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Repercussions of ESG reporting failures

Updated: Jul 4, 2023

The COVID-19 pandemic has instilled the inclination towards conscious consumerism. Companies across the globe are fighting a competitive battle. In recent times, the focus has shifted to adopting methods focused on reducing environmental impact, improving social outcomes, and building better governance structures. Hence, companies are now focussing on investing in ESG.

Key Takeaways

· According to Bloomberg Intelligence, global ESG assets will reach $50 trillion by 2025.

· Investors are investing in companies that are conscious of the environment and its associates and create a strong governance structure.

· ESG reporting plays a significant role in garnering the attention of investors.

· ESG reporting failures cast aspersions on the name and brand image of the organization.

Exploring more about ESG

The term ESG stands for environmental, social and, governance. As a part of this initiative, organizations are now investing in technologies and adopting operations that help them achieve organizational goals while serving the environment.

Furthermore, investors have become keener to invest in socially responsible companies. Most investors believe that the company with strong ESG ratings are financially more successful in the long run.

The three pillars of ESG are:

· Environment – It covers the impact of the organization on the environment.

· Social – It covers the impact of the organization on its staff, end-user, and stakeholders.

· Governance – It showcases how transparently an organization is working.

ESG report is a sustainability report published by the organization showcasing the best step forward for creating positive environmental, social, and governance (ESG) impacts. This report convinces the consumers and the stakeholders that the company’s actions are sincere.

ESG Reporting

Who is responsible for ESG reporting?

While ESG has become a global phenomenon, its popularity is also rising in India. In fact, India became the first nation to mandate CSR with the Companies Act of 2013. The country has introduced new ESG reporting requirements for the top 1000 listed companies. The business Responsibility and Sustainability Report (BRSR) has been voluntary for FY 2021-22 but will be mandatory from FY 2022-23.

Why is ESG reporting of great sense to the organization?

A recent study by MSCI highlights that the company with a stronger ESG ratings have performed better than the ones with weak ESG ratings by 2.5% between 2007 to 2016. This ESG reporting also garners the attention of investors. Hence, ESG reporting has become even more significant for organizations.

Several reasons make ESG reporting paramount for organizations:

· Investors are keen to make socially responsible investment

· Companies with stronger ESG are financially successful

· The jobseekers are also willing to work for companies with strong ESG practices

· Stronger ESG also improves the reputation of the organization.

· The aggregate ESG assets are touted to exceed USD 50 trillion by 2025.

The ESG reporting framework in India

The ESG zone is witnessing an expansion in India. For 2022-23, the top 1000 companies in India will have to prepare a ‘business responsibility and sustainability report’ (or “BRSR”). This report entails an overview of the ESG disclosures of the organization. This BRSR is an annual report on the company's official website and is also presented to the shareholders.

Repercussions of ESG reporting failures

The above discussion highlights the significance of ESG reporting. Failing to comply with these parameters involves legal penalties and a bad reputation from the customer and the stakeholder.

Since regular funding is necessary for the organization to sustain itself in the market, ESG investing has become significant for the companies. These investments are not just based on financial factors but also non-financial factors like environmental, social and governance (or ESG) factors.

Poor ESG reporting can have potential repercussions:

· Difficulty in accessing capital

A low ESG score can make it more difficult for the companies to gain investors' attention. Since investors have become increasingly inclined to invest in sustainable companies that offer environmentally friendly solutions, having a lower ESG score can create a cast aspersion on the company's reputation.

· Reduced brand value

Everybody is concerned about the environment, from stakeholders to investors and end users. Hence, their prime focus is associating themselves with organizations focusing on environmental sustainability. A company with a lower ESG score can impact brand value negatively. Thus reducing its brand value.

· Difficulty attracting and retaining employees

The ESG score is not just attracting the stakeholders and the consumers but even the employees. One of the pillars of ESG is social parameters, including policies for the employees, establishing diversity and working on inclusivity. A company with a poor ESG score highlights that the organization, is not employee-centric. Thus, the attrition rate increases, and retention of employees become challenging.

Ways to improve your ESG score

· Adopting environment-friendly measures

Organizations can adopt several measures to improve their ESG score, like implementing policies and practices that improve the environment. It could be adopting environmentally friendly business operations, which have less carbon emission and improve energy efficiency.

· Work on improving social performance

The organization can improve social performance by implementing policies that help build good employee relations and community engagement.

The Bottom Line

Positive ESG reporting is a great way to communicate an organization’s focus on adopting policies and methods that favour all. Failing to report the ESG data can have a significant impact on the reputation of the company. They may face monetary penalties, reputational risk, favor, and competitive disadvantages. Hence, organizations must not ignore the significance of ESG reporting to be ahead of the competition.

Author Bio

As per, the jobs in the environmental, social, and governance (ESG) industry have witnessed a massive growth of 468% in India between April 2019 to April 2022. ESG is the need of the hour, and so is the need to have certified ESG professionals. World Development Organization is focused on providing a comprehensive learning experience. This course covers the core philosophy of ESG, its relevance, and its implication for the future. Join the bandwagon of leaders of tomorrow with expertise in ESG

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