What is ESG – and Why is it Important?

ESG Forest

Environmental, social and governance (ESG) reporting is a critical tool for telling a company’s sustainability story in a transparent and compelling way. Here are some keys to getting it right and maximizing business impact.

Elevating ESG reporting as a business priority

Gathering and sharing information about ESG topics helps organizations identify and communicate their impact on the environment and society – key details that a growing list of stakeholders demand. Investors, customers, regulators, NGOs, prospective employees and consumers all have heightened expectations for greater transparency about a range of ESG topics. 

The growing focus on ESG issues – especially climate-related risks and actions – has made ESG a mainstream business priority. Today, ESG represents a broader category than previous corporate social responsibility (CSR) communications. The evolution to ESG reporting now requires a more integrated, sophisticated and data-driven approach to address major topics stakeholders are caring more about. 

ESG topics cover every area of an organization’s sustainability and social responsibility efforts, including:

  • Environmental: carbon emissions, energy use, water stewardship, air quality, waste, biodiversity and natural resource conservation
  • Social: diversity, equity and inclusion (DEI), employee safety, human rights, labor practices, community involvement, product safety and data privacy
  • Governance: board diversity, business ethics, conflicts of interest, sustainability leadership, transparency and assurance of progress metrics

Adapting to increasing scrutiny, evolving regulations and frameworks

Once limited to a company’s CSR efforts, information about ESG topics is increasingly included in financial reports and company scorecards, requiring increased coordination inside an organization to meet expectations for additional levels of data assurance. 

While formal reporting across all ESG topics is still voluntary in the U.S., soon companies will be required to comply with proposed Securities and Exchange Commission (SEC) disclosure regulations, which could be finalized by the end of 2022. Meanwhile, the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD), expected in October 2022, applies not only to EU companies but also to subsidiaries of U.S. companies in the EU that meet certain criteria.  

In the meantime, those tasked with ESG reporting are relying on a patchwork of existing sustainability frameworks to determine how to best convey their progress – a familiar list of acronyms including CDP, GRI, SASB, SBTi, TCFD and the UN SDGs, to name a few. (See Part 2 of this ESG blog series for more details on navigating these frameworks.) Once released, the much anticipated International Sustainability Standards Board (ISSB) guidelines – expected by the end of March 2023 – promise a more uniform approach to reporting that weaves in much of the guidance from these existing frameworks. 

As the mix of regulations and guidance continues to evolve, stakeholders are developing a more sophisticated understanding of the impact ESG issues have both inside and outside a business. Everyone from investors to customers to prospective employees is using this information to help shape their decisions and actions in relation to a company, its products and services. Listed below are key topics every company should consider as part of their ESG strategy and reporting approach.

A company’s climate approach is critical to business success

The effects of extreme heat, drought, flooding and other climate impacts – not to mention risks to natural ecosystems – impact companies that rely on natural resources for their products and/or production processes. At the same time, a company’s impact on the environment, both directly and indirectly, is not only important to the health of the planet, but also to the health of the business as stakeholders become increasingly aware and engaged.

Research continues to show the inherent need for large-scale emissions reductions in the coming years:

  • According to the World Meteorological Organization’s United in Science 2022 report, to be in line with the 1.5°C goal of the Paris Agreement, the ambition of new emissions reduction pledges for 2030 need to be seven times higher.
  • In their initial research paper, Why Net Zero Needs Zero Deforestation Now, the UN Climate Change High-Level Climate Champions, Global Canopy, The Accountability Framework initiative, WWF and the Science Based Targets initiative found that protecting and restoring forests around the world could achieve 18% of the emissions cuts needed by 2030 to prevent catastrophic climate change.

Prioritizing DEI drives customer engagement, employee recruitment and retention

In addition to protecting the planet, long-term sustainability includes a focus on people – the workers, customers and communities who represent the “social” component of ESG. Companies must effectively address DEI considerations related to racial equity and gender equality, and weave into their businesses a broader mix of perspectives that reflect their communities, the employees they want to attract and retain, and the customers they wish to serve. 

At the same time, companies must be transparent about the steps they are taking to protect human rights and ensure safe labor practices within their operations and supply chains. 

Environmental and social sustainability inform effective management and governance

Bringing ESG to the forefront by focusing on the intersection of business, the environment and society leads to better decisions, more resilient strategies, greater transparency and stronger connections with customers, investors and employees. Embedding ESG and sustainability oversight and accountability at the highest levels of leadership helps ensure that efforts are prioritized across departments and business units and operationalized accordingly.

Moving forward on your ESG journey

Gone are the days of CSR reports that were more about generating positive PR than making an impact on business strategy. Today, companies taking a more sophisticated ESG approach are generating positive business outcomes, from attracting customers and investors to retaining the best talent. 

If you’re feeling behind, don’t be dismayed – this is a great time to get started on your ESG journey. Remember the fundamental ESG best practice is to be transparent about where you are and the challenges you face, state your goals and how you plan to get there, then report your progress consistently – what you’ve learned, where you’ve improved and what you need to do next.

And when you’re ready to start – or take a leap forward – on that journey, Pivot is here to help. Read our ESG case studies here. 

About the Authors

Cathy McCarron, Practice Leader, ESG Reporting & Sustainability Communications

Cathy brings more than 30 years of experience to the Pivot team, including running her own communications consulting business for 18 years after working in corporate and agency roles. Cathy’s broad expertise includes over a decade leading CSR and ESG reporting projects — ideal background for her role as Pivot’s ESG Reporting and Sustainability Communications Practice Leader. She is a strategic, versatile communicator adept at delivering targeted communications and reporting solutions for clients across a variety of industries.

Sara Keis, Communications Consultant

For more than 15 years, Sara has been helping organizations effectively connect and engage with audiences and stakeholders. With experience across a variety of industries, she knows how to distill complex topics into easy-to-understand messages that will inform and resonate.