The financial markets are increasingly scrutinizing the activities of businesses. This scrutiny is driven by formal guidelines, such as the Global Financial Reporting Standards (GFR) and the increased visibility of blockchain technology and its impact on business operations. The growing emphasis on risk management has resulted in more businesses re-evaluating their operating procedures. The financial community expects that companies will disclose all relevant risks, as well as measures taken to address those risks. This article highlights the top five reasons why ESG disclosure is important for your business.
Your Business Is a Part of the Natural Environment
The human population has steadily increased since the industrial revolution, and more than half of the world’s population currently resides in urban areas. This urbanization process is now creating major issues for the natural environment, including water pollution, resource shortages, and loss of biodiversity. The financial community has recognized the need for businesses to shift to more sustainable practices, and the trend toward ESG disclosure has been growing. The sustainability of your company’s operations affects the environment and society in many ways. If you choose to operate in a manner that is environmentally unsustainable, you may cause harm to people, the local environment, and other businesses.
ESG Disclosure Improves Financial Reporting
When you choose to disclose the activities of your company to investors, you have the opportunity to improve your financial reporting. Companies have long sought ways to improve their financial reports and make them more compelling for investors. This process has typically involved fluffing up certain numbers and trimming down others in an attempt to manipulate the report to make the company look better than it really is.
ESG disclosure can help improve financial reporting by reducing or eliminating the manipulation that has historically been part of accounting practices. If you disclose your company’s emissions of greenhouse gasses, water pollution, and use of toxic substances, investors will receive a much more accurate picture of your business operations. Additionally, investors will receive a clearer picture of your business’s financial health because they will have access to relevant information about your company’s environmental impact. This information can help investors understand the risks involved in your company’s operations, which can increase their confidence in the company’s long-term potential.
Investors Care About Risks From a Long-term Perspective
Investors care more than ever about the risks that companies pose to the environment, financial stability, and the health of the local community. As more investors become wary of companies’ environmental practices and financial stability, companies are starting to incorporate environmental, social, and governance (ESG) metrics into their financial reports. These metrics are not meant to replace traditional financial metrics. Instead, they are meant to provide investors with information about the company’s behavior from an ESG perspective.
Investors are placing a high value on these metrics because of their growing importance in the overall business landscape. The United Nations Environment Programme has identified the need for global action on climate change, water pollution, air pollution, biodiversity loss, and other issues. Investors are concerned that certain companies are not taking these issues seriously enough. If investors see that a company is negatively affecting the environment, the global community, or another aspect of society, they may become less willing to buy company shares. Investors care about risks from a long-term perspective because they are looking for companies with a long-term investment outlook. As a result, investors are looking for companies whose operations are not negatively affecting the environment and the global community.
Transparency Equals Trustworthiness for Business Partnerships
If your company has partnered with other organizations, such as suppliers, customers, or government agencies, disclosing the activities of your company will increase the trustworthiness of those partnerships. Transparency will improve the trust that stakeholders have in your company. Business partners can become more transparent and accountable if they are doing business with a company that is disclosing its ESG activities and impacts. This will ensure that partners are taking responsible actions and making responsible decisions.
Partners may be more likely to work with your company if they know that you are transparent about your ESG activities. These partners may choose to do business with your company even if they are not financially motivated to do so. Partnership partners may have a desire to have a positive impact on other aspects of society, such as the environment or local communities.
ESG Disclosures Are Increasingly Mandated By Law
Disclosure of your company’s ESG activities is becoming increasingly mandatory. Many governments and financial institutions now require companies to disclose their ESG activities. These requirements are most commonly found in the context of the reporting of environmental, social, and governance issues.
If your company operates in a certain industry that is experiencing government regulation, it may be required to report certain information about its operations and risks. For example, if your company operates in the energy industry, you may be required to disclose your company’s emissions of greenhouse gases and the impact of this emissions on the environment. If you operate in the transportation industry, you may be required to disclose your company’s emissions of air pollutants, such as fumes and particulate matter, and the impact of these emissions on the local community.
Bottom Line
ESG disclosure helps investors better understand the risks that your company poses to the environment, financial stability, and the health of the local community. The resulting transparency can improve trust in your company’s partnerships and make your company more likely to be selected as a partner by other organizations. These benefits are becoming increasingly common in the financial community, and they are likely to become even more prevalent in the future. The bottom line is that it is important for companies to make an effort to incorporate ESG reporting strategies into their overall business operations.