How to Approach ESG Reporting
While holistic sustainability programs are the engine that drives progress, ESG reporting and disclosures provide the necessary information and accountability in accordance with regulatory requirements and stakeholder needs. The following considerations can help executives determine the best way to achieve their reporting objectives.
Determine materiality and what ESG means for your company
What ESG means to a company will be determined by its industry, geographical footprint, and a number of other factors material to the business or its stakeholders. Some of the reporting scope may be determined by mandatory universal and industry-specific standards, while some may be based on an organisation’s customer orientation and values — but ultimately, it should focus on meeting the jurisdiction’s requirements and the path of the highest positive impact. Companies must use materiality criteria to determine not only the scope of ESG reporting but also the metrics and the required data.
Determine responsibility for ESG reporting
Who owns ESG reporting will likewise depend on a company’s unique characteristics. Chief financial officers, chief risk officers and chief operating officers are often assigned ownership, but the responsibility may also fall on chief data officers or a committee. At many companies, chief sustainability officers are increasingly fulfilling the ownership role. The number of CSOs holding an executive-level position increased to 28 percent in 2021, three times the percentage five years earlier.
In the case of CSRD, which positions ESG reporting in the management report of companies, the board and top management are ultimately responsible, though they may not be involved with the day-to-day aspects of data gathering. Companies must therefore determine who is responsible for providing and ensuring the quality of the required data.
Whoever ends up owning ESG reporting must have the ability to lead, communicate and collaborate across business functions because ESG permeates all of them.
Tell a credible story
“Credible” is the critical word here, and to meet that standard, all of the required data must be disclosed — cherry picking information is no longer acceptable. The EU’s CSRD stresses the importance of reliable, comparable and relevant information on sustainability risks, opportunities and impacts. With this data, investors and business partners can assess how the ESG efforts affect value chains, while non-governmental social impact and environmental organisations can monitor societal and climate trends, among other impacts.
- ESG disclosures must be auditable and attested. The CSRD is requiring wide-ranging, attested reporting on 12 standards — two general, one governance, five environmental and four social matters. Additionally, the CSRD is obligating companies to secure third-party assurance for their disclosures — initially “limited” assurance, and by 2028, reasonable assurance if reasonable for auditors and companies. In the U.S., the SEC’s upcoming regulations will require ESG reporting attestation, but only on climate-related disclosures.
- Reporting must be comprehensive. At a minimum, the information disclosed must satisfy regulatory requirements of the relevant jurisdiction. Companies must understand and define their reporting boundaries — which often extend beyond the walls of the enterprise. For example, Scope 3 emissions are “indirect” emissions that present a significant challenge when reporting greenhouse gas (GHG) emissions, but they are coming under increasing scrutiny by regulators. When measuring total GHG emissions, a company will need to assess emissions produced by assets that it does not own or control but that nevertheless are part of its value chain. Examples of the 15 categories of Scope 3 include business travel, employee commuting, waste disposal, distribution, and purchased goods and services.
Companies must meet predetermined KPIs and demonstrate progress toward them. The materiality assessment, which each company should perform, will clarify which KPIs will be material and therefore need to be reported. For example, organisations in scope for CSRD reporting need to show how their climate change mitigation plans are fulfilling the 1.5o C target. Organisations are emerging to help companies, investors, countries, cities, states and regions determine and measure their KPIs.
Building Your ESG Reporting Engine
Creating an ESG reporting program can feel overwhelming, especially for organisations that are newly affected and at the very beginning of their journey. The following recommendations can help make the effort a little less difficult:
Get it together in the proper order
Organisations may be eager to focus on the reporting as the most visible part of ESG before they have fully defined their strategy or scope — but this would be counterproductive. Companies must first assess their current state, decide what they want to accomplish and chart a road map to achieve those outcomes before making ESG disclosures. The reporting is the most visible part of ESG, but to be credible it needs to be rooted in operational changes tied to the activities of most impact — even if those operational changes are still evolving or ongoing.
Assemble the engine piece by piece
It may be tempting to report the information that is easiest to collect, but companies should focus on material matters first. These are the activities that have the biggest internal (on it) or external (from it) business impacts. In fact, the materiality of issues is a key requirement under CSRD. Focusing on material issues will not only facilitate reporting that complies with the regulatory standard, but will also place attention on operational aspects that can effect the biggest positive change or move the needle the most.
Leverage existing skills and architecture
It is not surprising that building an ESG reporting engine can leverage many of the skill sets and infrastructure expressed in key company processes: financial reporting, operational excellence programs, and data gathering and analysis. Data architecture that companies already have in place — enterprise resource planning, customer relationship management, financial reporting, and human resource systems — can be tailored to capture ESG information. Operational efficiency systems — metres, monitors and controllers — can also provide reportable information. Companies can use their existing data on energy and water usage, as well as waste and recycling rates, as a baseline from which to measure progress. Importantly, they can leverage internal control frameworks as the rigour expected for sustainability reporting is on par with financial reporting (in the case of CSRD, for example).
Establish internal controls
Companies should prepare themselves for the likelihood that most, if not all, of their ESG disclosures will be subject to some level of audit, depending on the regulatory jurisdiction in which they fall. And jurisdictions that do not require audits today could very well see them in the near future as global regulations continue to evolve. Therefore, strong internal controls over the ESG data gathering and reporting process are necessary to ensure information is accurate, complete and timely, and thus, audit-ready. To this end, the Committee of Sponsoring Organisations of the Treadway Commission (COSO) issued an updated guidance on how to effectively apply the 2013 Internal Control— Integrated Framework (ICIF) — currently applied to financial reporting — to sustainability reporting.
Aside from audit, internal controls ensure good governance and encourage accuracy, consistency, reliability and confidence in the results of the program.
Establish accountability for results
Organisations should set goals and create accountability for them. Guided by materiality, they should rank those goals by their level of importance as they relate to the narrative the company is delivering to its stakeholders and the public. Additionally, companies should be prepared to recalibrate the ESG reporting process as needed during regularly scheduled follow-ups while also keeping an eye toward delivering expected financial results.
When setting up an ESG reporting function, companies are likely to discover that they need to partner with service providers, data vendors, research groups and other organisations to meet their goals. When they start gathering information, in all probability they will find that they lack certain pieces of data, such as GHG emissions or human rights due diligence data. Consequently, they will need to identify vendors that provide data and calculation services that can fill those information gaps. Academic research institutions and other marketplace service organisations are gathering and exchanging information with various industries and making it broadly available, as well.
Partnerships with the broader ecosystem of clients and suppliers are critical, too. These relationships can create value for both parties in the form of collaborative positive impact, reduced risk, greater process efficiency, sustainable use of materials, improved product or service quality, and innovative advances. Additionally, firms with multifunctional expertise can help companies with virtually all aspects of building a sustainability program and reporting engine, including defining a story, mapping an ESG data ecosystem, developing a strategy and designing a road map to increase positive impacts and decrease negative impacts.