ESG disclosures are quickly evolving into a fundamental requirement for corporations, with most of the world’s largest companies already producing an annual ESG report. For instance, a 2022 KPMG survey reveals that 79% of the N100 and 96% of the G250 report on sustainability, figures that will likely rise amidst the flurry of recent regulatory changes.
It’s undeniable—we’re approaching a juncture where ESG reporting is increasingly becoming a mandatory, structured, and externally assured business practice, on par with traditional financial reporting. But before we hit the collective panic button, let’s cover the basics of what an ESG report encompasses, including its purpose, benefits, and core challenges.
Understanding ESG reports
An ESG report is a public document that discloses environmental, social, and governance data, providing stakeholders with insight into how effectively a company manages its ESG issues.
ESG reports introduce a layer of transparency around potential risks and opportunities, instilling stakeholder confidence that your commitment to sustainability is genuine. As the demand for sustainability information intensifies from investors, consumers, employees, and other stakeholders, generating high-quality, reliable, and accurate ESG data has become a critical cross-functional exercise for businesses, both large and small.
Additionally, ESG reports contain information about a company’s impact materiality—its positive and negative influence on people, the planet, and society—and its financial materiality—how ESG issues impact the company’s financial performance, operations, risk profile, etc. Consideration of both is known as double materiality, which companies are increasingly expected to do.
What’s the main purpose of an ESG report?
The primary purpose of an ESG report is to transparently disclose information about the progress of a company’s ESG programs. And, while companies want to do good and conduct themselves ethically, they also want to attract financing, nurture a positive public image, and remain competitive.
More specifically, an ESG report provides the market with reliable and decision-useful information. Why? Because diverse stakeholders require such information to make decisions about the company—whether to invest in it, do business with it, or join its ranks. This is linked to the fact that stakeholders increasingly want to generate impact; reporting is part of this dynamic, serving as a conduit between a company and its stakeholders.
Moreover, in light of mounting concerns surrounding greenwashing, showing that your ESG programs are concrete and authentic is good for business. Ensuring data accuracy and transparency in periodic disclosures is crucial for reputational capital. This is why businesses often adopt reporting standards and frameworks like the GRI to achieve consistent and thorough reporting.
Lastly, ESG reports also highlight areas for improvement, provide more granular-level insight into performance at the metric level, and shed light on the degree of integration with business strategy. And, because ESG performance is increasingly important to investors, ESG reports are a tool to attract those aligned with company values.
Who are the stakeholders?
An expanding array of actors are demanding that companies exhibit transparency across the broad spectrum of ESG considerations. These stakeholders include:
- Investors integrate ESG into their investment decisions to optimize returns and allocate capital to address system-level risks. Ultimately, they’ll scrutinize ESG reports to evaluate the feasibility of their investment choices.
- Increasingly, employees are choosing to work for companies with a clear sustainability-driven corporate purpose. ESG reports help employees understand the company’s commitment to social responsibility and ethics, fostering a sense of purpose in their work.
- A growing number of consumers want to purchase from businesses that respect the environment and people. By conveying your company’s values and sustainability initiatives, ESG reports provide the transparency that consumers require. In turn, this influences buying preferences and fosters brand loyalty.
- Regulatory bodies and NGOs are actively shaping the landscape of corporate responsibility. They are putting forth policies and regulations that mandate companies to take action and disclose information regarding their ESG-related matters. ESG reporting meets these regulatory obligations and facilitates NGO engagement focusing on environmental and social causes.
By engaging with their stakeholders through ESG reporting, organizations can build trust, strengthen relationships, and unlock new value.
ESG reports—the benefits
ESG reporting extends beyond conventional financial reporting by concentrating on non-financial measures that span a wide range of ESG practices. By fostering transparency and accountability, committing to ESG reporting offers numerous benefits, including:
- Better risk management: Since the ESG report is the culmination of many prior activities (data governance, collection, verification, and so on), it serves as a public declaration that a company is: 1) aware of its material risks and opportunities, and 2) and is staying on top of them. Thus, reporting constitutes a chance to communicate potential weaknesses, enabling informed oversight for enduring sustainability. Ultimately, disclosing ESG performance enhances your company’s risk profile and financial performance.
- Enhanced investment attractiveness: Producing accurate, high-quality ESG reports can help companies access a growing body of responsible investors seeking financial gains and evidence of strong ESG credentials. This translates to better capital availability, reduced borrowing expenses, and an enhanced reputation.
- A sharper competitive edge: In an era of conscious consumerism and purpose-driven employees, ESG-oriented firms resonate with consumers and retain talent. Companies know that prioritizing sustainability opens doors to new markets and products. For example, cultivating ESG in organizational culture can also encourage green innovation. Ultimately, strong ESG performance has the potential to foster favorable brand perception and reputation, a differentiating factor in a crowded marketplace.
Challenges in ESG reporting
While ESG reporting offers many benefits to companies and their stakeholders, the challenges of producing quality ESG reports are real—and recurrent. Let’s explore some of the most common ones:
- No data governance framework: Data is a foundational building block for managing and reporting business-critical issues. Yet, many companies lack a solid data governance framework, which compromises ESG data quality and makes data management harder than it has to be. Keep in mind that data governance is both a foundational exercise and a continuous improvement process. If you’d like to learn more, feel free to explore our white paper: “Quality In, Quality Out: The Benefits of Better ESG Data Governance”.
- Data collection is messy: Gathering reliable and accurate ESG data is an ongoing challenge for many companies, especially those at an early stage of ESG maturity, those with complex supply chains, or many global locations. Because most organizations lack a centralized ‘data hub’ or single system of record (SOR), ESG data is often siloed and scattered across departments and legacy systems. And, without the right ESG management tools in place, sustainability teams are especially prone to experiencing the three O’s: becoming overburdened, overwhelmed, and overworked.
- Lack of focus: Identification of which ESG issues are the most salient to your business is a subjective exercise, one that requires time, energy, human resources, and buy-in. Organizations must select indicators aligning with business and stakeholder expectations. Not all ESG matters are applicable universally; relevance depends on a company’s operations, location, and value chain. Essentially, it’s about what, how, and where a company operates. The goal is to prioritize ESG concerns pertinent to your company and its core endeavors.
A word on ESG metrics
ESG reports provide insight into company performance across a range of particular metrics. But, while financial data is primarily numerical, ESG metrics encompass a blend of both quantitative and qualitative data. Disclosing ESG metrics gives investors and stakeholders a deeper understanding of a company’s actions, material issues, and long-term objectives.
Quantitative ESG metrics provide numeric benchmarks, enabling seamless comparisons over time and across companies. They unravel facts about quantities, ratios, percentages, and the like—diverse units beyond mere dollars.
On the other hand, qualitative metrics emerge as narrative puzzle pieces, trickier to gather and align. They articulate qualities, traits, strategies, processes, and actions that defy quantitative measurement. Social factors are often qualitative—think diversity, equity, and inclusion (DEI) practices or a company’s impact on local communities. While these metrics are relatively subjective, they afford insight into a company’s ethos and principles.
For example, ESG metrics can include:
- Greenhouse gas emissions (Scopes 1, 2, and 3);
- Waste management (e.g., overall water usage in water-stressed regions).
- Diversity, Equity, and Inclusion (DEI): Proportion of representation of racial or ethnic groups in both management and employee roles;
- Labor practices: Percentage of active workforce covered by collective bargaining agreements.
- Cybersecurity: Incidents of data breaches, proportion of breaches involving personally identifiable information, number of users impacted;
- Executive compensation: Yearly total compensation ratio between CEO and median for all staff members.
Companies typically use both quantitative and qualitative metrics in their ESG reports, painting a holistic portrait of their sustainability journey.
What about standards or frameworks in ESG reporting?
Companies use various standards and frameworks to manage and report on the ESG issues that are material to their business. However, standards and frameworks are not the same:
- An ESG standard contains detailed disclosure criteria encompassing performance metrics. Standards involve a public interest focus, independence, due process, and public consultation, strengthening the basis of what is being reported. They offer consistent guidelines for companies to communicate their ESG performance, objectives, and policies. Rigorous governance and stakeholder consensus drive their formulation.
- An ESG framework offers a broader, more contextual ‘frame’ for ESG reporting. As ‘guiding principles,’ frameworks shape comprehension of a subject’s trajectory without specifying data collection or reporting methods. While not detailing performance metrics, they mandate high-level disclosures. Often utilized alongside standards, frameworks arise through more streamlined advisory processes.
At their core, standards and frameworks are tools that contain different underlying ESG metrics. For example, the GRI standards segment ESG metrics into three groups: 1) Universal Standards for all companies’ activities and governance, 2) Sector Standards for specific industries, and 3) Topic Standards based on material impacts.
The future of ESG reporting
ESG reporting is poised to play an increasingly significant role in the business landscape as sustainability concerns and stakeholder expectations evolve. Here are some emerging trends and developments shaping the future of ESG reporting.
Emerging trends to keep an eye on
- Integrated reporting: The trend is shifting towards integrating financial and ESG information within a comprehensive reporting framework. Thus, we’re seeing a convergence of financial and non-financial (i.e., sustainability) reporting standards.
- Changing disclosure conditions: New regulations are requiring companies to produce more comprehensive ESG disclosures and to make them more widely available. Moreover, they’re making it mandatory to apply specific standards (which make disclosures more comparable), to obtain external assurance (which makes disclosures more reliable), and to digitize their ESG reports—which makes disclosures more sharable, discoverable by machines, and readable by both humans and machines.
- Emphasis on materiality: Companies increasingly prioritize identifying and disclosing pertinent ESG factors that align with their operations and stakeholder interests. Yet, without periodic materiality assessments, determining which ESG subjects warrant focus becomes complex. These assessments not only pinpoint significant areas for stakeholders but also illuminate where a company can make the most significant impact. Consequently, the outcomes of these evaluations shape the content of a company’s ESG report.
- Use of ESG software: Advances in technology and data analytics are simplifying the reporting process. For example, automation and artificial intelligence help bolster precision, efficiency, and transparency. Many companies increasingly use ESG data management & reporting software to streamline their data collection and reporting processes.
An evolving regulatory landscape
We’re rapidly transitioning from voluntary or “soft” disclosures to mandatory sustainability reporting. The requirements for such reporting vary depending on the jurisdiction and the nature or size of the company.
More recently, we’ve seen a flurry of change in the market. The U.S. Securities and Exchange Commission (SEC) is currently finalizing its new climate-related disclosure rules, which are eagerly awaited. The proposed rules are inspired by the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
Meanwhile, the finalized IFRS Sustainability Disclosure Standards were released on June 26, 2023. They comprise two standards, the IFRS S1 (general standards) and IFRS S2 (climate-specific standards), and emphasize financial materiality.
On July 30, 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS). This means that companies subject to the Corporate Sustainability Reporting Directive (CSRD) must report according to the ESRS. The new regulations will apply to about 50,000 companies and will require disclosure of double materiality (both impact and financial materiality).
It’s time to produce vibrant ESG reports
Greenwashing anxieties, a worsening climate crisis, and a rapidly shifting regulatory landscape are driving the ESG reporting revolution head-on. This presents a unique opportunity for companies to craft a compelling narrative around their ESG and sustainability programs.
Novisto can help you tell your sustainability story through quality data. Our ESG management platform streamlines the reporting process through automated data collection, performance tracking, and dynamic stakeholder engagement tools. Find out why global brands are using our ESG management platform to elevate their sustainability performance—for the long term.
Book your demo today.