ESG reporting is the new frontier for enterprise disclosures, becoming another avenue through which investors and stakeholders make critical decisions. With over 90% of the S&P publishing ESG reports to demonstrate their commitment to civil and environmental matters, enterprises and their decision-makers should consider whether ESG reporting will or should be part of their public reporting. After all, businesses seeking to do the right thing isn’t new — many companies have chosen to incorporate sustainability, diversity, equity, human rights, and environmental initiatives into their day-to-day operations.
Today, there is not yet an agreed-upon, formal way to report on these types of initiatives to investors and stakeholders, creating an uneven landscape of Environmental, Social, and Governance (ESG) reporting. The importance of ESG reporting continues to gain steam with investors, consumers, and employees adding pressure to mandate and standardize these types of disclosures. With regulation on the horizon, internal audit, risk, and compliance professionals are well positioned to help their organizations get ahead.
Successful ESG disclosures counter accusations of greenwashing, collecting and displaying real, valuable, meaningful ESG metrics and ESG information. Ultimately, good reporting leads to transparency around a company’s ESG performance, and with annual reports on sustainability providing benchmarks, reading these disclosures should provide a picture of the company’s performance compared to their ESG goals.
The fallout of neglecting environmental, social, and governance factors as a matter of strategy and risk management can be costly — both in financial and reputational ways. To demonstrate their dedication to environmental and social matters, companies have incorporated ESG reporting into their overall corporate governance strategy in the name of transparency, trust, and attracting investors. However, regulating bodies like the United States’ Securities and Exchange Commission (SEC) have already taken a strong stance against “greenwashing” or the practice of exaggerating or misrepresenting a company’s environmental and/or social disclosures, typically in the pursuit of profit or investment, with one investment adviser fined $1.5 million in 2022.
As we await the approval and finalization of guidance around ESG reporting and standardization from the US, companies can make moves to get ahead of regulations. Today, ESG reporting is still largely voluntary, though there are many ESG reporting frameworks organizations can opt to leverage. But what is ESG reporting, really? And how can you ensure that the ESG information coming from various sources is accurate and reliable? Here, we’ll break down the basics, steps to roll out a successful ESG reporting process, and how an audit-ready ESG program can benefit your organization.
Components of ESG Reporting
The components of ESG reporting are Environmental, Social, and Governance. Corporations are expected to maintain sustainable practices and consider the civil impact of their business decisions; beyond that, they are increasingly expected to report on these efforts. Regulations for reporting on ESG matters are on the horizon with the U.S. Securities and Exchange Committee (SEC) expected to release formal guidance for ESG disclosures soon. Currently, the winds are blowing towards an integrated approach to ESG reporting, treating this information as part of an organization’s financial reporting, and subjecting ESG disclosures to the same rigor of audit as financial disclosures. Though companies can define their own ESG strategy and prioritize, there are some common threads that fall into each category of the E, S, and G.
The “E” in ESG stands for “environmental,” and relates to matters of climate change, carbon emissions, clean water, greenhouse gasses (GHG); that is, what impact is the organization having on the environment. Depending on what industry your business is in, the focus of environmental reporting could look very different. A logistics and shipping company might prioritize efforts to reduce emissions and keep fuel consumption low, while encouraging the use of electric vehicles where possible. Meanwhile, a manufacturing company might focus on reporting air quality metrics, efforts made to reduce pollution, or information about waste disposal, including hazardous waste. Other efforts can fall into this bucket too, like recycling, number of electric vehicles in use, and other environmentally-related subjects.
The “social” component of ESG involves matters of people, society, human rights, and the company’s effect on the community. Themes that fall under the umbrella include Diversity, Equity, and Inclusion (DEI), discrimination prevention, human rights, data protection and privacy, labor, and health and safety — among others.
And, ESG doesn’t just impact external stakeholders either. While ESG reporting is geared towards the financial markets and investors, job-seekers and employees are likely to catch wind of the contents of these reports, tempering their expectations and opinions of a company. Lack of transparency around ESG topics could even push stellar candidates away. Some companies have showcased their commitment to moving the bar in terms of diversity by publishing the composition of their company leadership, even when the optics may not be ideal. Addressing societal impact and the footprint they make on communities is another critical component of ESG reporting.
“Governance” in ESG, much like with other risk-related disciplines, deals with oversight, accountability, and leadership — how the organization maintains and encourages a culture of ethical behavior in line with the company’s values and goals. In this arena, businesses may opt to express their values and principles, discuss overall ESG strategy, explain their risk management approach (especially regarding ESG risks), and tackle challenging topics like executive compensation, diversity, and privacy.
Like the previous components of the ESG acronym, stakeholders, investors, and other external parties are paying more and more attention to organizations’ leadership, governance structures, and disclosures. People want increased transparency into how a business’ performance translates into executive compensation; people want to know that companies are doing and prioritizing the right things, for their investors but also for a wider range of stakeholders. Visibility and integrity need to be taken into account as part of a company’s ESG strategy.
These components of ESG reporting may seem loose and undefined — what exactly does a business have to disclose as part of ESG reporting? At this point, ESG disclosures are still voluntary — there’s no regulating body that enforces mandatory ESG reporting… yet. However, various international standards organizations and governmental bodies have proposed several potential frameworks and/or standards that companies can base their ESG reporting strategy on — we will break these down later in this article.
Benefits of ESG Reporting
The primary benefit of ESG reporting is building trust with stakeholders, investors, customers, regulators, capital markets, and the wider community. ESG reporting benefits companies and builds trust through transparency, compliance, communication with investors and stakeholders, and providing accountability and confidence.Trust leads to greater benefits, better reputation, better bottom line.
As demand for socially responsible and sustainable practices in business rise, so does the demand for socially responsible and sustainable investments. In fact, ESG assets around the globe were predicted to surpass $41 trillion in 2022 and $50 trillion in 2025. By issuing honest, accurate ESG disclosures, companies can attract those types of investments and committed stakeholders; delivering transparency, compliance, accountability, and confidence.
The rising trend in ESG-forward investment has also led to a rise in greenwashing, when a company portrays itself as more environmentally and/or socially conscious than it is. Certainly many instances of greenwashing are unintentional, occurring because the data around ESG lacks proper controls and governance. Some argue that the lack of regulation around ESG disclosures has contributed to greenwashing, driving the move towards standard reporting processes.
Although ESG reporting is currently voluntary, regulatory requirements are in flight. The European Commission’s Corporate Sustainability Reporting Directive (CSRD) will affect companies beyond the EU, with FY2024 as the target reporting year. The SEC’s proposal for “Mandatory Climate Risk Disclosures,” launched in 2022, and influenced by the Task Force on Climate-Related Financial Disclosures (TCFD), would require disclosure on climate-related objectives and risks, metrics on GHG emissions (depending on Scope), and the value of climate-related impacts on financial statement items.
In short, the ESG wave is going in the direction of consolidated, formalized reporting standards with compliance requirements. Businesses operating in the US or the EU — or doing business with customers in those regions — may soon find themselves having to submit ESG reports. Getting ahead of that wave, or perhaps, riding it, seems to be the most prudent solution, and many corporations like FedEx, Gap, and Caterpillar have opted to release some form of ESG report. Businesses that aren’t tracking ESG metrics may want to do so, and organizations that have not issued ESG disclosures should also consider doing so.
Attracts Investors and Stakeholders
Another major benefit of ESG reporting is the potential to attract ESG-centric investment, which, as we’ve mentioned, could total $50 trillion globally by 2025. It can’t be said enough — as consumers and other stakeholders become more interested in and dedicated to environmental and social causes, their purchasing decisions shift to reflect those values. Financial investments follow similar trends, with some investors showing a preference for companies with ESG disclosures. Bloomberg and S&P issue aggregate ESG scores, used by investors to guide decision-making. ESG reporting can attract and keep investors and stakeholders who share the same values as the organization. The benefits of building constructive relationships with investors and stakeholders with the same priorities can’t be overstated, as they can direct further investment and attention to companies with a dedicated ESG strategy.
Accountability and Confidence
ESG reporting, and indeed, all kinds of public disclosure, is designed to build trust between consumers, stakeholders, and companies. Good reporting enables investors to make informed decisions, and public disclosures can give customers and stakeholders confidence that their values are reflected in the companies they do business with. Ultimately, ESG disclosures go another step towards building trust in capital markets, and building trust between people. ESG reporting keeps businesses accountable to their goals, and presents data to benchmark their progress against. Transparent and standardized ESG reporting can discourage and combat greenwashing. The impact of companies choosing to adopt ESG reporting and to keep ESG as part of their agenda makes companies and their leaders accountable to the public and to investors, and builds confidence that they are (ideally) doing the right thing. The true impact of committing to ESG-conscious practices is not just a step towards a better market, but a step towards a better world.
5 Steps to Accurate and Reliable ESG Reporting
While the task of implementing ESG information gathering and reporting processes can be daunting, there are some solid foundations for building an ESG program. Organizations can start developing an integrated ESG reporting strategy by identifying relevant metrics, choosing an appropriate reporting standard, collecting the right data, reporting on data, and communicating and publishing the results.
1. Identify Relevant Metrics
Like other risk-based approaches, ESG reporting isn’t one-size fits all. Companies in different industries have different stakeholders, customers, and investors; their impact on the environment and society are certainly not uniform. In one obvious and somewhat extreme example, an airline company would have a much larger carbon footprint than, say, a bike courier service, and might choose to disclose things like fuel consumption and carbon emissions as part of their ESG disclosures.
Businesses should focus on developing an ESG strategy that first identifies the relevant metrics, data points, and priorities for the company. If sustainability efforts are important, then the business opts to focus on that area; if addressing homelessness is important, then the business opts to report on those metrics. It’s better to focus on a few key ESG issues rather than trying to boil the ocean — a thoughtful, honest, and measured approach will go further in this arena and avoid the pitfalls of greenwashing.
2. Choose Reporting Standard(s)
Let’s call a spade a spade — there are a LOT of ESG reporting frameworks, acronyms, and standards out there. It is confusing and challenging to navigate those frameworks — this is driving efforts to consolidate and formalize standards and disclosure formats. Instead of telling you which reporting standard(s) to choose (because one size does not fit all) we will give you a breakdown of commonly used ESG reporting frameworks, and who they might be best suited for.
Commonly Used ESG Reporting Frameworks and Disclosure Guidelines
- Task Force on Climate-Related Disclosures (TCFD)
- Description: Facilitates ESG disclosures by providing guidance to public companies and other organizations on better reporting of climate-related risks.
- Aimed Towards: Public companies can utilize this framework internationally to report on climate-related risks.
- Global Reporting Initiative Standards (GRI)
- Description: Internationally-used standard for reporting on 40+ ESG topics.
- Aimed Towards: Public and private companies internationally can use these standards to report on various ESG topics. This standard is popular in Europe.
- International Sustainability Standards Board (ISSB) / IFRS Sustainability Disclosure Standards (IFRS SDS)
- Description: Launched to consolidate and baseline ESG disclosures internationally. Leverages TCFD, GRI, and the Sustainability Accounting Standards Board (SASB).
- Aimed Towards: Public and private companies will likely be able to utilize the guidance issued by the combined ISSB/IFRS.
- Greenhouse Gas Protocol (GHG Protocol)
- Description: Comprehensive guidance on reporting GHG emissions.
- Aimed Towards: Public and private companies who must inventory and report on GHG emissions.
- Corporate Sustainability Reporting Directive (CSRD)
- Description: Mandatory ESG reporting adopted by the European Financial Reporting Advisory Group (EFRAG).
- Aimed Towards: Listed EU companies and EU subsidiaries of non-EU companies that fall within the legislative parameters.
Some organizations may need to combine one or more of these frameworks to meet their reporting requirements and obligations. You can also find additional frameworks not covered here.
3. Data Collection
Once the organization has identified relevant metrics and selected a reporting standard (or two), then it’s time to begin collecting relevant ESG data. ESG data can be collected from a variety of sources, including systems and people. You may find that you don’t have the means to collect the desired data. In these cases, it’s important to weigh the benefits and costs of implementing a new method for collecting ESG data. Businesses may even need to find new methodology for calculating the costs and benefits of sustainability and social responsibility efforts.
I can only speculate on what data points the “regulation revolution” may call for as ESG reporting requirements expand.
Data collection is probably the most challenging step for many companies as they try to compile their ESG information. Existing systems and monitoring mechanisms may not provide the types of data or the level of granularity needed to provide meaningful ESG metrics. As businesses develop and mature their ESG capabilities, so too should they iterate on and improve their ESG data collection methods.
Whenever possible, companies can and should leverage the information already present in their organization. If possible, these data sources and streams can then be tagged and centralized into an ESG-specific dashboard for integrated ESG reporting.
4. Data Reporting
Once the necessary data has been collected according to the requirements of the targeted disclosure framework, the team compiling the ESG report can finalize the draft and prepare for management and leadership review. At this stage, a company may even opt to bring in a third party assessor or auditor to review and offer an opinion on the integrity of the ESG report. Though this step is not required, it can give an organization valuable insight into how to improve their ESG processes. Management and leadership may also have follow-ups or require additional details on segments of the report. Investigating these areas provides greater insight into the real picture of the company’s ESG program.
The results of the ESG disclosure process should be thoroughly reviewed by management and leadership, as these documents are often made available to investors and stakeholders, if not the broader public.
5. Communicate and Publish the Results
Simply issuing an ESG report is not the finish line for most companies today. After going through the effort of producing an ESG disclosure, companies may want to publicize their report and their efforts through a social media marketing campaign. Organizations can leverage lessons learned to improve and facilitate the development of ESG reporting practices, sharing what they have learned through webinars, talks, and presentations.
Once the reports have been published, I encourage businesses to review their ESG reports and compare their performance against prior years. Where were goals exceeded? Where did the company fall short? Were there learnings that could be applied to future projects to improve results?
By communicating and discussing the results of their ESG efforts, companies can glean deeper insights and support the larger business community in their efforts to overcome ESG reporting challenges.
Devise an Effective ESG Reporting Strategy Today
The field of ESG compliance and reporting seems to be widening before our eyes. Despite the prevalence of environmental and social initiatives touted by companies and businesses, the arena of reporting and disclosures is still a fairly young one, with no clear contender enforcing this ESG framework over that one. It seems that a few standards are rising to the top, like the SEC’s proposed disclosure framework and the EU’s CSRD, but there’s no silver bullet for ESG reporting.
Implementing purpose-built technology can ease the burden of managing ESG data collection and overseeing a whole ESG reporting program. While spreadsheets have been the go-to for risk management and reporting for some time now, ESG reporting adds another layer of complexity to existing compliance and operational requirements. Using the right ESG management software can save time and effort when building an ESG program!
Frequently Asked Questions
What are the components of ESG reporting? The components of ESG reporting are Environmental, Social, and Governance.
What are some benefits of ESG reporting? The primary benefit of ESG reporting is trust — building trust through ESG reporting with stakeholders, investors, customers, capital markets, regulators, and the wider community.
How is ESG reporting implemented? Organizations can start developing an integrated ESG reporting strategy by identifying relevant metrics, choosing an appropriate reporting standard, collecting the right data, reporting on data, and communicating and publishing the results.
Claire Feeney is a Senior Product Marketing Manager at AuditBoard focused on ESG and RiskOversight. In her role, she helps support organizations in transforming their enterprise risk management and sustainability programs. Prior to joining AuditBoard, Claire worked in product marketing at OneTrust, VMware, and Infor. Connect with Claire on LinkedIn.