The practice of ESG reporting is growing in profile as investors and broader stakeholders pivot to a more holistic view of how companies should behave and be evaluated. For board directors and governance teams, it represents one of the key operational outcomes of the ongoing shift away from shareholder capitalism in favour of stakeholder capitalism.
Historically the board’s primary focus was to drive value for shareholders, using financial measures to demonstrate success. Still, this primarily financial focus is no longer enough to convince investors of the business’s health over the long term. Increasingly, investors — and regulatory bodies — demand to know how the business is positioned to mitigate and respond to existential threats such as climate change, social justice evolution and, of course, global health threats.
In response, companies are prioritising ESG Strategy to ensure they have a long-term approach to reducing, managing and avoiding current and emerging risks around the environment, society and governance. However, having a strategy is just the first step; implementing, monitoring, reporting and improving the strategy is where the ultimate value lies. To demonstrate that the business is acting sustainably and correctly identifying key risks and opportunities for growth, directors need to provide the in-depth intelligence that ESG reporting delivers. Therefore, building ESG reporting competence is a useful undertaking that is best addressed sooner rather than later.
What Should ESG Reporting Include?
Environmental, social and governance (ESG) covers a diverse range of activities, which means reporting is a significant undertaking. Businesses can struggle to identify what to include, and there has been little consensus on the best approach. The various ESG rating organisations have different weightings and emphasis across the various areas, meaning the same company could receive different ESG scores depending on which methodology was used to evaluate their metrics.
However, the recognition that businesses will be more open to ESG reporting if they can be assured of a level playing field has driven several initiatives that are building consistency around the most effective approach.
The first is the Task Force on Climate-Related Disclosures (TCFD), created by the Financial Stability Board in 2015 to develop consistent climate-related financial risk disclosures for companies, banks, and investors to provide information to stakeholders.
The U.K. has become the first nation to make climate disclosures mandatory. In late 2020, Chancellor Rishi Sunak announced that listed commercial companies, large private companies, banks, building societies, insurance companies, and many more would be required to report on their climate impact by 2023.
After the work of the TFCD and recognising that there are far more than financial issues at stake, the World Economic Forum has partnered with the International Business Council (IBC) to develop a set of 21 “common metrics and disclosures on non-financial factors”. Rather than undoing the excellent work that has already taken place, the metrics are deliberately based on existing standards.
The WEF sustainable value creation core metrics have strong potential to become the standard for ESG reporting, so companies should begin ensuring that they can report their impacts and performance in each area.
The following is a summary of the four key areas and some of the metrics that should be included in ESG reporting. More in-depth details, including how to report progress towards targets, are included in the WEF IBC Measuring Stakeholder Capitalism Report 2020.
Principles of Governance:
- Organisational purpose
- The composition of the governing body
- Stakeholder engagement and identification of key issues impacting stakeholders
- Ethical behaviour, including anti-corruption and whistle-blowing risk
- Opportunity oversight
- Greenhouse gas emissions (GHGs)
- TCFD implementation
- Land use and ecological sensitivity
- Water consumption and withdrawal in water-stressed areas
- Diversity and inclusion
- Pay equality
- Wage levels, including the ratio of executive to the median compensation level for all employees
- Risk for incidents of child labour
- Health and safety records
- Support for employee wellbeing
- Staff training provided
- Employment and wealth generation
- Absolute number and rate of employment
- Economic contribution, including revenues, operating costs, wages and employee benefits, community investment, etc.
- Financial investment contribution
- R&D expenses
- Total tax paid
It is also important to note that, for many of these metrics, ESG reporting should cover the entire supply chain and the effects caused by consumers using products or services, not just the direct impacts of the organisation.
What About CSR Initiatives?
The WEF metrics, as the name suggests, are focused on measurability. This can be more difficult to report on for activities with less tangible outcomes. Some aspects of Corporate Social Responsibility programmes are harder to quantify. Still, they should be incorporated into ESG reporting where possible and linked to the relevant pillar of Governance, Planet, People or Prosperity.
What Does ESG Reporting Achieve?
Effective ESG reporting requires considerable investment by the organisation, but it also delivers a range of benefits.
It provides investors and other stakeholders with the means to objectively assess the business and its viability as an investment target, supplier, employer or partner. The drive for sustainable business is becoming a virtuous circle, as companies focus on improving their performance by stipulating that the entities they work with also meet high standards. Real-time access to relevant data will be increasingly business-critical in a variety of contract negotiation situations.
Acting early to put the framework and processes in place to collect, analyse and report on ESG performance anticipates the likelihood that reporting will likely move from voluntary to mandatory in the coming years. As evidenced by the Chancellor’s move to make TFCD reporting compulsory, being proactive about this now can put companies ahead of future compliance obligations.
ESG reporting allows better measurement of progress towards key targets. The more data collected, the more accurately companies can understand where they are making progress and where they must do work. Analysis of ESG reports can also help businesses identify emerging risks sooner, allowing more time to address them before they become critical issues.
ESG reporting itself is a good indicator that the organisation is transparent and engaged in improving its performance. As such, it can offer reputational benefit. However, this should not be the main driver for ESG reporting — businesses must avoid greenwashing and ensure figures are accurately presented without bias or omission.
Building an ESG Reporting Strategy
Board sponsorship is essential as businesses build their ESG reporting strategy and competence. It requires investment to develop the reporting mechanisms, frameworks and processes to deliver the right data to the right people at the right time. Diligent’s ESG Solutions help companies turn their ESG commitments into action through ESG integration and effective reporting.
Acting early to establish ESG reporting is advisable. The earlier the business puts its ESG strategy in place, the more data it will have, the less likely it will be to find itself non-compliant and the quicker it can begin reaping the benefits.
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