ESG Reporting
What Is ESG Reporting?
The term ESG reporting plays an important role in sustainability reporting and is a central component of it. The abbreviation ESG stands for Environmental Social Governance. The term therefore refers to the process in which the three areas of environmental, social and governance are measured, evaluated and presented transparently. The aim here is for companies to be able to disclose their sustainability and CSR (Corporate Social Responsibility) activities.
The term originally comes from the world of finance and is primarily used by stakeholders as a basis for decision-making. The key figures published in the report make the reports measurable and comparable.
ESG reporting is also becoming increasingly important, particularly in the software and project management sectors, in order to meet all requirements, provide stakeholders with sufficient information and also strengthen competitiveness and reputation through responsible business practices.
European Sustainability Reporting Standards (ESRS)
The first drafts of the European Sustainability Reporting Standards (ESRS) show how complex reporting can be. A total of 70 indicators are included in the drafts and assigned to the three areas.
32 of these indicators fall under the area of the environment. This means that the ESRS divides the relevant environmental topics into the following categories, among others: Climate Change, Pollution, Water and Marine Resources, Biodiversity and many more.
A further 32 key figures are assigned to the area of social issues. Here, the topics can be subdivided as follows: own workforce, workforce in the value chain, customers, end consumers and affected communities.
Governance is more about responsible business practices (focus on diversity, anti-corruption, etc.) and less about data-driven indicators. The last six indicators are assigned to this area.
These indicators also help shareholders and stakeholders to better evaluate the company. The more ESG criteria a company fulfills, the better it is ranked in the reporting.
The ESRS are binding standards for all European companies that are required to prepare ESG reporting.
Other Mandatory EU Directives
In addition to the ESRS, the CSRD (Corporate Sustainability Reporting Directive) guidelines must also be complied with, with non-financial reporting playing a particularly important role (e.g. sustainability targets, role of the Supervisory Board).
Another important EU directive is the EU Taxonomy, which contains guidelines for climate and environmentally friendly investments and tasks. The SFDR (Sustainable Finance Disclosure Regulation) also plays an important role. This requires all parties involved to disclose the sustainability of their financial products.
Who Is Obliged to Provide ESG Reporting?
ESG reporting is still voluntary for some sectors, but all capital market-oriented companies are obliged to prepare a sustainability report. This regulation is also to come into force for all large companies (such as banks, insurance companies, limited liability partnerships) from 01.01.2025.
However, such companies are only obliged to prepare a report as soon as they fulfill two of these three criteria:
- At least 250 employees
- Net turnover of at least €50 million
- Balance sheet total of at least € 250 million
The obligation to prepare a sustainability report will also apply to small and medium-sized companies from 01.01.2026 if they are capital market-oriented and meet two of the three criteria:
- At least 10 employees
- Net turnover of at least €50 million
- Balance sheet total of at least €25 million
How Does the ESG Rating Work?
Within the rating, companies are assessed on the extent to which they comply with ESG criteria. The higher the company’s rating, the better the company performs in the environmental, social and governance areas. A higher rating can in turn have a positive effect on a better reputation and helps investors and stakeholders to make better, sustainable and responsible decisions.
Challenges in ESG Reporting
One of the main challenges is the complexity and the fact that regulatory requirements are constantly changing. In recent years, regulations have become stricter and more and more have been added.
In addition, data management is also a major challenge, as a large amount of data needs to be collected and processed. It can also often be difficult to obtain accurate and reliable data. The resources required to obtain and maintain the data can also lead to very high costs, which can also be a challenge.
Furthermore, transparency can also prove to be a difficulty, as sensitive data should be communicated openly and comprehensibly without risking competitive disadvantages.
Advantages of ESG Reporting
Despite the existing challenges, the following advantages of ESG reporting can be mentioned, among others:
- Transparency: the required transparency and disclosure of social responsibility can lead to investors and customers building greater trust, thereby improving the company’s reputation.
- Increased sales: Sustainable product innovations can open up new markets and consequently not only improve the environmental footprint, but sales growth can also be achieved.
- Better risk management: Potential problems can be identified earlier and proactive measures can be taken at an early stage.
- Access to capital: The better the ESG rating, the better the reputation among investors for whom sustainable and responsible practices play an important role. This can facilitate access to additional funding.
Conclusion ESG Reporting
ESG reporting is an important tool for companies to create transparency in environmental, social and governance practices. With the help of reporting, the trust of customers and investors can be promoted, risks can be better managed and can lead to a longer-term increase in value.