From a classic investor perspective, sustainability means: the process of incorporating ESG factors into financial decision making (IOSCO).
ESG stands for the creating, verifying and publishing of information related to environmental, social and governmental issues.
So, ESG gives information about companies on how:
1. ESG impacts their business
2. ESG impacts environmental, people and society
Reporting on these 2 processes is what we call ESG reporting, or sustainability related reporting.
Environmental: for example reporting on the measurement of greenhouse gas emissions, or water usage by a company.
Governance: for example labor conditions in the supply chain.
Social: reporting on staff turnover rates, or genver balance in staff & leadership (D&I). About the relationships with employees, and people and institutions in the communities where you do business, including labour standards, diversity, inclusion, employee wellbeing
Benefits: retain talented employees, decrease turnover, increases work safety, protect employees, and enhances company brand perception.
How does Dutch Founders define ESG? find out more under reporting.
However the non-financial reporting director is somewhat unclear. For the EU it states that it's only mandatory to report on ‘some’ ESG statistics. There is ‘some’ guidance as to what to do and report on.
Basically, it is just very unclear yet what the norm, standard and way of non-financial reporting should be and look like. Problem: currently, there are so many different sets of ESG standards and frameworks while there’s not 1 holy standard yet. Companies, and investors, pick ‘n choose for their ESG reporting.Result: you never know exactly how a company is ranked, or what it even means.
You may want to take a look at the IASB = International Accountant Standard Board, who’s trying to set up a global sustainability standard board.But still, it is a maze with different exits. So, as an investor, how reliable and useful is this information to you? Why should you report on non-financial matters when it is not mandatory yet?
So, what have we done at Dutch Founders Fund? At DFF we have asked the help of renowned ESG advisor Harald Walkate who helped us write our own ESG policy, which can be viewed here.