ESG reporting: Balance 'purpose with profit' for real impact
There is a lack of transparency around reporting and companies aren't obliged to change their business practices. Where once, investors looked at ESG as merely a risk factor, PE dealmakers are now approaching the whole transaction life cycle from an ESG perspective, building ESG into due diligence, and eyeing the potential value on exit. Specialist ESG thematic investment funds are growing in popularity - albeit from a small base - targeting areas like renewable energy, waste, water management, nutrition, health, biodiversity and climate, amongst others. Investors remain unclear over what constitutes a sustainable company: some businesses have low carbon emissions but poor people practices, and vice versa, while others have gaps in ESG reporting. As investors and asset managers seek concrete metrics to present to their investment committees, a major stumbling block for investors and asset managers is the lack of uniformity in ESG reporting. With companies moving at different speeds in adopting ESG reporting, it can be hard to distinguish between those companies that genuinely embrace sustainability and those that are merely greenwashing. Many companies are still at a low point on a steep ESG reporting learning curve. With every dollar invested by financial institutions impacting the real economy, it's essential to understand a range of ESG consequences of these investments. Its Non-Financial Reporting Directive and Sustainable Finance Disclosure Regulation require respectively disclosure of non-financial information and evidence that ESG risks are integrated into investment decision-making. Mandatory reporting may improve internal awareness of ESG issues, and help investors, but it doesn't necessarily oblige companies to change their business practices.