Environmental, social, and governance (ESG) reporting is a report a business generates about its environmental, social, and governance impact. It’s usually done by public companies to be more transparent about the risks and opportunities it faces so that investors know their risks and opportunities. The SEC released a proposed rule on climate-related disclosures for investors which requires public companies to include information in their annual reports about climate-related risks likely to impact their businesses. Obviously, this reporting doesn’t apply to privately-held companies, but small businesses may want to think about these issues…whether or not they formalize their findings in a written report.
What is ESG?
Understand what each component of ESG is about:
- Environmental. What is the company doing about its interaction with the environment? Is it working to reduce its carbon footprint? What measures are being used to go green?
- Social. How is the company dealing with people…employees, customers, suppliers? What is the company doing for the community?
- Governance. Is there sound leadership for the company? Are there plans for the future? Are there controls (e.g., audits) to ensure things are being handled correctly?
Why is ESG important?
It’s been reported that ESG is “changing the landscape in labor and employment law.” These changes impact small employers who aren’t subject to ESG reporting but should probably consider ESG factors in their operations. Some examples:
- Environmental. Allowing employees to work from home so they don’t need to commute is a plus for the environment. Using best practices for waste management and pollution control is an important green action.
- Social. Diversity, equity, and inclusion in the workplace as well as favorable working conditions lead to a happier workforce. Also helpful for employees are training and education. For customers, consider consumer protection and fair trade practices.
- Governance. Self-monitoring of company actions and reporting this to stakeholders (e.g., employees) also helps with employee recruitment and retention. Charitable donations and community participation demonstrate a company’s involvement beyond its walls.
What’s happening with ESG reporting?
In addition to SEC attention to reporting by public companies, some states are also enacting laws that enhance ESG responses. For example, check state laws on pay transparency (a rule that denies employers the right to require employees to keep silent about their pay). Pay transparency is designed to foster equal pay for women and minorities doing the same or comparable work.
Think about the future of ESG. The Department of Labor has a rule being finalized that would allow retirement plan fiduciaries to consider ESG factors in their menu of investments. Schroders 2021 U.S. Retirement Survey found that 69% of participants in defined benefit plans (e.g., 401(k)s) would or might increase their contribution rate if an ESG option were offered and 9 out of 10 invested in ESG options if they were aware of their availability.
Also, the United Nations has a Global Compact that is a corporate sustainability initiative that calls on companies worldwide, including small businesses, to “align strategies and operations with universal principles on human rights, labour, environment, anti-corruption, and take actions that advance societal goals."
While you don’t have to generate a fancy ESG report, you can review company policies to see that they align with ones favored by the marketplace and are just good things to do.