What is ESG reporting?
ESG stands for environmental, social and governance. The ESG factors relate to the non-financial aspects of a business that go beyond the traditional financial indicators.
- The ESG ‘E’ pillar includes all types of protection of the climate and the environment as well as the reduction of greenhouse gas emissions, energy efficiency and the conservation of resources.
- ‘S’ relates to a company’s relationships with its employees, customers, suppliers and society. This covers various subject areas, such as, working conditions, human rights, diversity and inclusion.
- The ‘G’ pillar describes topics such as corporate values or management and monitoring processes as well as shareholders’ rights and business ethics.
The ESG reporting process helps companies to measure their performance in the area of sustainability and to monitor and publish this. Companies are thus able to create transparency and make it possible for stakeholders, such as, investors, customers, employees and the public to understand the company’s sustainability achievements.
Key Performance Indicators (KPI)
The tools that are used to judge ESG factors are KPIs (key performance indicators). These are measurable indicators that can track and evaluate the progress and performance of a company or a project. These are specific indicators for the purpose of identifying and monitoring important objectives and success factors. These can likewise be allocated to the three pillars of ESG reporting.
Important indicators are:
(1) Environmental, e.g.:
- water consumption per unit of output
- energy consumption per square metre of surface
- amount of waste per unit of output
(2) Social, e.g.:
- employee satisfaction
- equality of opportunity and diversity
- investment in staff development
(3) Governance, e.g.:
- transparency of corporate reporting
- effectiveness of the internal control systems
- industry benchmarking
KPIs can vary depending on the industry, company size and geographical location. There is thus no specific system for preparing an ESG report. Companies normally select those KPIs that best suit their objectives, their strategy and their focus.
Women’s Career Index (FKI)
A topic that is increasingly growing in importance is equality of opportunity, in particular, equality between men and women. A tool for measuring the performance in this respect is the Women’s Career Index (FKI). This index serves as a measurement tool that can be used to document equality of opportunity between the sexes in relation to career opportunities.
The FKI is based on an in-depth analysis of the factors that impact the working conditions for women. These include, for example, fair compensation, the percentage of women in leadership positions as well as the work and family life balance. These indicators make it possible to use the index to consider the situation with regard to gender equality in a nuanced way in various industries. The FKI draws attention to existing imbalances and encourages companies as well as policy makers to take measures to promote equal opportunities in professional life. Companies use the index to review their own equality policies and to find potential improvements in order to create an inclusive workplace for all employees.
The analysis of the FKI that is described here is based on a standardised questionnaire that is suitable for all companies in all industries and of every size. The standardised evaluation mechanism means that a generally valid reference value is generated. The questionnaire enables companies to collect specific information on gender equality at their organisations. The evaluation mechanism scores these data and generates a reference value that allows companies to assess their progress as regards the promotion of equal opportunities and to compare this with other companies. On the basis of these objective and measurable results that the FKI provides, companies that use it are able to
- promote diversity and inclusion in their workplace,
- make better use of the potential of their female employees and, thus,
- create a fairer workplace.
Moreover, using the FKI makes companies more attractive employers for both excellent women as well as men. The FKI demonstrates a commitment to equality of opportunity and equal treatment and indicates to potential employees that the company provides an inclusive and diverse workplace. This can help to attract qualified skilled personnel and to expand the talent pool. Furthermore, the FKI can boost the confidence of employees within the organisation and promote their satisfaction and this can have a positive effect on the retention and motivation of the employees. Using the FKI thus enables companies to position themselves as trendsetters in the terms of equal opportunities and, as a result, gain a competitive advantage in the job market.
The benefits of good ESG reporting
The recruitment, selection and development of excellent skilled personnel is an essential and forward-looking task for every company. By implementing ESG reporting a company will be able to demonstrate that it is taking its responsibility with respect to the environment, society and governance seriously and this can lead to a positive perception as a result of building a sustainable corporate image. Furthermore, publishing ESG data and initiatives enables companies to gain the interest and support of sustainably-oriented investors. For companies, this can open up access to capital markets and financing alternatives because more and more investors wish to specifically invest in sustainability.
Moreover, the innovation rate can be boosted by ESG reporting because it encourages the identification of new business opportunities and sustainable solutions. Companies can use analysis and data to discover trends and potentials and align their business strategies with longterm and sustainable business models that aim not just at economic success but also at having a positive impact on society and the environment.
History & Outlook
In 2014, the EU introduced CSR (Corporate Social Responsibility) guidelines for the first time. These specified that, besides financial information, non-financial information also had to be included in the reports of corporations.
Since 2017, these CSR guidelines have had to be applied by capital market-oriented companies with more than 500 employees, total assets of more than €20m, or annual net turnover of more than €40m. Under the guidelines, companies are required to report on environmental matters, social conditions and diversity in the business. This report has to consist of a comprehensive description of the environmental impacts, the measures put in place to reduce the company’s ecological footprint as well as the initiatives to promote social responsibility and equal opportunities.
Since 2021, the EU has been working on reforming these guidelines so that even more companies will have to publish non-financial reports. Under the CSRD (Corporate Sustainability Reporting Directive), starting from the 2023 financial year, medium-sized enterprises with a stock market listing and over 250 employees as well as companies from third countries that are listed on a stock market in the EU will now also have to comply with ESG reporting requirements and report on their sustainability activities.
Please note: The EU is convinced that the sustainability reporting requirement is not just of societal relevance, but also offers added value for companies.