A company’s ability to positively impact social and environmental change has become an increasingly relevant consideration for businesses. Environmental, social and governance (ESG) factors cover a broad range of issues that touch on everything from company culture and employee compensation to climate impact and sourcing standards.
While traditionally absent from financial reporting, larger companies recognize the impact that ESG has on investor relations, market behavior and financial success. In fact, almost all of the Fortune Global 500 companies use a recognized framework to report on sustainability. Nearly 80% of the world’s largest companies use Global Reporting Initiative (GRI) standards, which provides transparency to consumers, investors and other stakeholders.
While public companies have been reporting on sustainability for decades, it has been historically less accessible to smaller businesses lacking the resources to invest in analysis and reporting initiatives. Luckily, B Lab has a free and widely accessible impact assessment that serves as a framework that is relevant to both large and small businesses.
Regardless of size, here are the top five reasons why sustainability reporting is relevant to every business.
1.It’s more than the environment.
While climate change was a catalyst for increased ESG reporting, social and governance factors are becoming increasingly relevant. ESG considerations can influence change faster than governments or nonprofits, and younger generations are viewing their investment dollars as an extension of personal values. In 2018, US SIF Foundation reported that investors held $11.6 trillion in assets associated with ESG criteria, up from $8.1 trillion in 2016. A TD Ameritrade survey revealed that 19% of ESG investors consider human rights as the most important factor in their decision-making.
Non-financial performance is often a leading indicator for a company’s long-term success. ESG metrics help businesses recognize when strategies need an overhaul. ESG assessments help identify what practices may be associated with future risk, even if currently working. For example, does the business outsource manufacturing to countries subject to changes in tariffs or inflating labor costs? Does management’s hiring tactics support employee retention? Traditional financial reporting fails to address many fundamentals.
3. People matter.
Today’s workforce holds their employers at a much higher standard than decades past, with working conditions, employee morale, health initiatives and overall culture held as being of the utmost importance. Sustainability reporting addresses these issues and provides insight into a company’s relative compensation, retention rates and diversity. This is not only important for attracting customers, it’s imperative for recruiting and maintaining talent. According to the Harvard Business Review and a decade long study entitled “The Happiness Advantage,” employee happiness raises sales by 37%, productivity by 31% and accuracy on tasks by 19%. The conclusion? Employee happiness is good for financial success.
4. Transparency is key.
A TD Ameritrade survey indicated that 67% of ESG investors care more about advancing social and environmental causes than an investment’s rate of return. Millennials, nearly a quarter of the U.S. population, show a particular tendency of associating with companies with a strong purpose and ethical governance standards. A 2015 Nielsen survey of 30,000 consumers in 60 countries reported that 73% of millennials are willing to pay more for sustainable goods and products. Furthermore, millennials are driving the market toward more ethically-sourced products and transparent labeling, with technology making it easier to research and stick with brands they trust.
While ESG reporting can be financially burdensome, B Lab has changed that paradigm. You don’t need to be a B Corp to use the B Lab assessment, which provides insight into tangible and relevant concepts typically absent from the financial performance conversation. These concepts can be used to benchmark and assess how a business can better align the values of the business with that of its stakeholders.
The bottom line
In addition to market differentiation and meeting consumer demand, consistently reporting on ESG helps businesses improve enterprise value — and it’s more accessible than ever. It can be done using a variety of frameworks, or even on your own terms. Consumers care about the mission and purpose of a business, and ESG metrics help share that story with the world.