The 5 main challenges of ESG reporting and best practice

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The 5 main challenges of ESG reporting

There is no doubt, the ESG (Environmental, Social & Governance) landscape is becoming increasingly complex with shifting global goals, increasing regulations, high stakeholder expectations plus the need for consistent reporting.

Here are the five main challenges of ESG reporting:

1. Multiple reporting frameworks

Today’s challenge is that there are no unified standards or structure for reporting. This becomes a significant challenge for multinational organisations, as they may have to adhere to multiple reporting frameworks. According to Deloitte, Reporting is typically done by applying one or more frameworks.5 The two most commonly used reporting frameworks are the Global Reporting Initiative (GRI) and the Sustainable Accounting Standards Board’s standards (SASB). ESG reporting is typically done by publishing a sustainability report although more and more companies are disclosing data through webpages that showcase the companies ESG performance in addition to a more standard report.

2. Complex regulations

Sustainability reporting regulations can be confusing at the best of times. But it cannot be denied, there is a trend towards more active regulation with increasingly granular requirements, underpinned by accurate and robust disclosure. And it continues to evolve. Globally, guidelines are being agreed that will harmonise corporate environmental regulatory disclosures from 2024 onwards. EU law requires listed and large companies to disclose information on their risks and opportunities arising from social and environmental issues, as well as the impact of their activities.

3. Understanding the impact of ESG initiatives

Beyond reporting requirements, ESG performance data is useful for improving the impact and outcomes of ESG strategies and plans. However, for many organisations, ESG data is siloed, which makes it difficult to connect the impact from ESG activity to the financial impact. Without ESG data existing in the same software as the budgeting, planning, and financial data, leaders, and decision-makers are not able to test scenarios to see an ESG activity’s potential impact on the balance sheet, P&L, or cash flow to better refine the strategy. So, effectively, without connecting ESG reporting to ESG planning, leaders are essentially going by guesswork.

4. Defining and quantifying ESG risks

Even though many organisations have discussions about ESG risk, not all have formal definitions, identified KPIs or systems in place to monitor them. This is especially challenging, as many are not quantifiable, and cannot be defined in terms of currency calculations.

5. Complex data management

ESG can encompass everything from diversity initiatives to executive compensation as well as environmental issues. Therefore, leaders need to gather data from across the business, which is both financial and non-financial. For many organisations, the data often resides across multiple systems that are not connected to each other, let alone the planning, and reporting systems. In such cases, the entire process is done manually by exporting large volumes of data and working in spreadsheets, creating delays, inaccuracies, and potentially corporate risk. Additionally, disclosure requirements change frequently, making the reporting landscape difficult to navigate. This is of course, hampered by a lack of consensus on terminology and definitions.

Finance, together with the teams responsible for ESG reporting, will need to work closer than ever as global regulators now demand climate-related disclosures, supported by auditable, verifiable data. Companies can no longer turn a blind eye to ever-increasing sustainability reporting laws and regulations that are coming into force globally.

For some organisations, knowing where to begin with ESG reporting can be confusing, but the process should be treated as a journey. It begins with finding the right way to instil sustainability practices into the organisation, while staying true to the organisational values and accounting for the needs of stakeholders.

ESG reporting best practice

Many companies are announcing their latest ESG initiatives and teams, but most are new and will require time to mature and be fit for purpose. However, ESG needs to be more than just good intentions, it requires a tangible, practical plan that achieves tangible results.

The four main areas of concern that will have to be addressed are:

  1. Knowing what needs to be collected
  2. Knowing who needs to be involved in the process
  3. Knowing where the data is in the business
  4. Developing a robust, future-proof data collection process

As the ESG disclosure landscape is evolving so rapidly, it is key for organisations to have an inventory of what metrics are being disclosed, where they are being disclosed, any relevant criteria and whether applicable controls and policies are in place.

The key to effective ESG data and reporting:

  • Remain agile when new regulations are put into place, or existing regulations are updated.
  • Automate disclosure requirements.
  • Control, validate and accurately report on ESG data.
  • Monitor and measure ESG KPIs for internal use or external reporting requirements.
  • Monitor the impact of ESG initiatives, with a view to improving future ESG planning or initiatives.

As ESG reporting is a cross-functional undertaking, it is best practice that all data is housed on a single platform, to support different internal reports as well as any external reporting requirements. Businesses should take advantage of automation with the goal of carrying out real-time reporting without much manual input.

By automating the process, it will help the organisation develop parameters against which to measure the milestones, as well as help leaders to identify risks and opportunities, including financial statement impacts.

By being upfront and disclosing progress, both positive and negative, builds trust with stakeholders (not just shareholders). And, by disclosing methodologies alongside results, companies can contribute to a communal knowledge of best practices as reporting standards and measurement practices evolve.

In fact, the NYSE suggests that ESG disclosure is most compelling when the organisation explains:

  • Why you have focused on the issues that you have (stakeholder engagement, materiality).
  • What your company is doing about those issues (strategy, measurement, targets).
  • What oversight your company has in place to make sure you stay on track (governance).
  • The best report is not the longest one but the one that demonstrates focus and understanding of the issues.

Finally, the finance function’s responsibility goes far beyond just reporting, they also need to ensure that the strategy is supported by sufficient budgeting to implement the required initiatives and plans. ESG and finance teams have an opportunity to collaborate to build value and identify risks, as well as new business opportunities.

For further information, including why finance should get involved with ESG, download our ESG best practice guide here

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