As more investors look at ESG Process factors, business leaders should be aware that it can cost money to develop and execute ESG policies. Here are some of the typical costs involved.
The “E” in ESG stands for environmental criteria such as the energy your company takes in, the waste it creates, and the consequences for living beings.
Costs of ESG Reporting
Many critics of ESG reporting argue that the process is too expensive, causing businesses to divert resources from pursuing more lucrative opportunities. However, many companies also cite the benefits of the reporting process, such as improved risk management and increased transparency for stakeholders. These factors can help to improve business operations and create a positive reputation among customers, shareholders, employees, and other stakeholders.
In addition, the ESG reporting process can help identify and mitigate business risks, such as natural disasters, water scarcity or resource shortages, climate change, and other environmental threats. By incorporating ESG reporting requirements into the company’s overall risk assessment and mitigation processes, organizations can reduce their risk of business disruption or even financial loss.
Another typical costs of the ESG process is the need to manage data sourcing, quality, and consistency. It can be challenging to compare data between different sources due to the differences in methodologies and analysis and who owns, generates, and verifies the information. This challenge is one of the significant barriers to creating a comprehensive and meaningful ESG report.
A potential drawback of the ESG reporting process is the potential for greenwashing, where companies may provide inaccurate or exaggerated claims about their sustainability initiatives. It can cause lasting reputational damage and impact investor confidence. However, likely, many companies would only risk exposing themselves to greenwashing if they were not required to disclose their ESG activities.
Costs of ESG Compliance
A company’s ESG compliance costs depend on the company’s ambition levels and targets. Leaders should identify these goals and create data management systems and reporting solutions. Ideally, these solutions will include benchmarking functionality and visualization for internal and external use.
A holistic approach allows leaders to manage regulatory requirements with consistent processes and teams. Additionally, it ensures that data and disclosures are linked to business performance throughout the value chain. It reduces the cost of managing a company’s ESG program and enables leadership to see positive outcomes beyond compliance.
ESG issues typically rise to the top of a company’s agenda because of various factors. These may be environmental concerns, human rights issues, corporate governance matters, or even the impact of a company’s operations on its employees. Investors demand more disclosure on these matters, while governments have imposed new regulatory requirements.
As a result, companies need to invest in ESG compliance and develop robust controls that can withstand the changing landscape of ESG disclosures. In addition, they need to develop a consistent approach to the governance of their ESG program rather than enlisting departmental expertise on a piecemeal basis. This strategy will not only lower costs but will also protect companies from penalties and wrong public opinion. It can also help shield them from the financial impact of ESG-related controversies that have sunk companies like BP and Volkswagen.
Costs of ESG Assessment
Investors and lenders actively search for companies demonstrating strong ESG performance in response to the increasing global enthusiasm for environmental, social, and governance (ESG) principles and practices. It is particularly true for smaller, mid-sized businesses that must secure loans and raise capital to grow, stay competitive, and expand their reach.
For these companies, it’s crucial to have a thorough ESG department that can effectively assess and measure their ESG impact to meet regulatory requirements and attract investors. While some companies can rely on internal data sources to assess their ESG impact, manually collecting, sourcing, and cleaning ESG data for reporting purposes may be more costly than investing in an automated ESG data solution.
ESG assessment costs can also include engaging external data providers and consultants to evaluate a company’s ESG impact. For example, an ESG consultant may charge a fee to conduct a comprehensive risk analysis, including assessing the potential impact of new regulations or a shift in consumer preferences.
Several vendors provide ESG scores and assessments, including MSCI, Sustainalytics, Fitch Ratings, and ISS ESG. These vendors use a variety of methodologies and scoring systems to determine an ESG score, which is then compared with the scores of other companies in the same industry.
Costs of ESG Assurance
The costs associated with ESG assurance can be significant. For instance, a middle-sized company with one or three full-time employees handling “sustainability issues” could spend $50,000 annually. Software tools that capture and prepare ESG data can cost $100,000. And getting an auditor involved can add another $50,000 to $100,000.
Whether you have dedicated team members or rely on your corporate services teams, ESG assurance is becoming necessary. Investors, customers, vendors, and employees want to know that the companies they work with are good stewards of the environment and positively impact society. In 2021, a survey discovered that consumers who prioritize social consciousness are willing to pay extra for products and services provided by companies that share their values.
In addition to investors, businesses are facing a growing emphasis from regulators and other stakeholders on ESG disclosures. The SEC’s proposal to require more reporting on climate-related disclosures is one example.
A robust, well-understood process for collecting and cleaning ESG data can help reduce these costs. And partnering with an ESG solution provider can allow you to focus on strategic opportunities and maximizing profits for your business. A good partner can also make sure that the data you collect and report is accurate and complete, which can minimize your risk of misreporting or omissions.