Toward more effective ESG reporting

Environment, social and governance reporting: It’s new, it’s evolving, and it’s worldwide. As it stands, comparability between different ESG reports is low, and investors’ demand for consistency is high. While most current frameworks are voluntary, they won’t be for long. Reform, global standardization, and mandatory disclosure are right around the corner.

Now is the time to prepare for ESG reporting. Let’s explore the biggest obstacles to producing ESG reports so companies can start addressing these challenges before they bottleneck reporting efforts.  

1. Multiple ESG frameworks 

The Global Reporting Initiative, the EU Taxonomy, the Sustainability Accounting Standards Board, and the Task Force on Climate-Related Disclosures — these may just be the beginning. While no single, global standard for ESG reporting exists, there are a lot of regional or industry-specific standards to navigate.  

Ultimately, organizations are going to have to choose one or more frameworks to adhere to meet investor demand, adequately showcase their sustainability, and meet the criteria for ESG credit scoring. (Our recent post, “The ABCs of ESGs,” gives a brief overview of some of the most notable ESG standards.) 

The mixed bag of competing standards and frameworks is a big challenge for organizations according to a recent study by Financial Executives International, which indicates that 85% of companies are using not one, but multiple ESG reporting frameworks. 

For now, companies may view ESG reporting as mainly for investors instead of regulators, but as the regulations continue to take shape, things will change, and companies will want to be ready. 

2. Evolving ESG regulations 

The European Union has instituted more stringent regulations in recent years — and more changes keep coming.  

As of March 2021, the new Sustainable Finance Disclosure Regulation started requiring financial market participants to disclose 18 mandatory indicators and another two of 46 optional indicators.  

The Non-Financial Reporting Directive (a standard that lays down the disclosure rules for non-financial and diversity information by large companies) is also scheduled for an overhaul. An updated, strengthened version of the NFDR’s basic disclosure requirement, known as the New Corporate Sustainability Reporting Directive is set to launch in 2022.

With these EU regulations leading the charge, standard-setters are beginning to succumb to the pressures from investors, regulators, and organizations eager to harmonize competing frameworks. In the last year, we’ve seen three big moves occur. 

First, in June of 2021, the Sustainability Accounting Standards Board and International Integrated Reporting Council joined forces to form the Value Reporting Foundation. They plan to work with other standards groups like Global Reporting Initiative, the Carbon Disclosure Project, and the Climate Disclosure Standards Board.  

Then, in November 2021, the International Financial Reporting Standards Foundation announced its plans to set up an International Sustainability Standards Board, which would deliver comprehensive global sustainability-related disclosure standards. The goal is to provide investors and market stakeholders with information about sustainability-related risks to inform their decision-making.  

Finally, in March 2022, the U.S. Securities and Exchange Commission released a set of proposed rules on climate-related disclosures for public companies.

If this is any indication of the coming future of ESG reporting, two things are certain: First, standards are changing, and second, organizations will have their work cut out for them when it comes to data management and transforming that data into meaningful disclosures. Speaking of data … 

3. Complex ESG data management and process

Data management is going to be one of the biggest, if not the biggest, challenges companies will face when creating ESG disclosures. For example, the SFDR requires public EU companies to disclose nine mandatory environment-related indicators and six mandatory social indicators (covering employee, human rights, anti-corruption and anti-bribery topics.) These organizations must also report on at least one of 22 optional environmental indicators and one of 24 optional social indicators.  

This is just the infancy of ESG regulation and it’s already full of complexity.  

To meet regulatory requirements or even just to adhere to voluntary frameworks, many organizations are starting to get their data ducks in a row. A study by global business consulting firm Privoti found that 68% of financial executives surveyed said that measuring and reporting ESG risks and issues has become part of their finance team’s role within the last year. Another 75% said senior leaders and boards are developing ESG metrics for progress tracking.  

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And yet ESG reporting is already posing challenges to companies because sustainability is inherently hard to quantify. Since ESG data is often divided in silos across the business or manually logged in spreadsheets, a global, integrated picture of ESG gains and impacts is hard to paint. This underscores the importance of proper data management and the need for ESG frameworks and standards to guide the ESG process.

In addition, the connection between ESG results and financial performance isn’t well understood because businesses have no clear way to see how sustainable activities impact the bottom line. 

4. Understanding, managing and quantifying ESG risks 

Sustainability is broad and covers many facets including sustainable production, supply chain equity, responsible HR, data governance, and governance. But as they say, you don’t know what you don’t know.  

Barbara Porco, director for the Center of Professional Accounting Practices at Fordham Business School, said it best: “All elements of ESG reporting are based on proper risk management. You cannot manage your risk if you don't know what your risk is. ESG risks are especially challenging to monitor because many aren’t quantifiable. They can’t be defined in terms of dollars and cents. The most impactful sustainability initiatives might in themselves pose a risk to an enterprise because they may negatively impact the bottom line in the short term. Sustainability can be expensive, and it will be critical to make sure you have visibility into the today and tomorrow of your financial data.”

5. Using ESG performance to improve ESG plans 

ESG performance is useful beyond attracting investors or improving an ESG score. With the right data management tools, you can use ESG data to improve the impact and outcomes of ESG plans and activities. 

For many organizations, ESG data is walled in department line-of-business silos, which makes the line of impact from ESG activity to financial outcome hard to draw. 

Without ESG data co-existing with budgeting, planning, close and consolidation data within a software solution, companies won’t be able to play out scenarios to see an ESG activity’s potential impact on the balance sheet, P&L or cash flow to better refine the strategy. In other words, without tethering ESG reporting to ESG planning, organizations are essentially choosing instinct or gut feelings over a data-driven approach.

They can have positive ESG performance while identifying ways to reduce their costs. They can wow investors with ESG activities while improving revenue and being profit-minded. They can have their cake and eat it too. They just need a platform that centralizes all corporate financial and non-financial data, including ESG data, and one that allows them to integrate their ESG strategy into all their financial processes, including budgeting, planning, close, reporting and disclosure. Then, by using tools like scenario planning and what-if analysis, they can see the ripple effect of ESG decisions on financial performance and use that insight to improve financial results.

Closing thoughts

ESG reporting seems challenging because it’s new, elusive, complex, impacts every financial process, and because the stakes, for the sustainability motivated investor, are very high.

The key is to include ESG data into corporate performance management platform so that companies can:

• Be agile in the face of new and changing regulations;
• Automate disclosure requirements;
• Control, validate and report accurate ESG data;
• Monitor and measure ESG KPIs; and,
• See the impact of ESG activities on other financial and operational plans, and use those insights to improve ESG planning.