By Mike Eric Juru
As the world grapples with the existential threats of climate change, social inequality, and governance failings, the imperative for businesses to prioritise sustainability and transparency has never been more pressing. Environmental, Social, and Governance (ESG) reporting has emerged as a vital tool for companies to account for their impact and commitments. Yet, despite its growing adoption, ESG reporting remains a complex and often opaque terrain, with inconsistent standards and conflicting priorities. This article delves into the current state of sustainability and ESG reporting, exploring the challenges, opportunities, and best practices shaping this critical landscape.
The most significant benefit of sustainability reporting to organisations, amongst other things, is self-introspection, with the company asking itself whether what it is doing is worth it. Further benefits include increased transparency, cost optimisation, credibility, accountability and improved corporate confidence and reputation. Consistent with this drive, the Security and Exchange (ZSE Listing Requirements) Rules – SI 134 extensively cover Sustainability Information and Disclosure. On the other hand, the triple bottom line of Environmental, Social, and Governance (ESG) practices has become the de facto language of capital markets due to its market value creation and preservation feats.
This long preamble sounds like jargon to real estate practitioners, but with a closer look at how global climate crises have become topical to corporate boards, governments, and international events, let’s swallow the hard fact that the built environment is known to contribute 40% of greenhouse gas emissions globally. The seemingly parallel worlds of Sustainability, ESG, and Real Estate have a point of convergence.
Interestingly, most business leaders and environmental experts use the terms sustainability and Environmental Social Governance (ESG) interchangeably. It somehow makes sense, considering that both share the same goal of improving a company’s business practices in order to boost profits and win the hearts of investors, customers, and regulators. That said, this article will shed light on the distinction between the two terms. It will also enlighten the reader on the importance and impact of sustainability and ESG on property values and organisational profitability.
Unfortunately, as it is limited in scope, sustainability has become synonymous with “going green” or “reducing carbon footprint.” As a result, most people align sustainability with interventions that reduce energy consumption, track water usage, and manage waste.
This alternate view is fine, considering the importance of the above interventions to organizational success. Regrettably, that’s a narrow perspective of the word sustainability. In reality, sustainability is an umbrella term that encompasses all of a company’s efforts to reduce its impact on the world around it. For example, sustainability can also mean creating good jobs or promoting gender equality—in addition to helping the environment.
Companies have struggled to embrace such a broad concept, and for that reason, sustainability has never been truly integrated into the majority of organisations. Those with a better idea of sustainability have needed help to develop mechanisms to measure and report on their performance.
To further explain sustainability, in business terms, it is a balancing act of meeting the environmental, social, and economic needs relevant to the entity in question. Expressly, three pillars denote corporate sustainability.
Environmental sustainability is about meeting the needs of the environment. This means leaving natural ecosystems unharmed, supporting biodiversity, maintaining natural environments and resources, and restoring natural climatic cycles.
Social sustainability is about meeting the needs of and supporting communities, employees, consumers, and other stakeholders. This incorporates everything from philanthropic charitable donations to establishing a healthy work-life balance for the employee.
Economic sustainability is about meeting the needs of the business itself. If a business is not profitable, it cannot operate.
By considering these three pillars together, the aim of corporate sustainability is to maintain an enterprise in the long run without depleting the environment or adopting socially harmful practices. Ironically, real estate development value is derived from the environment.
Reverting to the gist of the article, a sustainability report or “non-financial reporting” is a periodic report published by companies that want to share their corporate social and environmental goals and responsibilities with a broad range of stakeholders and their progress towards achieving them. The report synthesises and publicises the information an organisation decides to communicate regarding its commitments and actions in social and environmental areas.
By doing so, an organisation will inform stakeholders—from customers to employees and anyone else interested in the organization’s actions—about the brand’s sustainable development strategy.
Environmental Social Governance (ESG)
ESG gained traction after publishing the Global Compact 2005 report Who Cares Wins. The report demonstrated that ESG investments make good business sense, and since then, such investments have grown exponentially.
By definition, ESG is ‘The criteria that establish the framework for assessing the impact of a company’s sustainability and ethical practices on its financial performance and operations. ESG comprises three pillars: environmental, social, and governance, all of which collectively contribute to effective performance, with positive benefits for the wider markets, society, and the world.’ (IVS 2020 Agenda Consultation). ‘Although ESG principally refers to companies and investors, ESG-related factors are also used to describe the characteristics and, where relevant, operation of individual assets.
The ESG framework is used by investors to evaluate an organization’s performance against specific criteria. Such criteria are used to measure an entity’s risk exposure with the aim of improving investment decisions. Thus, it is safe to say ESG is a risk management tool.
Each category within ESG overlaps with the 3 pillars of corporate sustainability, as we explain:
- Environment: This includes corporate climate policies, energy use, waste management, pollution, natural resource conservation, and the treatment of animals. The environment category addresses the environmental risks a company might face.
- Social: Social criteria consider a company’s relationships with stakeholders, including employees and their well-being, supply chains, health and safety, consumers, and investors. They also consider philanthropic donations and working conditions for employees.
- Governance: Governance refers to how a company is managed and how well the executive management and board of directors attend to the interests of the company’s various stakeholders – employees, suppliers, shareholders, and customers. This includes transparent and complete financial reports, plus ethical and legal management.
Evidently, the three sustainability pillars and the three categories of ESG overlap, which is why the two terms are similar.
ESG and sustainability are strategic considerations for businesses, executive teams, and investors. They both share the same goal of improving a company’s business practices to boost profits and win indulgence from investors, customers, and regulators – while safeguarding the environment and supporting communities.
Accounting for these similarities makes it easy to see how the two terms can become confused.
ESG reporting
ESG reporting is the disclosure of data covering business operations related to a business’s environmental, social, and governance aspects using specific criteria to expose an entity’s risk profile to investors.
By disclosing this information in a report, a company’s progress related to these three fields can be examined against benchmarks and targets. Once more, an ESG report is designed to provide full transparency over an organisation’s environmental, social, and governance impact across many stakeholders, including investors, employees, and customers.
ESG reporting is a risk management framework that addresses a business’s compliance, sustainability, and social footprint. ESG risks are stated to cause material, financial, and reputational harm to a business. Failing to report and manage ESG-related issues is a risky business that could resort to an ESG-related incident or controversy, including delisting and revocation of operating licenses, to mention a few.
Although many standards used for ESG reporting can also be used to produce a sustainability report, the purpose and target audience of the reports differ. It is important to note that a sustainability report can be vague, whereas an ESG report is strictly structured by environmental, social, and governance criteria. To invest effectively and responsibly, investors need ESG reports as these reports allow them to review relevant, reliable, accurate, comparable, and timely data.
In short -“ESG looks at how the world impacts a company or investment, whereas sustainability focuses on how a company (or investment) impacts the world.” The main difference between ESG and sustainability on the stakeholders that each speaks to. On one hand, ESG is a concept used by investors, giving them a framework to assess a company’s performance and risk. As an investment framework, standards have been set by investors and ESG reporting organizations.
On the other hand, sustainability has a broader stakeholder focus, accounting for employees, customers, and shareholders. In contrast to ESG, sustainability standards incorporate scientific input.
ESG seeks the identification and ranking of undertakings that show desirable characteristics, which are broader than what’s considered in sustainability – these characteristics extend to directors’ pay, diversity of stakeholders, treatment of workers, community engagement, and health and safety issues, to mention a few. To an astute leader with a hunger for success, the distinction between ESG and sustainability is subtle but important.
To give more context to this analysis, ESG draws attention to how environmental, social and governance issues affect the value of assets while sustainability looks at how the assets impact on the people, environment and business. Simply put, organisational value is affected by an ESG analysis whereas sustainability gives direction on how to reduce this impact on various stakeholders.
The above praxis presents a compelling challenge to corporate entities and regulators to embrace the tenets of ESG and the values of sustainability, in their synchronicity, and in their parallelism for maximum gain.
As the ESG reporting landscape continues to evolve, it’s clear that transparency, consistency, and accountability will be key to unlocking its full potential. By embracing robust sustainability practices and standardized reporting frameworks, businesses can not only mitigate risks and capitalize on opportunities but also contribute to a more resilient and equitable future. As stakeholders increasingly demand clarity and action, companies must rise to the challenge, leveraging ESG reporting as a catalyst for meaningful change. The journey towards a more sustainable tomorrow begins with an honest accounting of today – and the time to start is now.
Article compiled by Mike E Juru, Chief Executive Officer for Integrated Properties, he can be contacted on 0773805000 or mejuru@intpro.co.zw
