has led to continued controversy in the surrounding community of Dorchester, where the nearby residents have complained for decades due to the cultural appropriation. The issue is periodically discussed in the Boston news media, resulting in continued social harm.
ESG and Governance
Governance represents a challenging aspect of ESG since it is a fairly nebulous term that encompasses the organization’s principles and rules — principles and rules that govern the company’s mission, operations, and interests.
Governance is among the more challenging metrics associated with ESG reporting. Organizations are tasked with identifying metrics that represent their impact on sustainability — metrics that are likely to resonate with prospective investors and others who are seeking to learn more about whether a company’s values, operations, and missions align with their own.
ESG Reporting Requirements
With ESG reporting becoming mandatory, companies are seeking a good solution for tracking their ESG metrics. ESG frameworks are under development, offering a data-driven approach that simplifies reporting. This will make it easier to track and report key metrics that provide insight into the organization and its operations. In turn, sustainability-focused investors have the opportunity to support businesses that align with their values.
In addition to ESG software systems, organizations can turn to custom development solutions for their enterprise resource planning (ERP) platforms. This is a data-driven strategy whereby organizations can track their activities and operations in a way that inspires confidence amongst potential investors.
An enterprise resource planning (ERP) system already aligns with ESG reporting demands. This kind of enterprise software platform serves as a centralized database for a company while also offering a digital home for all divisions within the organization. This includes:
- Financials and accounting;
- Human resources;
- Sales and procurement;
- Supply chain; and
With all of these departments pouring data into the centralized ERP database, company leaders have the ability to collect data that is extremely useful for ESG reporting purposes. In cases where the data is not already being collected, developers can step in to modify the ERP interface so it both gathers and reports the necessary data points.
Reports are a key aspect of an ERP platform, as the centralized nature of the company’s ERP database allows all data to pour into a single depository. From there, users can query the data and generate reports that can be used for ESG reporting purposes.
ERP systems also document the data that arise from a company’s operations, offering clear evidence of an organization’s commitment to a particular aspect of sustainability. This means an ERP platform is a powerful software solution that will allow companies to meet their ESG reporting mandates with relative ease.
Contact the team at iTech today to discuss the ESG reporting mandates and how the SEC’s task force will affect your company. Our team can help you develop a data-driven ESG strategy in preparation for the new reporting mandate.