4 Challenges of ESG Reporting and Strategies for Overcoming Them

While 95% of the largest global companies disclosed their environmental, social and governance (ESG) impacts in 2021, the reporting landscape continues to be rife with swiftly-changing regulations, and a myriad of unknowns. The challenges of ESG reporting are real, and recurrent. 

Reflecting on their 2023 joint benchmarking study, the International Federation of Accountants (IFAC) and the Association of International Certified Professional Accountants reveal that “significant hurdles remain when it comes to providing consistent, comparable, and high-quality sustainability information for investors and lenders.” 

Although industry has come a long way in forwarding their commitment to sustainability, there’s much terrain left to cover. The field of ESG reporting is still a Brave New World. 

But why, in 2023, is this still the case? 

This post will be dedicated to unpacking this very question. First, we’ll provide a brief overview of the current sustainability disclosure landscape. Then, we’ll take a look at some of the common challenges of ESG reporting and propose strategies and tips for mitigating them. 

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

Navigating the Chaos

You know it better than most: ESG reporting is increasingly vital to your organization. And, it needs to be, as destabilization of the Earth’s systems become evermore pronounced. A greater number of stakeholders are concerned—investors, business partners, and employees—and they’re increasingly making choices based on their conscience. 

Reputational capital has never been more at stake. 

While organizations know that robust ESG performance can yield business benefits, forward-motion isn’t always linear. The challenges of advancing on your ESG journey are real—change is hard, and scary, with tangible consequences for getting it wrong.  

For the C-level and senior leaders, this has provoked a whole new set of anxieties—beyond the regular existential ones. Simply put: not adhering to new ESG requirements puts an entire business at risk. A 2022 study of 1,300 ESG decision-makers identified that they’re most concerned about the financial consequences of regulatory action (59%), as well as the potential for investors to withdraw support (57%), loss of sales (48%), and damage to reputation (48%).

Moreover, growing investor concerns surrounding greenwashing necessitates more robust sustainability disclosures. It’s not enough to just talk the talk—you need to start walking. Yet, this is easier said than done, especially if you’re at an early stage of ESG maturity. 

A 2023 report by PwC on Canada’s largest public companies sheds light on some of the challenges of ESG reporting: 

1. Companies are starting to prioritize ESG reporting, but they 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

ESG Reporting Challenge #1: Data Collection

A perpetual challenge in ESG reporting pertains to the burdensome data collection process. Indeed, collecting ESG data involves gathering information from various internal and external sources, including different departments within your organization, supply chain partners, industry benchmarks, and third-party data providers. 

However, several obstacles can impede the data collection process:

1. The data is fragmented and siloed: 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. Moreover, 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 readily comprehend). And, because data banks are siloed, integration or system interoperability is not readily available. 

2. Data quality and reliability: because most organizations lack a centralized ‘data’ hub, ensuring the quality and reliability of ESG data is a perennial challenge. Issues will arise from incomplete or inconsistent data, data gaps, errors in data collection or processing, and the reliance on self-reported information without independent verification.

3. Data complexity and scope: ESG reporting covers a broad spectrum of environmental, social, and governance factors, each with its own set of indicators and data requirements. 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.

When addressing the challenges of data collection, organizations can consider the following: 

1. Consider your organization’s material issues: conduct a materiality assessment to identify and prioritize the most relevant ESG issues for your organization. Focusing on material aspects reduces data complexity and allows your team to concentrate resources on collecting and reporting on the most impactful indicators.

2. Invest in data collection systems: utilize data management software and automation tools specifically designed for ESG reporting. These solutions can streamline data collection, validation, and analysis processes, reducing the resource and time-intensive nature of managing ESG data across various dimensions. Your team can better organize and centralize their sustainability data, and provide real-time insights for informed decision-making.
3. Engage internal stakeholders: involve relevant departments and personnel within the organization, such as sustainability teams, finance, operations, and human resources, to ensure comprehensive data collection. Collaborate across departments to establish clear responsibilities and processes for data collection, ensuring a coordinated effort to manage ESG data effectively.

ESG Reporting Challenge #2: 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. 

Typically, this encompasses: 

1. Data governance: establishing robust data governance processes is crucial for maintaining data integrity. Organizations must define clear roles, responsibilities, and procedures for data collection, storage, and updates. Without proper governance, data can become outdated, inconsistent, or subject to manipulation.

2. Data validation and verification: verifying the accuracy and reliability of ESG data is vital to build trust with stakeholders. However, data verification can be complex and resource-intensive, particularly when dealing with large datasets or relying on third-party information. Ensuring the credibility of data sources and implementing rigorous validation processes is essential.

3. Reporting boundaries and scope: defining the boundaries and scope of ESG reporting is essential to avoid data gaps or inconsistencies. Organizations must determine which entities, activities, and impacts are included in their reporting and clearly communicate these boundaries to stakeholders.

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: 

1. 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 employing data validation techniques to identify and rectify any inconsistencies or errors.

2. Collaborate and engage with stakeholders: engage with relevant stakeholders, such as industry peers, standard-setting bodies, and data providers, to promote data consistency, standardization, and sharing of best practices.

3. Strengthen data management systems: adopt a robust data management system that automates data governance, verification and validation. This should include features for conducting regular audits, and ensuring data accuracy and reliability through rigorous quality control processes.

4. Enhance transparency and disclosure: promote transparency by clearly communicating data sources, methodologies, and assumptions used in ESG reporting. Provide detailed explanations and context to help stakeholders understand the limitations and potential biases in the data.

ESG Reporting Challenge #3: Stakeholder Engagement and Communication

Another frequently encountered challenge in ESG reporting pertains to managing relationships with stakeholders, which is critical to advancing your sustainability initiatives. 

On the one hand, regular engagement illuminates stakeholder expectations, allows you to gather relevant data, and fosters trust. On the other, communication ensures that ESG information reaches stakeholders in a timely fashion, which is integral to promoting accountability and informed decision-making.

Yet, this is easier said than done. With so many moving parts, it can be challenging to simultaneously please everyone and advance your team’s most pressing ESG objectives. 

But what exactly makes stakeholder engagement so difficult? We’ve summarized the major challenges below: 

1. 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 difficult to effectively communicate and engage with all of them simultaneously.

2. 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 obvious. Making the data understandable and relevant requires careful interpretation, analysis, and contextualization, which can’t be achieved overnight. 

3. Transparency and trust concerns: stakeholders are increasingly demanding transparency and assurance regarding ESG performance. However, ensuring the accuracy, reliability, and consistency of reported data can be challenging, 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. 

We’ve just reviewed some of the core challenges of doing stakeholder engagement in the ESG reporting space. Now, let’s take a look at how you and your team can overcome them:  

1. Identify key stakeholders: do you have a firm pulse on who your stakeholders are? A helpful first step is to conduct a stakeholder mapping exercise to identify the individuals, groups, and organizations that have a vested interest in your organization’s sustainability performance. Divide them into two key groups: internal (e.g., senior management, board members) and external (e.g., customers, suppliers, investors, distributors, regulators).
   Additionally, consider their priorities and pain points: what is most critical for them? What are they most concerned about? 

2. Develop an engagement strategy: develop a comprehensive strategy that outlines the objectives, methods, and frequency of stakeholder engagement. Begin early in the ESG reporting process and continue it on an ongoing basis. Think about how you’re going to: involve them in decision-making, seek their input, and provide progress updates. 
   
   When developing your strategy, it can also be helpful to consider:

• Surveys and feedback mechanisms: conducting surveys or soliciting feedback from stakeholders is key to gathering their perspectives on ESG issues and reporting practices.
• Dialogue and consultations: hosting stakeholder consultations, roundtable discussions, or public forums provides opportunities for direct engagement and facilitates an open exchange of ideas and concerns.

3. Establish communication channels: creating transparent and accessible communication channels to facilitate engagement can go a long way. This can include dedicated websites, public forums, social media platforms, or regular newsletters that provide updates on sustainability initiatives and progress.

4. Tailor communication to stakeholder needs: meet your stakeholders where they’re at by communicating clearly, visually and in a way that is relevant to their needs and priorities. Consider how you can:

• Prioritize clarity and simplicity: present complex ESG information in a clear and concise manner, avoiding jargon and providing clear explanations.
• Utilize visuals and infographics: use visual aids, charts, and infographics to communicate complex data effectively 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, and deliver targeted communications accordingly.

ESG Reporting Challenge #4: Measuring & Quantifying ESG Factors

In this section, we’ll examine another recurrent challenge in ESG reporting, that of measuring and quantifying ESG factors. 

Although this is a critical part of the process, organizations often struggle to effectively evaluate and quantify the impact of their sustainability initiatives. These difficulties can stem from the subjective nature of ESG factors, the lack of standardized metrics, and the complexity of capturing the intangible aspects of sustainability performance. 

Let’s take a closer look: 

1. Subjectivity and complexity: ESG factors encompass a wide range of qualitative and quantitative indicators that capture an organization’s environmental, social, and governance performance. However, many of these factors are subjective in nature, 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. 
2. Standardized metrics and comparability: the lack of standardized metrics and frameworks for ESG reporting pose a significant challenge for organizations. Without clear guidelines, it becomes difficult to compare and benchmark performance across companies and industries. The absence of standardized metrics also hinders investors’ ability to evaluate and integrate ESG factors into their decision-making processes.
3. Capturing the intangible: ESG reporting goes beyond financial metrics—it must capture the intangible aspects of sustainability performance, which are typically hard to quantify. Factors like reputation, brand value, and social impact often lack clear measurement methodologies.

To address these specific ESG reporting challenges, organizations can leverage numerous solutions, including: 

1. Use established frameworks and standards: organizations can utilize established reporting schemes such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD). These standards and frameworks provide guidance on the selection and measurement of key ESG metrics, promoting comparability and transparency.
2. Elevate the intangible: develop innovative approaches to more effectively capture and communicate the intangible aspects of your ESG performance. One approach is to utilize qualitative indicators and narratives 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.
3. Engage ESG reporting experts: seek guidance from ESG reporting experts or consultants who have 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. 
4. Utilize ESG reporting software: if you’re giving serious thought to leaving your legacy systems and spreadsheets behind, it’s important to familiarize yourself with the options. Leverage ESG reporting software solutions that are specifically designed to align with leading guidelines. If you’re looking for a particular framework or standard, make sure that the software is specifically certified in that area. These software tools often come with built-in features and templates that simplify the reporting process, ensuring compliance with particular standards.

Equipped with new strategies and approaches, you can overcome the above-mentioned challenges in ESG reporting. Tangible improvements are possible, encompassing the areas of data collection and verification, stakeholder engagement, and measuring and quantifying ESG factors. Consequently, this not only produces more effective and accurate ESG reporting but provides you with a solid foundation for sustainable and responsible business practices.

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, and burdensome, creating frustration for forward-thinking organizations across sectors and industries. 

This is 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 important stakeholders.

Scalable and agile, Novisto’s trailblazing platform empowers you at every step of your sustainability journey. With deep, in-house knowledge and a growing team of professionals, we’re poised to take the ESG reporting revolution by storm. 
Contact us today, and let’s get started!