In recent years, as climate change and social issues have become more prevalent in our daily lives, people have started calling on corporations to acknowledge their effect on the environment and the role they can play to create a more equitable society. To answer this call, environmental, social, and governance (ESG) reports have become a popular way for businesses to disclose their practices not only to investors and stakeholders, but also to the general public.
ESG reports summarize an organization’s strategy on environmental, social, and governance issues. For example, a typical ESG report might include how a business plans to reduce its greenhouse gas emissions, implement new employee benefits, and diversify its board of directors. There are no requirements for organizations to publish these reports in the United States; however, world leaders have called for ESG-related disclosures to be mandatory and adhere to particular standards due to the important role businesses play in advancing sustainability practices globally.
The concept of ESG began to emerge in the 1970s, after the rise of anti-war movements and the creation of the Environmental Protection Agency. The developments at the time prompted corporations to look more closely at the purpose of their business and the role it should play in society, apart from profit maximization. In 1990, the first Socially Responsible Investing index was launched to assist investors in making environmentally and socially conscious investments. Since then, there have been several attempts to create guidelines to integrate ESG issues into business operations and standardize sustainability measurements.
The recent rise in ESG reporting has raised concerns with the Securities and Exchange Commission (SEC), as its job is to ensure that investors have reliable information about potential investments. ESG reporting is not mandatory in the United States, and there is no standard for disclosures in an ESG report. However, the SEC requires that both mandatory and voluntary disclosures be accurate and complete. In 2021, the G7 finance ministers announced their support of the Task Force on Climate-related Financial Disclosures’ recommendations to mandate climate risk reporting. Since then, the SEC has proposed amendments to its reporting forms that would establish specific ESG-related disclosure requirements. Mandatory ESG-related disclosures would provide more transparency for investors and guarantee that companies follow through on their sustainability plans.
While many corporations have utilized ESG reporting simply to attract investors and obtain more funding, ESG may be the answer to the many significant global challenges we are facing today. Companies that take the time to develop legitimate, transparent ESG plans will be more valuable in the eyes of investors while also playing a vital role in reducing greenhouse gas emissions and fighting climate change. ESG will continue to impact the way corporations develop their business plans, especially as the SEC and other global entities move for standardized, mandatory ESG disclosures.