ESG Reporting is More than Greenwashing. It Spurs Financial Success.

In the wake of corporate oil spills, unethical labor practices, emissions disputes, and other scandals of previous decades, consumers are now demanding that businesses take responsibility for their actions. Many companies have responded by integrating environmental, social, and governance (ESG) factors into central operations and decision-making. Examples of ESG practices include lowering carbon emissions, improving labor relations, assessing environmental risk, and prioritizing diversity and inclusion. But it isn’t enough for companies to simply say they’re working on ESG initiatives without demonstrating action. These baseless or false promises are known as greenwashing. Greenwashing can occur when companies claim to uphold specific values but fail to provide evidence of change. Consumer dissatisfaction with a lack of transparent reporting has driven an increase in ESG disclosures. 

Reporting is only the first step. As there is no universal scale to measure non-financial factors, like ESG indicators, reports can differ from one company to another. Unlike standardized formats for financial disclosures, voluntary ESG reporting varies across businesses, sectors, and countries. This lack of mandatory, universal standard leads to a wide range in the quantity and quality of reports. While calls for corporate accountability have raised interest in disclosure, many companies only put effort into reports directly tied to financial gain. Therefore, a link between profitability and ESG disclosure could get company leadership more invested in quality reporting.  

In a recent study published in Business Strategy and the Environment, researchers from Italy’s LUM Giuseppe Degennaro University and University of Salento examined the link between corporate ESG reporting and financial profitability in Europe’s agriculture and food (agri-food) sector. The authors chose to analyze this sector as it’s central to human existence and has ties to sustainability through the anti-food waste movement and the push for local, organic produce.   

The authors evaluated the ESG disclosure practices and financial profitability of 57 European agri-food companies. These metrics analyze a company’s transparency and rigor in reporting environmental, social, and governance issues. The researchers discovered significant, positive relationships between ESG disclosures and profit levels. They conclude that more detailed reporting and higher transparency of a company’s ESG activities could lead to greater financial success.  

The study shows that it’s in the best interest of a European agri-food company to produce quality ESG reports. However, the implications can expand to other industries and countries, as well. By integrating ESG considerations into operations and creating rigorous reports on those activities, companies can increase their profitability. This research joins a growing movement that shows that environmental factors and financial success aren’t mutually exclusive. In fact, they go hand-in-hand.  

As a pioneer in standardizing non-financial disclosures, Europe has recently begun to require certain sustainability information to go into financial reporting. Although the study was conducted before these regulations were established, agri-food companies were already noticing the value of increased reporting. Understanding the potential added financial success of regulated disclosure would be an interesting direction for future research. Following in Europe’s shoes, countries around the world should normalize ESG reporting. For now, self-enforced and robust reporting can be an effective way to hold money-hungry companies accountable to consumers – and make them a bit more green.