Top 4 challenges of ESG reporting and key strategies

Corporate sustainability practices are gaining momentum globally, driven by a growing emphasis on transparency and accountability. The G&A Institute's 2024 Sustainability Reporting in Focus report reveals that 93% of Russell 1000 companies published sustainability reports in 2023, up from 90% in 2022. Similarly, KPMG’s Survey of Sustainability Reporting 2024 highlights a significant rise in companies publishing carbon reduction targets and nearly half of the largest companies adopting double materiality assessments.

Despite this growth, the road to robust ESG reporting is far from straightforward. Organizations must navigate evolving regulations, grapple with fragmented standards, and manage uncertainties that demand constant adaptation. These challenges underline a crucial truth:

The field of ESG reporting is still a Brave New World.

While organizations recognize the business value of strong ESG performance, the journey is anything but linear. Advancing in this space requires balancing precision with a strong will to walk the talk.

“The field of ESG reporting is still a Brave New World.”

Navigating the chaos  

As Earth's systems continue to show signs of instability, ESG reporting is becoming increasingly critical for companies worldwide. Stakeholders—from investors to employees—are paying closer attention, often making decisions based on corporate sustainability efforts. Reputational capital has never been more at stake. 

For the C-level and senior leaders, this has provoked a whole new set of anxieties—beyond the regular existential ones.

According to a 2023 KPMG study of 750 companies, 75% are in the early stages of ESG assurance preparedness. Respondents cited various obstacles, including a shortage of internal expertise (44%), inadequate IT or digital systems (39%), and the absence of clear metrics or measurement tools.

What’s more, a 2023 joint benchmarking study by the International Federation of Accountants and the Association of International Certified Professional Accountants revealed that "significant hurdles remain when it comes to providing consistent, comparable, and high-quality sustainability information for investors and lenders.”

Against this backdrop, heightened investor concerns around greenwashing are pushing companies toward more robust disclosures. Simply "talking the talk" is no longer sufficient; organizations must take tangible steps to back their ESG claims with audit-ready data. However, this is often easier said than done, particularly for those at earlier stages of ESG maturity. 

A 2023 report by PwC on Canada’s largest public companies offers a bird's-eye view of the current landscape:

1. Companies are starting to prioritize sustainability disclosures but are ill-equipped for forthcoming mandatory reporting obligations.
2. Many Canadian companies still view ESG and financial reporting as distinct procedures, hindering their capacity to generate value through integrated reporting.
3. Although investors increasingly rely on ESG reporting, Canadian companies are overlooking significant opportunities to enhance the credibility of their sustainability disclosures.

Sound familiar? 

In what follows, we’ll take a closer look at some of the most frequently encountered ESG reporting challenges and propose tips and strategies for mitigating the chaos. 

The challenges of ESG reporting 

Challenge #1: Measuring & quantifying ESG factors

Which ESG topics should our company report on? Which metrics do we select? And, how do we even quantify and measure them? These are common questions that companies of all sizes grapple with, leading to roadblocks in ESG program advancement.

Let’s examine what's driving this uncertainty:

• No unified or “universal” standard: The absence of a unified ESG reporting standard has resulted in the emergence of numerous sustainability reporting frameworks, surveys, and initiatives to engage shareholders and data providers. Consequently, organizations frequently find themselves in the position of having to determine which sustainability aspects to emphasize, what to disclose, and which ESG metrics to use. The lack of standardized metrics poses a significant challenge, hindering performance comparisons and decision-making for organizations and investors alike.

• Determining material topics: Companies increasingly prioritize the disclosure of relevant, industry-specific ESG factors. However, the task of determining which ESG topics deserve attention becomes intricate in the absence of regular materiality assessments. Many companies only conduct one every two or three years, which is insufficient to keep up with rapidly evolving investor expectations, emerging trends and issues, and shifting reporting frameworks.

• Subjectivity and complexity: ESG factors encompass various performance measures. These are commonly referred to as qualitative and quantitative metrics or indicators that capture corporate ESG performance. However, some of these factors are more subjective than others, making their measurement and quantification challenging. For example, evaluating social factors like employee satisfaction, community engagement, and human rights practices involves capturing qualitative aspects that are inherently difficult to quantify.

Strategies to consider 

To address these specific ESG reporting challenges, organizations can: 

• Engage ESG reporting experts: Seek guidance from ESG reporting experts or consultants with in-depth knowledge of the various sustainability frameworks and the ESG reporting process. These experts can provide valuable insights, assist in interpreting sustainability guidelines and standards, and offer recommendations for effective reporting and narrative presentation. In particular, companies with lower ESG maturity could benefit from guidance on measurement selection, financial materiality, and peer benchmarking.

• Use established frameworks and standards: Organizations can utilize established reporting schemes such as the Global Reporting Initiative’s GRI Standards or the IFRS Foundation’s Sustainability Disclosure Standards. These standardized reporting frameworks can help with the selection of relevant ESG metrics, promoting comparability and transparency. ESG reporting software typically has these embedded.

• Elevate the intangible: Develop innovative approaches to capture and communicate the intangible aspects of your ESG performance. One approach is to use qualitative indicators alongside quantitative metrics. This allows organizations to provide a comprehensive view of their ESG performance, highlighting the qualitative achievements that may not be easily quantifiable but are nonetheless significant.

Challenge #2: Data collection

A common roadblock in corporate sustainability reporting is the burdensome data collection process. 

More often than not, efficient data collection is impossible due to:

• Data fragmentation and silos: Manually gathering relevant sustainability data from diverse sources within the organization can be complex, particularly if the data is dispersed across departments and systems. Indeed, fragmentation seems to be the name of the game. Spreadsheets are prone to error, and disparate systems often have no way of speaking to one another (at least, not in a way that a human can easily comprehend). And, because data banks are siloed, integration or system interoperability is not readily available.

• Inefficient and convoluted workflows: Inefficient and complex workflows areone of the byproducts of the traditional siloing of ESG data. Because corporate sustainability is inherently a cross-functional exercise, nearly every department tends to oversee some aspect of it. From human resources to building operations to finance, coordinating the data collection, reviews, and approval from these various teams can be arduous and prone to error.

• Data complexity and scope: ESG reporting covers a broad spectrum of environmental, social, and governance issues, each with its own set of indicators and data requirements. Tracking and collecting data across these diverse dimensions can be complex and resource-intensive. In addition, relevant ESG data might be hard to come by: it may be proprietary, confidential, or difficult to access, particularly when it comes to supply chain information or indirect environmental and social impacts.

Strategies to consider

When addressing data collection challenges, you can: 

• Invest in data collection systems: Consider an ESG data management software for automated data collection. This will streamline data collection, validation, and analysis processes, reducing the resource and time-intensive nature of collecting ESG data from multiple sources.

• Engage internal stakeholders: Involve relevant departments and personnel within the organization, such as sustainability teams, finance, operations, and human resources. Collaborate to establish clear responsibilities and processes for data collection, ensuring a coordinated effort. Sustainability committees can also play a pivotal role, overseeing the development and implementation of ESG strategies and streamlining reporting processes.

• Conduct regular materiality assessments: Streamline your data collection by focusing only on relevant and material topics. Regular assessments help eliminate unnecessary data collection and ensure alignment with key priorities. For organizations subject to the CSRD, the double materiality requirement makes this a mandatory and integral part of the process.

Challenge #3: Data management and verification  

Your data is now collected, but it still needs to be managed and verified for accuracy, completeness, and reliability. At this stage, it’s natural for organizations to grapple with the ESG reporting challenge of data management and verification.

Typical challenges include:

• Limited (or absent) data governance: Robust data governance is crucial for maintaining data integrity. However, it’s common for organizations with relatively lower levels of ESG maturity to lack a solid data governance framework, or, if one is in place, it might be on the flimsy side. Without proper governance, data can become outdated, inconsistent, or subject to manipulation.
• No single source of truth: The absence of a centralized system of record (SOR) hinders efficient data collection, management, and auditing. Plus, when key team members leave, there's a real risk of losing valuable institutional knowledge, including critical data points.
• Limited data quality and reliability: Relying on manual methods often results in incomplete or inconsistent data and an over-reliance on self-reported information without independent verification. Data verification can be complex and resource-intensive, particularly when dealing with large datasets or relying on third-party information.

Strategies to consider

Data verification and management in ESG reporting isn’t for the faint at heart. Let’s explore several tips that can help reduce your burden: 

• Implement robust data verification practices: Conduct regular data verification exercises to ensure the accuracy and reliability of the collected data. This can involve third-party verification or data validation techniques to identify and adjust inconsistencies or errors.
• Invest in a centralized system of record (SOR): Consider adopting a robust ESG data management software that automates data governance, verification, and validation. As a single source of truth, a SOR naturally improves the reliability, robustness, and consistency of your non-financial data. In turn, this helps ensure external verification and audit readiness for your sustainability disclosures. 
• Enhance transparency and disclosure: Communicate data sources, methodologies, and assumptions. Provide detailed explanations and context to help stakeholders understand the limitations and potential biases in the data.

Challenge #4: Stakeholder engagement and communication 

Another frequently encountered challenge in ESG reporting pertains to managing relationships with stakeholders, critical to driving long-term sustainability success. While regular engagement is key for understanding stakeholder expectations, gathering data, fostering trust, etc., it's common for organizations to struggle with these activities.

But what exactly makes stakeholder engagement so difficult?

• Diverse stakeholder groups: ESG reporting involves engaging with a wide range of stakeholders, including investors, employees, customers, communities, NGOs, and regulatory bodies. Each stakeholder group has unique interests, perspectives, and information needs, making it challenging to communicate and engage with all of them simultaneously.

• Varying levels of knowledge + complexity: Stakeholders have different levels of familiarity and understanding of ESG issues, reporting frameworks, and terminology. Communicating complex ESG topics—and large volumes of data—in a way that is accessible and meaningful to diverse stakeholders isn’t always immediately apparent. Moreover, making the data understandable and relevant requires careful interpretation, analysis, and contextualization, which can’t be achieved overnight. 

• Transparency and trust concerns: Stakeholders increasingly demand transparency and assurance regarding ESG performance. However, ensuring the accuracy, reliability, and consistency of reported data can be difficult, leading to concerns about greenwashing or misleading information. Indeed, a lack of robust data management, verification processes, and streamlined communication makes trust hard to come by. 

Strategies to consider

 What can your team do to overcome the above challenges?

• Identify key stakeholders: Do you know who your stakeholders are? If not, the first step is to conduct a stakeholder mapping exercise to identify the individuals, communities, and organizations with a vested interest in your sustainability performance. Divide them into two key groups: internal (e.g., senior management, board members) and external (e.g., customers, suppliers, investors, distributors, regulators). What is most critical for them? What do they prioritize?

• Develop an engagement strategy: Develop a comprehensive strategy that outlines the objectives, methods, and frequency of engagement. Begin early in the ESG reporting process and continue on an ongoing basis. Consider how you will:
  • Involve your stakeholders in decision-making
  • Ask for their input 
  • Provide progress updates
  • Establish communication channels
    

• Tailor communication to stakeholder needs: Meet your stakeholders where they’re at by communicating clearly and in a way that resonates with their needs and priorities. Consider how you can:
  • Prioritize clarity and simplicity: Present complex ESG information clearly and concisely. Try to avoid using jargon.
  • Use visuals and infographics: Create visuals to communicate complex data and highlight key insights.
  • Be mindful of audience relevance: Recognize the specific interests and perspectives of different stakeholders, such as investors, customers, employees, regulators, NGOs, and the local community; tailor your communications accordingly.

You’re not alone. 

Mitigating the chaos of a swiftly-changing ESG reporting landscape isn’t a simple undertaking—nor can it be achieved overnight. The challenges of ESG reporting are real, creating frustration for forward-thinking organizations across sectors and industries. 

This is precisely why a growing number of global enterprises are turning to ESG data management solutions to consolidate their sustainability data, streamline their disclosures, and own their narrative for key stakeholders.

Trusted by global enterprises, Novisto is an ESG data management and reporting platform that simplifies the collection, auditing, and reporting of ESG data. We empower sustainability and finance teams with the confidence that their disclosures are accurate and reliable, allowing them to take control of their narrative and disclose what's relevant to investors and key stakeholders.

Request a demo of Novisto today.