This article was originally published for Forbes Agency Council.
For decades, the standard for evaluating investment opportunities and communicating with stakeholders has been annual reporting. But expectations are changing. More and more, stakeholders expect radical transparency from companies beyond financials.
As a result, environmental, social and governance (ESG) reporting is rising to the forefront. ESG reporting is quickly becoming the new annual report — an essential management tool that helps companies identify and mitigate risk, address operational inefficiencies, attract and retain talent, and strengthen their brands. It's also a tool for customers and investors to reference when making purchasing decisions and assessing risk.
For the last 25 years, I've been involved in financial, sustainability and climate reporting, and in recent years, we've helped a number of public companies develop their inaugural ESG reports and align them with their corporate and brand strategies.
The markets and top talent are following the companies that demonstrate a commitment to ESG. For leaders at mid-market or enterprise companies that haven't considered ESG reporting, I believe the time is now.
The Brand Impact Of ESG Reporting
A brand is a perceived relationship between stakeholders and a company. It's a constant dialogue, so it's essential to have open channels of communication. ESG reporting gives tangible data to the intangible asset that is a company's brand. It also allows companies to publicly align themselves with certain values that affect brand perception.
And that perception affects the bottom line. A strong brand affects margins, customer satisfaction, recruiting and purchasing decisions. According to research by LinkedIn, 71% of professionals said they would consider taking a pay cut to work at a company that aligns more with their values. In a 2019 Clutch survey, 75% of respondents said they "are likely to start shopping at a company that supports an issue they agree with," and 71% said that environmentally friendly business practices are one of a company's most important attributes — more important than price.
In short, the market rewards brands that align values with action. And the Covid-19 pandemic has amplified the spotlight on brand values. "This global pandemic has really put in pretty sharp relief the importance of how corporations treat their stakeholders, in particular their employees and their customers," observed Jon Hale, director of sustainability research at Morningstar investment research firm. "So much of even corporate value these days is based on intangible assets like your reputation."
You can nurture a positive reputation through trust and transparency. Since your brand exists in the minds of your stakeholders, you don't own it — but you can manage it. Consistent ESG reporting is effective brand management because it can cultivate trust and a bond that is difficult to break.
The Business Case For ESG Reporting
Management theorist Peter Drucker wrote, "What gets measured gets managed." ESG reporting is a proactive way for businesses to measure and manage risk. Reports assure investors, customers and other stakeholders that they are receiving complete transparency in regard to the company's operations and future objectives. They're also an effective form of accountability for forward-thinking management who want to measure values versus action over time.
Over the past decade, ESG investing has moved from a niche market to become a mainstream investment community. BlackRock CEO Larry Fink wrote in his 2020 letter to CEOs, "Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward." This is coming from the world's largest asset management firm.
The Covid-19 pandemic appears to have accelerated investments related to ESG. Companies with a commitment to ESG are attracting unprecedented amounts of cash. In the first quarter of 2020, "estimated net flows for the 314 open-end and exchange-traded sustainable funds available to U.S. investors reached $10.5 billion," according to Morningstar, "easily eclipsing the previous quarterly record set in 2019's fourth quarter."
A clear ESG strategy with consistent reporting is an important reference point for investors and stakeholders alike. Without it, companies risk losing access to capital and the top talent needed for expansion or growth.
Purpose Positively Impacts Profits
Skeptics might argue that a commitment to ESG could negatively affect profits. In fact, the opposite is true, according to recent data from industry leaders like Morningstar and BlackRock. In April, Morningstar reported that 89% of its ESG-screened indexes "outperformed their broad market equivalents in the first quarter of 2020." And according to BlackRock, "Sustainable investment strategies globally proved resilient amid the market volatility of Q1 2020."
Tie ESG reporting to tangible business goals and objectives. This allows all key stakeholders to understand the linkage between positive financial outcomes and social impact. Tying these efforts together only strengthens the bond between the company and its shareholders, employees and customers.
The Future Of ESG Reporting
ESG reporting is optional now, but it's likely only a matter of time before it becomes mandatory. The European Union has already introduced new reporting requirements that will take effect in 2021. And the U.S. Securities and Exchange Commission has begun inquiring about a similar standard for disclosures in the U.S.
"ESG is no longer a fringe concept," according to an SEC subcommittee report. "It is an integral part of the larger investment ecosystem of our modern, global, interconnected world."
This growing movement is critical to raising the bar of good corporate stewardship and improving brand trust and affinity — which, in turn, can impact the bottom line. The benefits of ESG reporting are clear: a stronger company, a stronger picture of future risk and a stronger brand. What company wouldn't want those benefits? Soon, ESG reporting may cease to be optional and become the new annual report for companies. Why wait?