ESG reporting insights and perspectives

What is ESG?

Over the past two decades, many academics, consultants, executives and leaders of non-governmental organizations who have looked to the future have promoted theories that show how business can flourish while pursuing a more socially responsible agenda.[1] This is not an unprecedented concept, something that has existed for decades under various understandings, such as “socially responsible investment.” ESG is an abbreviation of the words “Environment”, “Society”, “Governance", and these three letters alone may not represent much, but together they are significant non-financial indicators that indicate the attitude of any business or enterprise towards environmental issues, social responsibility, and capacity for governance.

• Environment: This indicator shows how business and corporate activities are affected by climate change, energy, resources, greenhouse gas emissions, biodiversity, air and water quality, dwindling forest, waste management, land use, etc. Companies that do not account for these environmental factors and the risks posed by them may face unforeseen financial risks.

• Society: Social criteria illustrates how an enterprise affects its community. Criteria include gender and diversity, employee engagement, employment conditions, policies, customer satisfaction, data protection, privacy, public relations, human rights, labor standards, and responsibility for products and services that create value affecting society.

• Governance: This criteria includes corporate leadership, board composition, executive supply, audit committee structure, internal control, shareholder rights, relationship with stakeholders[2], transparency, bribery, corruption, lobbying and political donations.

Just as ESG is becoming an integral part of business, environmental, social and governance criteria are always interrelated and inter-dependent on each other. For example, if social indicators overlap with environmental indicators, governance will play an important role in ensuring compliance and sustainability of environmental laws.[3]

Along with economic growth, globalization, and technology development, businesses expand with increased utilization of natural resource and human-force impacts that further impact on the environment. This phenomenon requires increased attention of the countries towards the sustainable development and environmental issues.

According to a World Health Organization report, 24% of all annual deaths in the world population (about 13.7 million per year) and 28% of all deaths in children between the ages of 0 and 5 are due to preventable environmental impacts.[4] These figures show that environmental issues have a significant impact on biodiversity, climate change and eco-systems, as well as on human health, life expectancy and quality of life.

ESG cannot be separated from the concepts of sustainability and sustainable development, which aim to achieve economic, environmental and socio-cultural balance in the long term. It is not enough to address sustainability and sustainable development solely from the environmental perspective.

The United Nations World Environment and Development Commission, led by Norwegian former Prime Minister Gro Harlem Brundtland, published the "Our Common Future" report, known as the "Brundtland report" in 1987, describing the report's sustainable development principles as "developments that meet current demands without compromising the ability of future generations to meet their needs." The publication of the report is seen as an important step in an international awareness and understanding of the importance of sustainable global development.[5] Humans began to strongly address the issue of sustainable development in the 1960s.

The income and benefits of companies and businesses that are high in EGS performance, sustainable development and social responsibility are positive, while investors, stakeholders and consumers are increasingly concerned about the footprint, social responsibility and ethics they leave behind in their home – Earth.

McKinsey said in the article published in November 2019 that ESG creates value in five important ways. These include: (1) developing new markets by attracting investments, expanding the current market, (2) spending less on energy, reducing water consumption, etc., (3) reducing regulation and legal intervention, (4) increasing employee productivity, and (5) optimizing investment and capital expenditure.[6]

ESG investors

Investors' indicators and interests in the business are changing at times, largely due to ESG. Today, the concept of ESG investment (commonly referred to as “socially responsible investment”, “impact investment”, “sustainable investment/financing”, etc.) is already familiar, but it is also a form of reflection of the importance of the concept, as ESG funds and investors have increased sharply in recent years.

ESG investors make value-based investments, and they understand that they are interested in what will happen in the next ten or twenty years rather than the next quarter, and that the changes and results in their investments take time. As such, they work together to strengthen the company to create long-term value.

About one third of professionally managed assets around the world, or about $30 trillion, are subject to ESG criteria. This is a significant amount showing an increase of more than 30 percent immediately since 2016. Only between April and June 2020, investors focused more than $70 billion on ESG stock funds, far more than the cash flow of recent years.[7]

In an added example, the European Commission announced on December 11, 2019 that it had set a ambitious goal that the European Green deal would make Europe the most moderate (neutral) global climate continent by 2050. In doing so, climate-focused action will be at the heart of Europe's Green Deal, with large-scale reductions in greenhouse gas emissions seen as an incentive for major measures such as investing in the latest research and innovation and preserving Europe's environment. The goal says it will reduce greenhouse gas emissions by at least 55% by 2030 and fund a European Green Deal with a seven-year European Union Budget, a third of the 1.8 trillion-euro investment from NextGenerationEU's recovery plan.[8]

In 2020, the total number of loans issued by commercial banks, non-banking financial institutions, savings and credit cooperatives amounted to MNT 18.6 trillion, while the green credit report issued by the Bank of Mongolia reported a total of 2,463 green loans that amounts MNT 48.4 billion, of which 95% were disbursed to business entities and 5% to citizens. Such sustainable finance loan supports environmental and social friendly businesses and projects in all 8 sectors as follows[9]:

• Sustainable water and waste consumption 54%;
• Green building 25.8%;
• Sustainable agriculture, land use, forests and eco-tourism 13.3%;
• Energy saving 3.2%;
• Low carbon transport 2.0%;
• Pollution prevention and reduction activities 1.1%
• Low pollutant energy 0.5%;
• Renewable energy 0.2%.

For more information on the financing of green loans and sustainable loans in Mongolia, please refer to the following link of the Financial Regulatory Commission of Mongolia.(“FRC”).

http://www.frc.mn/resource/frc/Document/2021/04/13/b4tto0ihypdl6qq0/%E2%84%9628.pdf.

ESG report

The ESG report (also known as the “sustainability report") refers to the disclosure of data covering a company's activities in three areas: environmental, social and corporate governance. It provides investors and other stakeholders with an overview of the impact of the business on these three areas. The ESG report helps investors avoid companies with high financial risks stemming from environmental performance or social and governance practices. Companies with high ESG performance have benefited from higher investment and are able to withstand any crisis with less risk. On the other hand, due to the lack of transparency of companies that do not publish these reports, there may be significant challenges in attracting investment, understanding with stakeholders and expanding operations.

Initially, reporting ESG was not a common practice among companies, and there was no established structure, guidance or requirement for the information disclosed. However, over time, ESG data has gained significant attention from investors and stakeholders, and has begun to provide value to ESG, which has contributed to companies reporting their ESG efforts and performance more structured and appropriate ways. The importance of ESG has led to the improvement of ESG content with more noteworthy details and figures than the single or two-page data attached to the enterprise annual report in the past.[10]

The Sustainable Development Goals 2030, including the 17 goals, 169 targets, 244 indicators, adopted by the 70th session of the UN General Assembly in 2015, which is the latest major initiatives of the world's countries related to sustainable development and climate change, which set important criteria and requirements for their responsibilities and participation, and The Paris Agreement, adopted by 196 parties to the United Nations Framework Convention on Human Rights in 2015, increases the number of ESG reporting topics and deepens their content. As a result, different internationally recognized systems, standards, ratings and indices have been targeted for ESG reporting. Each and every one of the countries as well as corporate and individual participation in sustainable development and climate issues is important.

As of July 2020, 90% of S&P 500 Index companies had already published their sustainability/ESG reports publicly.[11] It was the highest of all-time highs, reaching 20% in 2011, 53% in 2012, 75% in 2014 and 86% in 2018.

Carrots & Sticks 2020[12] sustainability reporting policy and global perspective report states that while governments and financial regulators remain most active in issuing reporting requirements and guidance (reporting conditions), then stock exchanges and industry bodies are ranked. In addition, since the report was published in 2006, the number of voluntary and mandatory total conditions (reporting conditions) in different countries has increased significantly, with 245 of the 614 conditions covered in the 2020 report showing how Europe, 174 in Asia Pacific, 85 in South America, 73 in Africa and the Middle East, and 37 in North America.

In ESG reporting, standards, scope (framework), rankings and indices provide basic coordination and orientation, while these four tools can complement each other and work together and side by side. In short[13]:

• Standards are process-based metrics that meet certain ESG measurement and disclosure rules. ESG standards dictate what companies should report.

• Scope is a top-level guideline that provides principles and guidance on how to disclose information.

• Rating agencies collect ESG data from different companies, develop research and methodology and rank them.

• Indices combine data into a single measure, which represents a specific market or strategy. The indices allow investors to track the company's performance on ESG reports.
  
  

Below are the key tools barring the path to sustainability reporting. These include[14]:

Tool	Standards	Scope	Ranking	Index
SASB Sustainability Accounting Standards Board	•
GRI Global Reporting Initiative	•
CDSB Climate Disclosure Standards Board		•
IIRC International Integrated Reporting Council		•
CDP		•	•
TCFD		•
MSCI			•	•
Sustainalytics			•
Bloomberg			•	•
Refinitiv			•	•
ISS Institutional Shareholder Services group of companies			•
DJSI Dow Jones Sustainability Indices				•
FTSE4GOOD				•
GSA Corporate Sustainability Assessment			•

Where will the report be published?

Companies and enterprises are providing their reports and information in annual and quarterly operating reports or preparing separate ESG reports and sustainability reports, introducing them for investors, preparing brochures, press releases, web hosting, to the public and target audience.

Further perspectives in the reporting

The report is prepared on mandatory and voluntary basis. Currently, ESG reports are voluntary in most countries. While reporting arrangements are primarily focused on the activities of listed companies and large multinational corporations, there is widespread speculation that, regardless of the shape or size of the business or enterprise in the future, all of these reports will be prepared and reported just like financial and accounting statements.

For companies listed on the stock exchange, it is common for stock exchanges to adopt reporting guidelines. Reporting conditions based on the specifics of sector and industry are becoming more common. According to trends over the past decade, the report's terms mainly cover financial services (banking, insurance and investment). Health-related issues due to the Covid19 pandemic are being added to the report, while anti-corruption concerns are most striking among governance topics.[15]

While reporting tools provide information on ESG performance and outcomes to those who need it, understanding, following and applying different standards and guidelines can cause confusion and misunderstanding for companies and consumers of the reports. This is due not only to the increasing standards of reporting, but also to the fact that they are becoming more sophisticated and complex. For this reason, in 2020, five major organizations, including international reporting coverage, standard-bearer CDP, CDSB, GRI, IIRC, and SASB (as mentioned in the table above), published “statement of intent to cooperate in the company's detailed reporting”[16]. This paper represents a deepening of cooperation between these organizations and a concerted effort to ensure the interconnectedness of scope and standards to ease these challenges and complexities.

They said in their paper that they believe the existing scope and standards setting process could provide the basis for the company's transition to a comprehensive reporting system. In the 1970s, international accounting standards were created, and in 2001 renamed IFRS which became accepted in more than 140 countries. The ESG reporting standards and scope are also unanimously recognized by operatives and experts in this area, once there is requirement to become an internationally recognized, accessible standard that covers the information required by all industry. The Covid19 pandemic has further heightened the importance of ESG risk management, with international organizations concerned that the need for reporting will continue to grow.

ESG reporting standards and tools in Mongolia

For commercial banks, loan requests are assessed according to the assessment contained in 8 sustainable financing principles and five guidelines including construction, mining, agriculture, processing and textile sectors.[17] The Mongolian Association of Banks adopted the guideline “Principles of Sustainable Financing (PSF) of Mongolia”[18] in 2015, and this guideline provides directions on international standards and how to apply them in the framework of 8 principles.

ESG transparency, reporting procedures and standards for issuers in developing sustainable and green capital markets for the stock market, development of the guideline is planned to be carried out under the project “Mongolian Sustainable Stock Exchange Initiative”, and the “Memorandum of Understanding for joint work to promote the sustainable development of the capital market” was signed on May 20, 2021 by Kh. Altai, CEO of the Mongolian Stock Exchange, and Norihiko Kato, Chairman of the Board of the Mongolian Sustainable Financial Association.

While ESG reporting is not very developed in our country, our commitments to main documents such as the Sustainable Development Goals 2030 and the Paris Agreement are certainly an accelerator for the adoption of these reporting tools. Although our experience in this regard is not enough, if we manage our business sustainably and responsibly in the long term, we believe that it won’t take much time for ESG to take priority and use the relevant reporting tools to meet its operations and needs in order to attract investment and expand business.

We recommend our current and prospective client to have ESG review by us so that we can help and contribute in determining the actual value of your business. Please contact us for further information on ESG and our services.

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[1] Kenneth P.Pucker, Overselling Sustainability Reporting, Harvard Business Review, https://hbr.org/2021/05/overselling-sustainability-reporting

[2] Recommendation of the National Council on Corporate Governance: “Corporate stakeholders include stakeholders, board members, employees, governmental and non-governmental organizations, suppliers, buyers, and financiers, etc. The company usually deals with these by entering into mutual agreements.” http://governance.mn/tips

[3] McKinsey, Five ways that ESG creates value, https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx

[4] Please see the report here https://www.who.int/publications/i/item/9789241565196

[5] Environment & Society Portal,  http://www.environmentandsociety.org/mml/un-world-commission-environment-and-development-ed-report-world-commission-environment-and

[6] McKinsey, Five ways that ESG creates value, https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx

[7] Jennifer Howard – Grenville, ESG Impact Is Hard to Measure – But Its not Impossible, Harvard Business Review, https://hbr.org/2021/01/esg-impact-is-hard-to-measure-but-its-not-impossible

[8] European Commission, A European Green Deal, https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en

European Commission, EU Climate Action and the European Green Deal, https://ec.europa.eu/clima/policies/eu-climate-action_en

[9] Financial Regulatory Commission of Mongolia, Guidance of the Accessible Finance No. 28, http://www.frc.mn/resource/frc/Document/2021/04/13/b4tto0ihypdl6qq0/%E2%84%9628.pdf

[10] Schneider Electric, The Future of ESG Reporting, https://gresb.com/the-future-of-esg-reporting/

[11] Governance & Accountability Institute, Inc, https://www.ga-institute.com/research-reports/flash-reports/2020-sp-500-flash-report.html

[12] Please see the report here. https://www.carrotsandsticks.net/media/zirbzabv/carrots-and-sticks-2020-interactive.pdf

[13] Schneider Electric, The Future of ESG Reporting, https://gresb.com/the-future-of-esg-reporting/

[14] Schneider Electric, The Future of ESG Reporting, https://gresb.com/the-future-of-esg-reporting/

[15] Carrots & Sticks report, https://www.carrotsandsticks.net/media/zirbzabv/carrots-and-sticks-2020-interactive.pdf

[16] CDP, CDSB, GRI, IIRC and SASB, Statement of Intent to Work Together Towards Comprehensive Corporate Reporting, https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wp-content/uploads/Statement-of-Intent-to-Work-Together-Towards-Comprehensive-Corporate-Reporting.pdf

[17] Financial Regulatory Commission of Mongolia, Guidance of the Accessible Finance No. 28, http://www.frc.mn/resource/frc/Document/2021/04/13/b4tto0ihypdl6qq0/%E2%84%9628.pdf

[18] Mongolian Association of Banks, Principles of Sustainable Financing (PSF) of Mongolia, http://toc.mn/ufiles/uploaded/files/1534411217134.pdf