Whilst many people felt a sense of disappointment that COP26 failed to achieve major breakthroughs on tackling climate change, it did increase awareness of the importance of Environmental, Social, and Governance (ESG) reporting.
ESG measures are now a top priority for investors seeking to assess the long-term risks associated with any business. As a result businesses, stakeholders and trade bodies are working to gain a better understanding of ESG and the financial risks associated with failing to report or act.
ESG or CSR – what’s the difference?
ESG and CSR (corporate social responsibility) are often confused or seen as interchangeable, but they are different.
ESG criteria are a set of standards that potential investors use to screen companies that they could potentially invest in. Basically it’s an evaluation of environmental, social, and governance factors that determine the long-term health and prosperity of an organisation. Usually summarised in an ESG report: ESG measures are now a top priority for investors seeking to assess the long-term risks associated with any business.
CSR is a self-regulating business model used by organisations that want to understand the impact they are having on wider society. Companies who practice CSR set out to work in ways that improve the society and the world around them. They actively make themselves more accountable to employees, stakeholders and the public.
The major difference between ESG and CSR is that CSR is an operating model that businesses choose to use, whereas ESG is a set of criteria that investors use to assess a company and determine if they are worth investing in.
Environmental, Social, and Governance: an overview
So let’s look at what falls under each element of ESG.
Environmental factors include an organisation’s environmental impact such as carbon emissions, waste disposal and recycling, raw material sourcing, emissions and pollution and any regulatory fines or prosecutions.
For the moment the environmental aspect of ESG is top of mind for most organisations, governments and stakeholders as the global community tries to keep the 1.5°C target to limit global warming alive.
Social factors cover the way an organisation looks after its people and interacts with suppliers, stakeholders and the communities in which it operates.
This covers things like pay and benefits, employee well-being and how an organisation performs on diversity, equity, and inclusion.
More broadly it also includes the level of customer protection provided, the way supplier relationships are managed and how supply chains are monitored for human rights and fair labour practices.
This evaluates how well your organisation is managed by the directors. It’s not just about meeting financial reporting requirements but also how the organisation manages its environmental and social impacts.
A typical ESG assessment would look at the compensation of executives, auditing, risk management and conflicts of interest.
Why is ESG reporting more important than ever?
ESG has become increasingly important as investors are now assessing if an organisation has a sustainable future, and also if its current activities may lead to expensive long-term liabilities such as environmental remediation.
Whilst it’s important to investors, enlightened businesses are also using ESG to benchmark themselves and the factors they need to address to ensure their future success. This requires a detailed look at multiple factors and can require a great deal of time, effort and money to uncover all the data.
But don’t be daunted: help is at hand. The ESG Foundation is a community interest company and social enterprise that offers advice and tools for getting started. There are also numerous ESG tools available online. For those wanting to go beyond ESG reporting EcoVadis is widely regarded as the leading tool for measuring the overall impact of an organisation.
At Pelican, we can also help you to prepare your ESG report and communicate your progress to stakeholders. As the winner of the ESG Consultancy of the Year 2022, our expert team is ideally placed to support you.
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