Businesses know they need to track, monitor and report on ESG performance, writes INX Software CEO Marcus Ashby, but there are critical questions they need to resolve to do this well.
In any great social shift, change comes at different speeds. You will have innovators who start and shape the trend, rushing to seize first-mover advantages.
You have early adopters, who recognise the inevitability of change and switch early. And you have the majority who come to the creeping realisation that the world has tilted, and they need to be on the right side of the axis.
That’s where we stand as we kick off 2023 in regard to sustainability reporting. Everyone in business knows change has happened and it is time to put action into place.
The smartest companies will be ahead of the change curve. The real pain will be felt by those who wait.
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We can already see Australia’s biggest companies leading the way.
Recent research by KPMG shows 97 per cent of the ASX100 are reporting on sustainability initiatives, outperforming global averages.
Nine in 10 companies on the ASX100 say they recognise the climate as a financial risk, while 89 per cent are reporting carbon targets.
Social risks such as community engagement, safety and labour issues are also being reported — albeit without much data other than that required by safety regulators.
Some 67 per cent of the ASX100 provide commentary on the material risk of social issues as well as discussion around their approach.
With the country’s biggest companies on board, there is growing pressure for smaller firms to follow suit.
One of the biggest factors accelerating the adoption of sustainability reporting is reputation — companies with strong ESG practices are viewed favourably by consumers, investors and other stakeholders.
That results in better brand loyalty and increased interest both from investors and from so-called ‘green financiers’, with solid performance on ESG metrics often resulting in higher valuations.
The converse is also true. Companies that cannot point to a strong sustainable track record, or who lack data points to demonstrate sustainable practice, will be increasingly marked down by banks and others.
Employees are another key stakeholder in the ESG space. They increasingly demand that employers and potential employers share their environmental and social values — and can back this up with proof.
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They want more inclusive workplaces and they want employers who make their wellbeing and safety a priority.
Reporting on ESG shows a commitment to those values, which can help to attract and retain the best talent.
But while there are clear benefits to a genuine commitment to sustainability reporting, many business leaders remain unsure where to start.
While there is no one way to monitor and report ESG performance, most of the companies that we work with start by resolving a number of questions.
The first is to identify the gap that exists between your current understanding of environmental, social and governance performance and the ideal state — the level of insight, detail and reporting you want to achieve.
This process usually means assessing the reporting expectations of investors, banks, shareholders or financial backers. You need insight into what your board might want to see, and what your employees would like you to be able to share.
A second step is to decide how you will tell that story, acknowledging that ESG is a complex beast. Unlike financial reporting, which is clearly defined and seldom changes, the ESG landscape is constantly shifting, and reporting requirements are still evolving.
Will you set and report against regular metrics? Are there timeframes you need to follow or thresholds you have to meet? Again, understanding these early in the process avoids later regrets.
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For social and workforce issues, will you focus only on safety issues or focus on telling your diversity and inclusion story as well?
Finally, it helps to think about the bigger picture.
Are you seeking to report on sustainability to operate more in a way that is more environmentally responsible, or are you only meeting externally imposed demands?
Will you be transparent about your performance, even if it is subpar?
If your data indicates the need for remediation or action, who needs to see it to authorise that step?
These are not small questions, so the final advice is to consider who you want as your partner on this journey.
You might be working with complex quantitative and qualitative data points, collected in different ways on different platforms, and if you don’t have the capacity to manage this in-house, you need a partner that does.
Australia’s corporate regulator, ASIC, says momentum is building to develop effective frameworks to underpin sustainable finance, making it clear that 2023 will be the year environmental reporting hits its strides.
The same is increasingly true for workforce and social issues.
Health and safety laws now in place around the country raise the expectation that businesses do more to consider their people’s wellbeing, their mental wellness, and their psychosocial exposure to risk — as well as their physical health.
The companies that have genuine goals and plans in place to track and tell this story, rather than simply seeking to meet regulatory requirements, are likely to be the most successful.
But as in every systemic change to society, there are laggards who leave it too late. Don’t let that be the case for your business.