ESG reporting

What is ESG reporting?

ESG reporting is a type of corporate disclosure that details the environmental, social and governance (ESG) promises, efforts and progress of an organization.

Although organizations have long had to report on financial and operational performance attributes, ESG reporting is a newer phenomenon that gained traction in the early 2000s. The term ESG describes an organization's sustainable and ethical impact on the environment, society and governance.

An ESG report is an opportunity for an organization to provide a milestone update on progress toward environmental, sustainability and corporate governance goals. Its aim is to provide an accurate account of efforts undertaken and the expected impact of those efforts from both a qualitative and quantitative perspective with ESG data. Much like an annual report or other forms of corporate disclosure, an ESG report is a communication tool that can help an organization provide information to employees, investors and regulatory authorities.

Why is ESG reporting important for organizations?

ESG reporting is important for organizations for many reasons, making it a corporate mainstay across industries and jurisdictions.

Transparency. As climate change and corporate social responsibility are issues of concern, organizations must be transparent about their operations. ESG reporting provides that transparency, giving organizations the opportunity to report on ESG efforts and progress.

Investor demand. Investors have long relied on all manner of metrics to gauge the value and growth potential of an organization. An ESG report is another critical piece of information used to help investors make good decisions.

Brand loyalty. Consumers choose to do business with organizations that align with their beliefs about governance and sustainability. Consumers are likely to exhibit more brand loyalty with those organizations that report on ESG initiatives and progress.

Compliance. There are a growing number of regulations globally requiring organizations to disclose and report on ESG initiatives, sustainability and governance. An ESG report provides a way for organizations to make proper disclosure and helps ensure regulatory compliance.

Risk management. ESG-related issues can expose organizations to risk. An ESG report is an opportunity to get ahead of those issues by disclosing activities and identifying potential areas of risk.

Innovation. ESG reporting can also offer business benefits that help drive and improve ESG strategies. Reporting can be the driver that pushes an organization to enhance efficiency and identify areas that need improvement.

Goal tracking. An ESG report is a way for an organization to be accountable for its ESG performance claims and strategy. ESG reporting also provides a way to track progress on goals, as many targets can be multiyear, longer-term strategies that play out over a period of time.

Are companies required to do ESG reporting?

Depending on where a company's headquarters is, there can be national or specific jurisdiction-level regulations for ESG reporting. There are also a growing number of regulations in specific industries calling for some form of ESG reporting.

In the European Union, the Sustainable Finance Disclosure Regulation came into effect in March 2021, providing requirements for ESG reporting with a focus on sustainability-related initiatives. That regulation is complemented by the Corporate Sustainability Reporting Directive, which came into effect in January 2023. Large organizations in the U.K. are required to report using the Streamlined Energy and Carbon Reporting (SECR) framework.

Publicly traded corporations have come under increasing pressure in recent years to have ESG reports.

The U.S. Securities and Exchange Commission has issued proposals and guidance for climate-related disclosure as part of ESG reporting, as well as proposing future regulations. Individual exchanges, including the New York Stock Exchange and the Nasdaq composite, have encouraged issuers to provide ESG reporting.

Although ESG reporting isn't mandatory, a November 2022 report from the Governance & Accountability Institute Inc. found that 96% of companies on the S&P 500 index have published an ESG report.

ESG reporting might not be a legal requirement for all companies in every jurisdiction, but not having a report can lead to issues. A company that doesn't have an ESG report will be conspicuous in its absence, leading potential investors, consumers and employees to question its position on ESG issues.

ESG reporting frameworks to consider using

ESG reports follow a specific approach or framework that provides guidance and structure on how the report and its findings must be measured and communicated. There are many reporting frameworks that organizations can use.

Climate Disclosure Standards Board Framework. The CDSB Framework was a model designed to help organizations measure the environmental side of ESG reporting. Although the framework is still used by some ESG reports, the CDSB was merged into the International Financial Reporting Standards (IFRS) Foundation in January 2022 to create the International Sustainability Standards Board (ISSB) alongside the Sustainability Accounting Standards Board.

Sustainability Accounting Standards Board. The SASB Framework is an approach to providing information material to financial reporting on an organization's sustainability efforts. SASB got its start in 2011 and, in 2022, was consolidated into the IFRS Foundation to build a new framework for ESG reporting.

IFRS Sustainability Disclosure Standards. The ISSB is developing a new set of standards that builds on the prior CDSB and SASB frameworks. The new framework is an attempt to create a consolidated and comprehensive view of sustainability efforts in a reporting organization.

Global Reporting Initiative Standards. The GRI Standards aim to provide a set of sustainability standards for reporting. GRI has segmented its reporting model into a modular approach that includes sector standards for a specific industry vertical and a universal standard that apply across all domains.

Streamlined Energy and Carbon Reporting. The U.K. has developed its own reporting framework and guidance for ESG reporting. The SECR goes beyond reporting numbers alone to requiring that organizations provide a detailed explanation of sustainability efforts. The SECR makes use of greenhouse gas reporting standards to provide a method for reporting on carbon emissions data.

Taskforce on Climate-related Financial Disclosures. The Financial Stability Board created the first set of recommendations from the TCFD in 2017. The TCFD approach includes four thematic areas: governance, strategy, risk management, and metrics and targets. These areas are interrelated and supported by 11 recommended disclosures that provide information for investors and others to understand how companies evaluate and address climate-related issues.

United Nations Guiding Principles Reporting Framework. The United Nations has many reporting frameworks that are applicable to ESG; among them is the UNGPRF. The focus of the UNGPRF is on ethical governance and issues related to human rights. Alongside the UNGPRF is the complementary United Nations Global Compact, which provides guidance on helping organizations adopt sustainable practices.

Best practices and tips for effective ESG reporting

ESG reporting can be a complex and time-consuming operation. As with any type of corporate disclosure, there is a clear need for accuracy and diligence on everything that's reported.

The following are a few best practices and tips for effective ESG reporting:

• Define objectives. Have a goal in mind for what the organization wants to achieve. Having a set of well-defined goals is critical at the earliest stages of reporting.
• Identify stakeholders. Understanding who the stakeholders are in the organization will help align the company on goals and assist with getting the right data for reporting.
• Research ESG reports from industry leaders. ESG reports aren't a new thing anymore. There's a lot that organizations can learn from industry leaders.
• Accurate data collection. Make sure the ESG data that's collected is both precise and confirmable, and that it's gathered in a dependable and open way.
• Provide context. ESG reporting should be more than a compilation of figures and measurements. There also must be context around ESG efforts to provide perspective on what's going on.
• Use a framework. Adhering to an existing ESG framework is important, as it provides guidance and best practices for how the organization should structure and convey the report and its data.
• Review and repeat. An ESG report isn't a one-off task; organizations must review, update and improve it every year.