“ESG (Environmental, Social, and Governance) reporting has emerged as a critical consideration for European businesses and investors”

What is ESG reporting?

ESG reporting is the disclosure of a company's environmental, social, and governance (ESG) performance. It includes information about a company's environmental impact, how well it treats employees and other stakeholders, as well as its overall corporate governance practices. ESG reporting is important for businesses as investors, customers, and other stakeholders demand a more open and accountable approach to sustainability aspects of business.

Value from ESG reporting:

Companies can benefit from ESG reporting in a variety of ways, including optimized risk management, increased access to capital, improved stakeholder engagement, and positive brand perception. It can also help companies in recognizing opportunities for enhancement and guiding them toward more sustainable and responsible business practices. Overall, ESG reporting is an important tool for businesses to leverage to highlight their dedication to sustainable and ethical business practices.

The remarkable rise in ESG reporting among European companies - According to KPMG survey sustainability reporting has increased about 85% in western Europe and 72% in eastern Europe. Despite the continuing need for a common route in ESG reporting, existing standards are becoming more widely used. The survey results suggest that Global Reporting Initiative (GRI), Task Force on Climate Related Financial Disclosure (TCFD), Sustainable Development Goals (SDG) standards are the most used anchors in Europe for sustainability reporting.

The rise in sustainable financing pushes the ESG reporting - Companies are under more pressure to report their ESG performance as investors and stakeholders place a greater emphasis on sustainable finance. Investors are interested in how a company is handling risks associated with matters like diversity and inclusion, human rights, and climate change. The European Union is leading the way in this trend, with the European Commission recently implementing a sustainable finance taxonomy, which provides a classification system for environmentally sustainable economic activities. This taxonomy is intended to help investors make informed decisions while also ensuring that investments are in line with the EU's sustainability goals.

As a result, companies in the EU (European Union) seeking sustainable financing must show that they are committed to ESG principles, including disclosing on their ESG performance. This has led to a growing demand for ESG reporting frameworks and standards, which include the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). Overall, the rise of sustainable finance in the EU is putting pressure on companies to take ESG reporting seriously and be more straightforward regarding their sustainability practices and performance.

Climate change is putting demands on ESG reporting - Climate change is becoming increasingly recognized and indicating significant risks to businesses and society. The recent IPCC (Intergovernmental Panel on Climate Change) report also warns that fast but also driven action is required. Policymakers must take more meaningful action to incentivize the transition to guarantee a liveable future for all. If we do not recognize the urgency of climate change immediately, limiting global warming to 1.5 degrees Celsius will become extremely difficult.

Investors are becoming more concerned about climate change because they understand what it means for businesses and the possibility of a structural credit crunch to the economy. According to the 2020 EY Climate Change and Sustainability Services institutional Investor survey, ESG performance plays a vital role in investors decision making, with the majority of those surveyed (98%) indicating a transition toward a more disciplined and stringent approach to evaluating companies’ nonfinancial performance disclosures either formally or informally. Considering the present conditions, it is unavoidable that European businesses report their ESG performance to combat climate change.

The EU is gearing up to implement new and stringent reporting standards - ESG reporting will become more transparent and accountable as a result of the strict ESG standards that European regulators are adopting. Companies covered by the Corporate Sustainability Reporting Directive (CSRD) are required to align their reporting with the new mandatory European Sustainability Reporting Standards (ESRS) released by the EU in November 2022 mandating companies operating business in the EU to fully disclose and report on environmental, social, and governance issues from the year of 2024. It will be necessary for the approximately 50.000 companies who operate in EU-regulated markets to align their reporting to the ESRS.

The ongoing pressure for ESG reporting and the gaps that businesses face - However, when it comes to ESG reporting, businesses face several technological and data aggregation challenges. According to a survey conducted by Worldfavor to determine what challenges companies face, most of them admitted to having difficulties collecting data, inadequate data quality, data management and insight generation time constraints. 58% of businesses acknowledge that their current working methods are inefficient. To overcome these barriers, businesses may need to engage in technology infrastructure, systems for organizing data, and professionals with the necessary skills and expertise to capture and report on ESG data.