ESG is the acronym on everyone’s lips, and business is booming. Hampleton’s new report into the ESG M&A market (which you can read here) has revealed that, amid all the economic turbulence of 2022, this sector has remained in rude health. In fact, the first half of this year saw M&A deals involving ESG firms rise by 173% compared to the equivalent period in 2019. 

Investor and acquirer interest in such firms reflects an ever-increasing focus on the importance of ESG reporting. That is to say, a company’s disclosure of data relating to the environmental, social, and corporate governance aspects of its operations.  

Environmental information can include a company’s policies with regards to energy use, emissions, conservation and sustainability. It may lay out how the company adheres to its environmental responsibilities, from minimising the carbon footprint of its supply chain to ensuring any industrial waste is managed in a way that complies with necessary relegations.

The ‘S’ in ESG reporting might cover the company’s policies with regards to employee health and safety, diversity and LGTBQ+ concerns, and relations between the company and its suppliers. It may also divulge the company’s relations with the local community, its charity work and other socially beneficial initiatives.

Governance, meanwhile, may cover the company’s approach to policymaking, the distribution of responsibilities among its managers and shareholders, the rights of shareholders, and what procedures are in place to manage environmental and social concerns. 

ESG reporting can undoubtedly be a challenge, especially for larger companies that have to pull data from many siloed departments. This is why ESG tech companies, which streamline the whole process, have been in huge demand. See, for example, the $1.2 billion acquisition of Massachusetts-based software vendor ETQ – whose platform allows users to optimise the collection of quality control data and customer feedback.

But why should companies take ESG reporting seriously? Here are four key reasons that founders, executives and stakeholders need to keep in mind.

More and more, transparency regarding environmental, social and corporate ethics is becoming legally ordained around the world. Earlier this year, for example, EU governments agreed a deal on compulsory reporting on environment, social affairs and governance. From 2024, large companies – defined as those with over 250 employees a turnover in excess of 40 million EUR – must report on everything from environmental impact to work ethics. Many non-EU companies which trade in the UE will also be subject to these regulations.

Over in the US, the Securities and Exchange Commission recently proposed regulatory amendments that would require US public companies to make climate-related disclosures, such as data relating to greenhouse gas emissions. 

The upshot is that times are changing, and thorough ESG reporting is fast becoming essential to adhering to regulations in many territories around the world.

Speaking about the US SEC proposal mentioned above, Laura Corb of McKinsey said: ‘Investor scrutiny of climate risk is rising, and consumers and employees are increasingly factoring sustainability into their decisions. This is akin to the early days of digital. Like then, we are seeing massive shifts in value pools that will create new sector winners and losers and the basis of competition will shift in most industries.’

But it's not just the ‘E’ of ESG that matters to investors. Assessing all the aspects of the acronym is now part of the screening process for investors. After all, as noted in Hampleton’s new ESG report, ‘ESG is now linked to longer-term performance, and some also argue that it provides opportunities for cost savings, revenue generation and risk mitigation.’

According to a recent survey by PwC, ESG factors play an important part in the decision-making of nearly 80% of investors. Moreover, around half of those surveyed said they’d be willing to divest from companies that weren’t sufficiently proactive on matters pertaining to ESG. It’s therefore easy to see how the provision of comprehensive ESG reports can help make any company a more attractive investment or M&A target.

It’s a lesser-reported fact that consumers also pay close attention to ESG factors – even if the acronym itself isn’t necessarily on laypeople’s lips. Consumers increasingly care about the environmental credentials of companies they purchase goods and services from. More and more people, especially in the Millennial and Gen Z cohorts, want to know that companies take their social responsibilities seriously, and demonstrate good corporate citizenship.

In other words, ESG reporting can burnish brand image. More than 76% of people polled in a PwC Consumer Intelligence Series survey said they would not give money to companies which didn’t treat employees, communities and the environment in an ethical and diligent way. PwC’s research has also shown that a huge proportion of Millennial and Gen Z consumers will actively look to social media for ESG information on brands. Meaning that it may be prudent for companies to actively publicise their ESG reports. 

Competition for talent is fierce, particularly in an age marked by what’s been variously termed the Great Resignation and the Great Reshuffle. Young, talented workers are increasingly discriminating about the kinds of companies they will join – a fact highlighted by reports that the number of UK graduates going into the oil industry has dipped dramatically, in part due to doubts about the longevity and ethical ramifications of fossil fuels. 

ESG reporting can serve as a viable way to attract and retain talent. A report by Marsh & McLennan showed that employers which boast the highest staff satisfaction also tend to score higher on ESG metrics than the global average. The report also found that employers regarded as most attractive to young talent tend to have lower carbon emissions, more workplace diversity, and make a greater effort to understand employee feelings.

The report sums it up neatly: ‘As a workforce strategy, ESG performance has become a competitive advantage – both in engaging today’s employees and attracting tomorrow’s talent.’