A 2021 Morgan Stanley study revealed that 66% of millennial respondents were interested in sustainable investing, or in placing capital with companies that are not only profitable but are having a favorable environmental or social impact. Fast forward to today, and 80% of the top companies globally now report on sustainability. But just what is ESG reporting? Here is that and more.
Not too long ago, when it came to corporate sustainability, the conversation was more about removing plasticware from the cafeteria than what now occurs more than not: baking sustainability into business practices, operations, product development, and core strategies. In fact, many organizations now view environmental, social, and governance (ESG) reporting not as a regulatory duty, but as a way to lure investors.
But what is ESG reporting? It is the disclosure of ESG data with the purpose of illuminating a company’s ESG activities while boosting investor transparency and inspiring others to follow suit. In addition, reporting can demonstrate that a company is sincere about meeting its ESG objectives, and not just giving lip service.
ESG reporting is more relevant to publicly traded organizations seeking to attract investors, or to companies that need financing. What is more, strong ESG strategies are also associated with improved outcomes, according to a study by the NYU Stern Center for Sustainable Business.
Assigned by third-party providers, ESG scoring is a way to denote an organization’s likely ability to reach its ESG goals, its performance in that regard, and its risk exposure.
The scores are calculated based on certain ESG metrics, with each agency employing varying criteria. A company’s ESG score will likely be hurt if they have no ESG reporting.
The third-party providers that assign ESG score include such notables as:
In the U.S., the Securities and Exchange Commission two years ago said it would propose amendments to enhance disclosures surrounding risks and opportunities related to climate change. That is still pending.
The European Union currently has what is widely regarded as the most elaborate set of ESG regulations, established to help the region boost sustainable investing and to make measurable progress toward combating climate change. To meet goals in that regard, the EU has an established framework around robust ESG regulations.
ESG reports include data regarding the key topics of environmental, social, and governance:
This category could include, for example, what a company is doing to fight climate change and slash carbon emissions, or how the business is enhancing air and water quality. Other examples include how responsible a business is in managing its waste and using its supply chain, and whether it is preserving biodiversity.
Under the social umbrella, the basic question surrounds what a business is doing to improve lives. Information could include how involved the company is in the community, whether the organization is meeting human rights and labor standards, and the extent of employee engagement. It can also include how a business nurtures its employees and environment, and whether it offers diversity initiatives.
This generally has to do with what a company is doing to stave off corruption and ensure that its investments are sustainable. In addition to an organization’s internal controls, this category can cover the procedures, principles, and policies governing leadership, executive pay, board composition, and audit committee structure. It can also cover lobbying, shareholder rights, whistleblower programs, and political contributions.
The reports are important because they encapsulate a company’s ESG activities, both quantitatively and qualitatively, allowing investors to screen investments and choose those that align with their values. The reports create transparency, attract investors and financing, meet stakeholder demands, and respond to regulation change.
A strong ESG profile can establish value by propelling growth, slashing costs, increasing productivity, and helping to maximize investments.
The terms are often conflated, although sustainability generally pertains to an organization’s relationship to the environment. ESG, on the other hand, not only includes the environment, but social responsibility and the state of corporate governance as well.
Also, as an external investment framework, ESG helps investors gauge the company’s performance and risk. The internal framework that is sustainability, though, informs and motivates the company’s capital investments, while ESG is the reported outcome.
As part of their ESG programs, organizations can use ESG frameworks for disclosing data about their business operation’s sustainability and ethical performance. Depending on whether they are used in government, investing, or management, such frameworks offer guidance on how data is structured and prepared and what the information covers.
Frameworks are generally either of these:
These days, it is common for companies to include ESG reporting in their annual reports to demonstrate their sustainability.
While there is no universal standard (at least not yet), ESG reporting exists in the form of voluntary standards, regional reporting frameworks, and varying national laws. On an international level, G7 finance members two years ago pledged to follow the recommendation of the Taskforce on Climate-related Financial Disclosures and mandate climate reporting
ESG reporting typically involves companies on public market exchanges. However, there are ways to invest beyond equities.
Rather than having to respond to the constant ups and downs of the stock market, investors are increasingly turning to “alternatives” such as real estate and art, which are much less volatile and can provide consistent secondary returns. The leading alternative investment platform Yieldstreet, for example, helps investors create a more modern portfolio with investments previously reserved for the ultra-rich and institutions.
Such investments also serve to diversify holdings, which helps to mitigate overall risk. Diversification is crucial to successful investing.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially exceptional gains these investments presented were also limited to these groups.
To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
There is a general demand among investors for ESG data that can help them decide where to position their capital based on the organization’s relationship to the environment and how it handles its social responsibilities. Investments are also based on whether the company has good corporate ethics and treats its people well.
But remember, ESGs are generally tied to companies on the stock market, and that there are alternative ways beyond stocks to invest as well.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.