Ultimate Guide to ESG Reporting

In recent years, investors have been placing an increased emphasis on a range of environmental, social, and governance (ESG) issues resulting in ESG reporting becoming more important.

These issues are garnering more attention from legislators and regulators from around the world. As a result, there are more demands on companies to report on their activities and practices and how they impact environmental and social sustainability.

This means that ESG reporting is moving away from being a slowly but surely nice-to-have and becoming a business imperative that will become crucial in the future. However, to implement it, companies and organizations need to understand what ESG reporting is, what it comprises of, and why it is important.

With that in mind, we’ll now look at these aspects closer in this post and we will consider the steps companies need to follow when they want to report on their ESG practices.

What is ESG Reporting?

ESG reporting is the process of disclosing data by a company or organization about its environmental, social, and governance impacts. Similar to the process of financial reporting, companies or organizations produce ESG reports to provide a summary of both qualitative and quantitative disclosures that are supported by an analysis of their performance across the three sectors.

There are several reasons why ESG reporting is important, one of its main aims is to help companies and organizations communicate their performance in the areas of environmental, social, and governance. In turn, this allows investors to make more informed decisions based on a company’s sustainability practices.

ESG – An Overview

Before looking at some of the reasons why ESG reporting is important, it’s crucial that we look closer at and understand the separate key elements that make up the concept of ESG.

Environmental

The environmental element involves looking at how a company or organization uses natural resources across its operations. In other words, this element considers how these companies or organizations use energy and manage the environmental impact that their operations have.

Some factors considered here include:

• Climate change.
• Carbon emissions.
• Opportunities in renewable energy and clean technology.
• The use of natural resources.
• Biodiversity and land use.
• Waste management.

Social

The social element focuses on companies, people, culture, and their effect on the broader community. This element focuses on a company’s business relationships, the suppliers it uses, its contributions to the community, and the working conditions of its employees.

Some factors considered here include:

• Product liability
• Social opportunity
• Product safety and quality
• Human capital management and development
• Supply chain labor standards
•  Privacy and data security

Governance

Finally, the governance element involves looking at a company or organization’s internal controls, practices, and processes it has in place to comply with legislation and regulations. This, for instance, include that a company uses accurate and transparent accounting methods, implements proper shareholder voting processes, and doesn’t engage in any illegal practices.

Some factors considered here include:

• Corporate governance
• Business ethics
• Board diversity
• Text transparency
•  Accounting

Why is ESG Reporting Important?

To date, ESG reporting is still voluntary for most countries around the world. As such, there are no formal requirements that require companies and organizations to report and provide their ESG data. Yet, despite this, many companies choose to disclose their data in their annual reports. In fact, as of July 2020, 90% of the companies listed on the S&P500 had published their ESG reports. The question is: Why is this?

For one, companies that place an emphasis on their environmental and social impacts and responsibilities, have been shown to be more resilient and that they’re able to manage their risks better during a crisis. It also allows these companies to communicate their business strategy and purpose and companies with strong performance in all three ESG elements have demonstrated higher returns on their investments.

Flowing from this, ESG reporting also has value for investors. According to a 2019 survey by Harvard Business Review among investors and asset managers, ESG issues were one of the main considerations in respect of investment decisions. Likewise, according to research conducted by PwC, 65% of investors said that they took ESG issues into account when investing in order to manage their investment risks.

This is simply because, as mentioned above, companies that report on ESG issues can demonstrate to investors that they’re able to mitigate risks effectively which, in turn, allows them to generate sustainable long-term returns.
But it goes further than investing. Many of the new generation of consumers focus on companies that place an emphasis on their environmental and social impacts. According to research, 92% of Gen Z consumers said that they would rather do business with a company that supports ESG issues.

Finally, although ESG reporting is still largely voluntary, an increasing number of regulations around the world require adherence to and disclosure on ESG issues. The European Green Deal is probably one of the most ambitious of these regulations and aims to drive sustainable environmental, social, and governance practices.
As such, some of the measures published in respect of ESG include:

As such, some of the measures published in respect of ESG include:

• Non-Financial Reporting Directive (NFRD). This directive sets out the rules that require large companies to disclose non-financial and diversity information and requires these companies to include non-financial statements in their annual reports. At a minimum, companies should provide information relating to their business model, the outcome of their policies, the principal risks they face linked to their business operations, and other non-financial key performance indicators relevant to their business. Simply put, in terms of this directive, companies are required to make a series of disclosures and report on the social and environmental impacts their operations have.
• Sustainable Finance Disclosure Regulation (SFDR). The SFDR aims to give more transparency about sustainability and provide a common set of rules on sustainability risks. In terms of the regulation, asset management, pension funds, and insurers must disclose how they take ESG issues into account in their investment decisions. As such, they will have to include this information on their websites as well as all their fund documentation. They will also need to inform investors where the ESG risks are in their investment portfolios.
• Corporate Sustainability Reporting Directive (CSRD). The CSRD aims to make ESG reporting by companies and organizations more consistent with the aim of providing financial firms, investors, and the public with comparable and reliable sustainability information in respect of these companies or organizations. Simply put, it aims to improve the flow of sustainability information. As such, the CSRD aims to reform the NFRD with the result that more companies will be impacted by the rules, and it will also introduce stricter reporting requirements and audits relating to ESG information.
• EU Taxonomy Regulation. This regulation aims to support sustainable investment by providing a science-based transparency tool for both companies and investors. As such, it aims to make it clearer for investors to understand what economic activities contribute most to meeting the European Union’s environmental objectives. As a result, investors can use the information to invest in projects that have a positive impact on the climate and the environment.

Considering these regulations, the inevitable shift to mandatory ESG reporting, and an increasing number of companies voluntary reporting their ESG information, it’s easy to why it will become crucial for companies to launch ESG reporting as a business strategy that will help them maintain valuable relationships with investors and other stakeholders.

Getting Started with ESG Reporting

Now that we’ve seen what ESG reporting is and why it’s important, let’s consider the steps a company will need to follow to get started with ESG reporting.

Develop an ESG Strategy

The first step is for companies to create an ESG strategy that can help them be sustainability-driven. During this process, they’ll need to consider issues and factors that impact the company’s ESG impacts and gauge their relative importance relating to sustainability. This is known as the materiality matrix or assessment.

During the development of the ESG strategy, it’s also important to involve and consider the decisions of all relevant stakeholders. It’s also important to keep in mind that sustainability practices and a company’s needs and goals change over time.

This makes it vital to constantly review the ESG strategy and processes and adjust them according to the evolving needs and requirements. When this happens, it’s also important to notify all stakeholders of the changes and progress relating to the strategy.

Decide On the Right Reporting Framework

The next step is to decide on the right ESG reporting framework. Here, there are a variety of ESG reporting standards and companies should consider each carefully to find the right one based on the specific requirements.
Some of these ESG reporting standards include:

Some of these ESG reporting standards include:

• SASB. The SASB reporting standards guide the disclosure of financial sustainability information by companies and organizations to investors. These standards are able to identify the ESG issues most relevant to the financial performance of a company. They are available for 77 industries and fall under the auspices of the Value Reporting Foundation. A unique feature of the SASB standards is that they’re industry-specific so they cater to the unique issues of a specific industry.
• GRI. The Global Reporting Initiative is an independent, international organization that gives companies and organizations a global common language they can use to report on and communicate their impacts. In turn, this helps companies to take responsibility for these impacts. The organization provides probably the most widely used standards for sustainability reporting that advance the practice of sustainability reporting and makes it possible for companies and organizations to make better decisions that create more economic, environmental, and social benefits. These standards include universal standards and sector-specific standards that allow more consistent reporting on sector-specific ESG impacts.
• CDP. Formerly known as the Carbon Disclosure Project, CDP is a not-for-profit organization that provides a global disclosure system. This system makes it easier for companies, cities, regions, and states to manage and understand their environmental impacts and take the necessary the necessary steps to address any issues and limit their risks. To report through CDP, companies can use its corporate questionnaires on climate change, water security, and deforestation. This helps companies provide information about their impacts to customers, investors, and other stakeholders. In turn, this information helps investors and stakeholders make informed decisions about the company.
• IFRS. The International Financial Reporting Standards or IFRS are a set of reporting standards and accounting rules issued by the International Accounting Standards Board (IASB) that determine how companies should formulate their financial statements. The goal of these rules is to bring consistency and integrity to accounting practices, irrespective of the type of company or the country in which it operates.
• TCFD. The Task Force on Climate-Related Disclosures or TCFD released its disclosure recommendation in 2017. These recommendations are designed to help companies provide better information that gives investors, lenders, and insurers the ability to make better decisions regarding investments. These recommendations are structured around governance, strategy, risk management, and metrics and targets all of which should interlink and inform each other.

It’s important to note that there isn’t a one-size-fits-all approach to ESG reporting standards and the right standard will depend on a specific company’s industry, its reporting requirements, who it wants to report to, and what information it wants to report.

Gather Data

The next step is to gather the data to compile the report. Fortunately, a lot of this data can be gathered internally and companies will find relevant ESG-related information in the processes it uses in its different departments or as part of its operations.

One of the most important aspects when it comes to collecting data is that the data should be accurate and reliable. Simply put, based on inaccurate data, the report will be inaccurate and unreliable.

Ensure Reporting Reliability and Transparency

Tying in, to a certain extent, with ensuring that gathered data is reliable and accurate is transparency. In other words, it’s vital that the ESG report be transparent. The foundation of this is developing the right processes in order to achieve this. In turn, this involves finding the right metrics that will allow companies to properly identify and capture ESG activities and their impacts.

Now, these metrics will differ from company to company but the key is that they’re SMART. In other words, they should be specific, measurable, achievable, realistic, and time-sensitive. The reason for this is simply that SMART metrics allow companies to track their progress over time and see the impacts that their improvements have.

Communicate the ESG Report Effectively

The final step in the process is to communicate the results of the report effectively. This requires a reflection on the company’s ESG impacts during the reporting period and communication of its performance in the context of sustainability.

Another important aspect when communicating the report to investors, stakeholders, and the public is to demonstrate how the company’s performance in respect of ESG-related aspects aligns with its overall business strategy.

Use Technology

Although not strictly a step in the reporting process, it might be valuable for companies to consider using an appropriate ESG reporting solution. When they do, they’ll:

• Speed up the ESG reporting process. With the right ESG solution, companies will be able to manage their ESG reporting quickly, securely, and efficiently. As such, they’ll be able to identify the stakeholders that will be involved in each part of the report easier, and they’ll be able to define the data flow of the information the report is based on.
• Connect their reports directly to source data. With an ESG solution, companies will be able to connect their data directly to their ESG reporting efforts. This allows them to adapt to new reporting requirements with less effort and they’ll be able to capture changes in real-time. As a result, their reports will always be up-to-date with the latest, relevant figures.
• Reduce errors in their ESG reporting processes. Because ESG solutions help companies automate the process of report creation and revision, they’ll eliminate manual processes. As a result, their reporting will be more consistent, and they’ll reduce errors and their risks.

The Bottom Line

It’s no secret that ESG reporting is becoming more prevalent. This is for a variety of reasons including legislation and regulations that require it or companies voluntarily providing the information on their ESG impacts as part of their annual reports.

With ESG reporting companies are able to fully understand their risks and opportunities and they’re able to demonstrate the link between their financial and non-financial performance. Above all, they’re able to streamline their processes, reduce their costs, improve their efficiency, and reduce their risks.

This, in turn, can help companies improve their reputation, loyalty, and brand awareness which leads to more investment and lucrative opportunities. This post helped illustrate ESG reporting in more detail and the steps companies and organizations should follow when they want to get started.