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ESG reporting: a key to investor’s heart

12/ 02/ 2021
  Andrii Glushchenko. Analyst of GMK Center, PhD in Economics Preparing sustainable development reports (so called ESG (Environmental, Social and Governance) reporting) is a recent trend. More and more companies seek to demonstrate their social and environmental responsibility to keep up with their competitors and look attractive in the eyes of potential investors and creditors. Ukrainian companies are not an exclusion — they need to have a decent profile to be able to compete with foreign manufacturers that are more experienced in ESG reporting and communication with various groups of investors. Few Ukrainian companies do realize why they need ESG reporting, understand its role and components. These matters are beyond discussion, though they will become increasingly important in the years to come. Contrary to popular belief, the value of business depends not only on its financial results. Needless to say, business appraisers take into account various profit/loss multipliers or projected cash flows. The final cost, however, results from negotiations between the buyer and the seller. And this is a domain where other factors apply, including ESG activity. This activity allows a business to accumulate social capital that reflects the quality of its social relationships. It increases trust in the company (among both staff and local community). This, in its turn, increases workforce productivity, efficiency of cooperation with partners, and reduces transaction costs. Environmental projects also help increase resource efficiency. As a result, a business that is actively engaged in ESG activity will cost more than one that seems to be less concerned about ESG. So, ESG is one of the factors that determine the cost of business, and the purpose of ESG reporting is to show what ESG activities the company is engaged in. What does investor look for in an ESG report? Here’s some tips for you: First of all, a company should prove sustainability of its business model. A company is considered to be promising if there are long-term factors that drive its competitiveness. As an ESG report is a sustainable development report in fact, a company should outline its sustainable development strategy. This implies identifying the company’s long- and short-term goals in terms of sustainable development, preferably in the form of specific quantitative indicators. That gives the company a possibility to present specific KPIs and progress in achieving thereof. The way of the strategy implementation directly depends on the corporate management system. Investor expects an ESG report to describe the sustainable development management system. Reports of large international companies show that not only sustainable development directorates take part in managing sustainable development, but other company’s subdivisions too. An essential portion of an ESG report is dedicated to description of the company’s contribution to the achievement of the UN Sustainable Development Goals. SDGs represent the targets for everyone and indicate whether or not the company is heading in the right direction. A company’s activities influence the interests of many stakeholders (shareholders, investors, employees, consumers, suppliers, local communities, public authorities etc.). It is important to find balance in meeting the needs and expectations of all of them. That’s why in their ESG reports, companies tend to describe the value that their activities bring to all the stakeholders. The most successful report is one that expresses those values in monetary terms. Of course, not every value can be converted into money, for example, the benefit of introducing a system of preventing occupational accidents. Such values require detailed description proving that the company is making consistent efforts in achieving ESG targets. Integrity and anti-corruption are important components of a sustainable development report.Companies tend to disclose their integrity hot line performance and response mechanism. Such information shows that the company is committed to prevent and respond to any violations. ESG reports are becoming an integral part of annual corporate reporting. Investors take an increasing interest in companies’ efforts beyond their operational activity. The more ESG efforts a company demonstrates, the more successful it is in raising money to implement its projects. GMK Center analysts and consultants track the recent trends in sustainable development reporting and can help prepare high-quality and meaningful ESG reports to underline the competitive advantages of your business so that potential investors and creditors couldn’t resist.

Andrii Glushchenko

Analyst of GMK Center, PhD in Economics

Preparing sustainable development reports (so called ESG (Environmental, Social and Governance) reporting) is a recent trend. More and more companies seek to demonstrate their social and environmental responsibility to keep up with their competitors and look attractive in the eyes of potential investors and creditors. Ukrainian companies are not an exclusion — they need to have a decent profile to be able to compete with foreign manufacturers that are more experienced in ESG reporting and communication with various groups of investors.

Few Ukrainian companies do realize why they need ESG reporting, understand its role and components. These matters are beyond discussion, though they will become increasingly important in the years to come.

Contrary to popular belief, the value of business depends not only on its financial results. Needless to say, business appraisers take into account various profit/loss multipliers or projected cash flows. The final cost, however, results from negotiations between the buyer and the seller. And this is a domain where other factors apply, including ESG activity.

This activity allows a business to accumulate social capital that reflects the quality of its social relationships. It increases trust in the company (among both staff and local community). This, in its turn, increases workforce productivity, efficiency of cooperation with partners, and reduces transaction costs. Environmental projects also help increase resource efficiency.

As a result, a business that is actively engaged in ESG activity will cost more than one that seems to be less concerned about ESG. So, ESG is one of the factors that determine the cost of business, and the purpose of ESG reporting is to show what ESG activities the company is engaged in.

What does investor look for in an ESG report? Here’s some tips for you:

  1. First of all, a company should prove sustainability of its business model. A company is considered to be promising if there are long-term factors that drive its competitiveness.
  2. As an ESG report is a sustainable development report in fact, a company should outline its sustainable development strategy. This implies identifying the company’s long- and short-term goals in terms of sustainable development, preferably in the form of specific quantitative indicators. That gives the company a possibility to present specific KPIs and progress in achieving thereof.
  3. The way of the strategy implementation directly depends on the corporate management system. Investor expects an ESG report to describe the sustainable development management system. Reports of large international companies show that not only sustainable development directorates take part in managing sustainable development, but other company’s subdivisions too.
  4. An essential portion of an ESG report is dedicated to description of the company’s contribution to the achievement of the UN Sustainable Development Goals. SDGs represent the targets for everyone and indicate whether or not the company is heading in the right direction.
  5. A company’s activities influence the interests of many stakeholders (shareholders, investors, employees, consumers, suppliers, local communities, public authorities etc.). It is important to find balance in meeting the needs and expectations of all of them. That’s why in their ESG reports, companies tend to describe the value that their activities bring to all the stakeholders. The most successful report is one that expresses those values in monetary terms. Of course, not every value can be converted into money, for example, the benefit of introducing a system of preventing occupational accidents. Such values require detailed description proving that the company is making consistent efforts in achieving ESG targets.
  6. Integrity and anti-corruption are important components of a sustainable development report.Companies tend to disclose their integrity hot line performance and response mechanism. Such information shows that the company is committed to prevent and respond to any violations.

ESG reports are becoming an integral part of annual corporate reporting. Investors take an increasing interest in companies’ efforts beyond their operational activity. The more ESG efforts a company demonstrates, the more successful it is in raising money to implement its projects.

GMK Center analysts and consultants track the recent trends in sustainable development reporting and can help prepare high-quality and meaningful ESG reports to underline the competitive advantages of your business so that potential investors and creditors couldn’t resist.

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