The Importance of ESG Reports – Launching the Trakref and Darden Research Initiative for Compliance and Sustainability
ESG reports are becoming more standard each year, so building on our trailblazing history of more than 25 years of refrigerant management, Trakref launches the Trakref and Darden Research Initiative for Compliance and Sustainability in partnership with the University of Virginia Darden School of Business. This new initiative brings together Darden’s technology and the best minds from across the compliance spectrum to explore how the convergence of regulations and the drive to net-zero will transform global business, what it means for the future of society, and how organizations can uncover and better capture their opportunities.
Why We’re Embarking On This Journey
At Trakref, we want to know our customers as best we can. We want to not only know how they’re working with refrigerants but also how that work influences the way they compile their ESG reports.
We also know that in our industry, there isn’t much awareness of EPA regulations and ESG disclosures. In our own research, we’ve found that less than 5% of companies surveyed have awareness of EPA regulations. We want to ensure that our customers have an excellent grasp of these regulations so they can create their best reports, and together, we can work together to decrease emissions and better the environment.
Environmental, Social, and Governance reporting includes a need to report refrigerant emissions. There are several frameworks used for reporting including Sustainability Accounting Standards Board (SASB) that broadly require reporting and others like the Global reporting emissions, which has a specific section for refrigerants, GRI-305. Every ESG initiative requires that the organization accurately account for refrigerant emissions to properly target Net Zero Strategies
Refrigerants include CFCs, HCFCs, HFCs, PFCs, and most facilities have a combination of 2-3 of these refrigerants. When any of this equipment is installed, operated, serviced, or retired there will be an associated leakage of refrigerant, which is classified as a Scope 1 fugitive emission. These are a crucial part of ESG reporting. Global Emissions of refrigerants are projected to account for nearly 80 billion tons of CO2 by 2050. Project Drawdown has identified refrigerant management as the #1 way to curb emissions in their 2017 publication
We know that regulations can be confusing, and standards in reporting on sustainability issues are constantly changing, especially when it comes to refrigerants. We believe with our research, we can bring better visibility to regulations and help our customers create solid reports to showcase how they’re working toward the drive to net zero.
Environmental Social and Governance – What It Is
Environmental Social and Governance reports were originally seen as something only in the realm of more progressive companies. They wanted to explain how they were reducing emissions with sustainability reporting and show these results to stakeholders, including investors and customers.
As time has gone on, though, Environmental Social and Governance reports have become more standard. Some companies are finding that their stakeholders are demanding these reports. Customers want to see that the companies they buy from have sustainable practices, and investors now have knowledge of climate-related financial aspects. They know that these climate-related financial aspects have a real impact on the success of a business, and they want to see information on them.
So what exactly is an ESG report?
An ESG report explains the social impact that a business has, with a focus on its environmental, social, and corporate structures. These reports show corporate sustainability in both a quantitative and qualitative nature – as well as exposition, there is often detailed information about climate-related financials and the nature of the company’s emissions.
As well as climate-related financial disclosures, these reports often set long-term goals. For example, a business might commit to having all-electric vehicles in their fleet by a certain year, or set a percentage of refrigerant leaks that they want to see reduced. They give a complete snapshot of where a business is as well as where they are going to give stakeholders the most accurate understanding of how they are doing with sustainability.
ESG Performance Is Usually An Annual Report
ESG performance isn’t something that is reported on whenever the company feels like it or finds time. Like other financial reports, ESG data is something that stakeholders expect to see on a regular basis. Many companies are releasing these reports on an annual basis.
A quick search in Google reveals annual reports from the following companies:
- Citi Group
- JP Morgan
- Bank of America
Clearly, reports on corporate sustainability are no longer niche reports. ESG data is something that we now expect to see reported on often, just like we would with other types of financial reporting.
Investors and Other Stakeholders are Demanding ESG Data
Companies aren’t just creating reports on ESG data for fun, though. They’re seeing that there is an increased demand from their stakeholders.
More and more, consumers are interested in buying from companies that are reducing their environmental impact, meaning there are financial risks to not creating sustainability reports. McKinsey and Company’s Robin Nuttall noted in a podcast that “Consumers are now demanding high standards of sustainability and quality of employment from businesses” (listen to the podcast here). He also notes that ESG reporting is crucial for top-line growth, including breaking into new markets and expanding in existing ones. This means companies can no longer regard the environment as a niche interest. They must not only be talking about it but continually showing the data to customers through reporting.
Customers aren’t the only stakeholders that are interested in this type of reporting, though – investors are also demanding information as they realize ESG disclosures are just as important as financial reporting. ESG funds received about $51 billion from investors in 2020, more than double the amount invested in 2019 (CNBC). Many of these dollars are coming from younger investors who are interested in seeing companies tackle social issues, including environmental causes.
With stakeholders demanding more reporting on ESG issues, these reports will continue to be integral for companies to produce regularly.
The Value of ESG Reporting
We won’t lie – ESG reporting takes time and energy. However, it’s clear that it adds value to an organization, and there are financial risks to not doing it. As mentioned, it is what stakeholders are coming to expect from companies.
These reports also provide useful information for your business. By doing the work to compile the data that you’ll need for a report, you’re assessing any risk that you have. There may be aspects of your company related to sustainability that need attention, like the number of leaks in your refrigerant and your contributions to greenhouse gas emissions.
The sustainability performance of your company can improve by incorporating ESG disclosures into your reporting arsenal – both in terms of pleasing your stakeholders with the information that they’re interested in, as well as making sure that your company has a great strategy for addressing issues that affect the environment.
ESG Reporting Helps With Sustainability
As mentioned, ESG reports not only show others that your company has a commitment to sustainability and ending climate change – they also help you determine how sustainability plays into various factors of your company. Committing to sustainability is of course a noble cause, but it also has strategic implications.
For example, you might find from ESG initiatives and the data you collect that you have faulty equipment that is leaking and needs to be repaired. Or you may find that you’re wasting money on fuel instead of using renewable energy like electric cars in your fleet. Reporting on this data will not only hold you accountable but show where there is room for improvement in your company. You can uncover parts of your company that can be improved on from a sustainability angle.
And as we already discussed, investors and customers want to see data that suggests a company is being sustainable and fighting against climate change. Compiling an ESG report and ensuring you have this data will make you more attractive to these stakeholders who are looking for this information more than ever.
ESG Reporting Framework
So what reporting frameworks should you use to create an ESG report?
Unfortunately, there are no specific answers or reporting frameworks that are “approved” – every business does things differently. Reporting frameworks that you’ll usually see have a mix of qualitative and quantitative data, and this data tells the story about how a business is fighting climate change and working to be more sustainable. The frameworks used to arrange this data is up to each individual company to determine.
One of the best ways to decide the reporting frameworks you want to use is to read a variety of reports and see how various companies compile data. Simply typing “ESG report” into Google will bring up some of the top companies that have created reports. Take some time to read through them and decide how your business will create its ESG strategy.
Looking at some of these reports, some aspects of their frameworks include:
- A summary of greenhouse gas emissions
- Use of renewable energy
- Use of green buildings
- An overview of the business’s approach to climate change
- Technology being used by the business
- Energy management overviews
While there may be no specific reporting frameworks to use, seeing what your predecessors have done can inspire ideas for organizing your data.
The Competitive Advantage of ESG Information
As previously mentioned, ESG information allows for a competitive advantage. Consumers and investors alike are looking for information about how businesses are decreasing their environmental impact. By not providing this data, you’re not meeting their expectations.
In a report from Morgan Stanley, “ESG and the Sustainability of Competitive Advantage,” the writers note that ESG is growing in importance in whether they choose to invest in a business: “Our ESG analysis focuses on a company’s ability to sustain competitive advantage over the long term. In considering candidates for our portfolios, we assess companies’ ESG oriented strengths and vulnerabilities across several dimensions.”
Finding the right frameworks to report ESG data is becoming increasingly important, and to retain a competitive advantage, businesses will have to show how they are conscious of their environmental impact.
As businesses consider what to publish ESG reports, they should think about what is most important to demonstrate about the businesses’ commitment to sustainability. One of the crucial metrics that we would recommend is emissions from refrigerants. After all, it is the leading cause of climate change.
We think that businesses should include this information in their ESG data. Data points could include information about leaks, equipment maintenance, climate-related financial disclosures, and adherence to regulations. Much of this information can be found in Trakref, making it easy for our users to compile this data.
Other information, such as energy usage and use of fossil fuels, is also relevant to include and is what stakeholders are looking for when they read your report.
How ESG Reporting Helps with Sustainable Development Goals
Pleasing stakeholders is of course important – every business wants to make sure investors and customers are happy. But reporting is about more than just that. It is also about making sure that you’re reaching your sustainable development goals.
Your goal may be to decrease the number of leaks in your refrigerant or make sure that your equipment is running smoothly. How are you going to know that if you’re not regularly reporting on it, though? You won’t – that’s why ESG reporting is so important. You’ll be able to track your own progress and make sure you’re staying on track for the sustainable development goals that you’ve put in place.
We’re Seeing a Transition
We’ve established that ESG disclosure is important. It makes sure you’re staying on track with goals, and it pleases stakeholders from investors to customers. But making sure that you have the right infrastructure to create them is integral to the process of making these reports part of your corporate governance. After all, you want your report to be the best it can be.
As mentioned, this type of reporting used to be something that only a few progressive companies compiled, but we’re quickly seeing that change as it is in the middle of a transition from low to high fidelity investors. The reporting landscape is now rapidly moving toward globally harmonized disclosure standards. This makes the reporting standards more structured and systematic, allowing for more companies to produce them.
Moving forward, reporting will no longer be in the realm of idealists. Reports are now being seen as providing additional insights into a business’s resiliency, and they are something we should expect, especially from high-profile organizations.
Governance ESG Reporting – How CFOs are Becoming Central to Reporting
Recently, there has been increased pressure on corporate governance to improve their sustainability reporting. This has come from multiple sources – equity investors, insurers, lenders, bondholders, asset managers, and even customers who want more detailed information about what a company is doing to be a responsible corporate citizen.
This increased pressure on corporate governance to meet the needs of stakeholders with non-financial performance information is evident in the amount of money that companies are investing in these reports. Global ESG investment soared 55% to $35.3 trillion last year – in 2016, that number was just $22.8 trillion. The total will probably exceed $50 trillion by 2025 (Global Sustainability Investment Alliance).
So where do CFOs come in as far as corporate governance?
ESG initiatives need to be translated into financial metrics and used as input for strategy and investment decisions. CFOs are the fiduciary leader in corporate governance, making them the ideal fit for overseeing governance ESG reporting. After all, they have the experience compiling and reporting on metrics to stakeholders and shareholders, and they are also intimately familiar with other forms of regulatory and compliance filings. Compiling these reports is, therefore, a natural fit into CFOs’ duties.
Furthermore, silos around creating these reports are crumbling. Sustainability is no longer its own separate issue, relegated to just one area under corporate governance – there may even be a task force on climate or another committee in the organization working together on this issue. Companies have realized that sustainability issues and financial performance are intertwined. ESG factors are incorporated into investment analysis, and companies know that environmental and social initiatives contribute directly to economic performance. CFOs and other market-facing executives need to be ready to answer hard questions from stakeholders, and they need to be able to demonstrate their knowledge of companies’ force on climate-related issues.
The SEC and ESMA also have new requirements, with ESMA’s requirements including double materiality. These requirements involve business financials that are in a CFO’s purview. This means CFOs can’t ignore sustainability reporting or see them as part of someone else’s job – they must become extremely familiar with it, and their jobs must expand to include it.
How ESG Reporting Fits Into Current Business Models
Being able to tap into CFO’s expertise is great news for businesses. You don’t need to create a brand new role just to oversee ESG reporting. While it may take some time away from CFO’s other duties, they are already familiar with the information needed for this kind of reporting.
The CFO may not be the only person who will be involved with corporate sustainability reporting. As mentioned, siloes are crumbling, so there may be other people with data and know-how that can step in to provide the information that goes into an ESG report. Much of what needs to be figured out is already in their job description, though, and with some help from others, they should be able to compile much of the data required to create an informative report.
Risks and Opportunities in ESG Data
While there are of course risks and opportunities with disclosing ESG issues, we see reporting more of an opportunity than a risk. Of course, there is always some risk to putting information about your business out into the world, especially when it has to do with something like the environment. People may not react friendly toward less desirable parts of your information.
However, we think being transparent about your company’s risks and opportunities through sustainability reporting is ultimately the best path forward. Not only is it expected by stakeholders, but it shows where you are on your climate journey. You’ll be able to take inventory annually of how you’re doing. In the world of refrigeration, you’ll be able to see what equipment needs updating and how you can reduce the number of leaks you have. This is ultimately good for your business. So while it may be scary to show where you currently are, it also gives you a solid roadmap of how you need to move going forward.
Incorporate ESG Into Your Own Strategy
Incorporating ESG reports into a business strategy is crucial, and part of being able to do so is by having C-suite leadership involved. This is also why the role of the CFO is important. They are able to advocate for the importance of ESG reporting to leadership. Then, when they have the buy-in, they have the knowledge, data, and know-how to make a great report.
Stakeholders are looking for these reports. CFOs are able to make that known and ensure that reporting is an essential part of a company’s strategy.
Non-Financial Reporting in ESG Reports
ESG reports involve plenty of financials. One of the easiest ways to measure a company’s impact on the environment is by converting it into dollars. CFOs, who are often charged with overseeing these reports, have this data and will want to make sure it is heavily featured.
Non-financial reporting in these reports is also important, though. Summarizing a company’s impact on the environment as a whole through exposition can be a crucial part of a report. There are also data points, like those that can be found through Trakref, that are important to include. After all, refrigerant emissions are the top contributor to climate change. Making sure information about them is included in a report can make it more robust and ensure that you’re including an accurate snapshot of your company’s impact on the environment.
Trakref and Advocates for ESG Disclosure
With all of this in mind, Trakref ultimately advocates for ESG disclosure. That’s part of the reason we’ve created our survey. We believe it is important for companies to show their impact on the environment so we can all continue to work towards helping the climate.
We also want these reports to include information about refrigerants. We know that they are the top contributor to climate change, and we want companies to report about them so we can all work to reduce greenhouse gas emissions.
We know that creating an ESG report can be a confusing process, though – so we want to collect data to be able to better understand this kind of reporting in industries where refrigerants are most used.
How Trakref and Darden Are Helping
As the CFO’s role in external reporting, assurance, and operational controllership changes, Darden and Trakref are teaming up to better understand these trends.
We chose to work with Darden because of their hands-on approach to research and business. We wanted to have a partner who would be willing to dive deep into ESG reports and what companies need to know to meet ever-changing expectations.
Rapidly evolving regulations and market expectations continue to blur the boundaries between what is required and what is available, and we understand that companies need to move with speed to design a future that will include ESG reporting factors. That approach requires new tools and new ways of thinking. Rapid progress will depend on the ability of companies to leverage existing resources while new ones are being built.
Trakref, with its strengths across refrigerant, f-gas management, service process guidance, and compliance success in the HVAC/R industry, as well as its continuing commitment to reduce refrigerant emissions, is the ideal partner for Darden to create breakthrough research and thought leadership programs that can help companies seize the opportunity to both report on and reduce harmful emissions of high GWP refrigerants. With this research, we hope to better understand how CFOs are involved with ESG reporting and what is helpful in their decision-making as they navigate new standards.
Take Part in Our Research
We invite you to be part of this research and help us further understand the evolution of ESG reporting. Your input is incredibly valuable to our knowledge of reporting standards and how we can better help our customers.
Taking part in the survey will also help you, too. Once we’ve compiled and analyzed the results, we’ll share the findings with participants so you can learn more about how your peers are compiling sustainability reports and how their CFOs are involved in the process.
Take the survey here. Thank you in advance!