ESG Reporting: the Journey to International Reporting Directive
ESG reporting: the journey to international standard
ESG is a non-financial investment index which allows investors to invest responsibly. Released by MSCI, an American finance company specializing in investment indexes, in 1990, this index offered an alternative method of analyzing investment opportunities quickly gained popularity. Now with current trends, there is a greater understanding of the need for non-financial ESG data. Furthermore, the decision by the European Commission to adopt the CSRD (corporate sustainability reporting directive) concretes ESG data as a key metric for the future.
Meaning of ESG?
Environmental, social, and governance metrics make up an ESG rating.
Environmental metrics measure the sustainability efforts of a company. This includes the use of renewable energy in offices, the use of resources in the construction industry, and the CO2 emissions caused by logistics.
Social metrics look at the diversity and inclusion statistics and how the company meets its social responsibilities. This metric measures inclusion in the workforce and the treatment of customers. This metric also assesses a company’s social responsibility, including charitable donations and local community projects.
Governance data analyses how the company is structured and run. This metric considers voting rights and share structure of large corporations at board level and how this filters down. A key point on ESG data is that it is industry specific. The construction industry relies on metrics such as time off work for health and safety comparisons while technology firms are rated on data security.
In the beginning
Turning back to 1990, MSCI launched a new investing index. This offered a different approach to the traditional year-end reports. The MCSI KLD 400 Social index was the first socially responsible investing index. Investors were able to invest in alignment with their own environmental, social, and governance (ESG) values. ESG data started out as a niche non-financial investment statistic but has grown in popularity for several reasons.
Rise in popularity over the last few years
The last few years have highlighted a need for sustainable and responsible investing. The pandemic has shown us the true effects on the environment and action groups like Extinction Rebellion have been at the forefront of changing our opinions on climate change. Furthermore, the protests seen by organizations such as Black Lives Matter have shown the need to invest responsibly. As a result, investor sentiments have changed and a higher emphasis is placed on the social and governance metrics.
Journey to reporting standard: the corporate sustainability and reporting directive (CSRD)
The corporate sustainability and reporting directive (CSRD) accepted by the European Commission extends the existing reporting framework to affect more companies with the inclusion of environmental reporting. The ESG extension is designed to report the environmentally sustainable economic activities of the entity to governing bodies, including the enforcement of auditing these figures. The CSRD is to be implemented from the 1st of January 2024 for the 2023 Financial Year.
Non-financial reporting can be a way to force companies to think about their ESG values. With data being publicly available, the hope is that companies will act towards a more sustainable future. In the UK, the gender pay gap has been a mandatory report since 2017 for companies with over 250 employees. A recent article by LSE in March 2021 has shown that the pay gap has decreased as a result. The hope is that CSRD will have a similar effect but on a much larger scale.
More information on reporting possibilities
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