Demystifying ESG Reporting: Starting with the ABCs

Esg

What is ESG reporting?

Simply put, it’s the activity in which you disclose your Environmental, Social and Governance sustainability factors to your stakeholders.

Where do I start?

You start with those factors that are most material to your business. This means each company’s annual ESG report will likely be quite unique. And that’s fine: it’s about telling your company’s ESG story to your stakeholders.

How do I determine which factors are most material to my business?

A good starting point is to determine:

  • Which ESG factors are going to have the most significant impact on the financial performance of the company (positively or negatively). These will typically be different across different industries.
  • Which ESG factors will your stakeholders derive the most value from through the disclosure process.
  • Which ESG factors are going to be practical and cost-effective to disclose.

It’s important to note that this isn’t a static once-off exercise and each of the points above will likely impact your ESG disclosure from one year to the next.

What reporting standard should I align to?

Now that we understand what ESG reporting is, the starting point for planning your ESG disclosure, and the premise under which you will go about deciding what is material; let’s unpack how we can make sense of the sustainability ecosystem, which is crowded and can leave companies feeling confused and frustrated.

Let’s start by breaking down the ESG ecosystem into 3 main groups. While this could be viewed as an oversimplification as some of these organizations play several different roles, it’s helpful for our discussion to differentiate with some examples:

Frameworks - The first group of organizations are those that provide a framework companies can implement that guide them on how information needs to be prepared and structured for effective ESG reporting. Examples of these are Task Force on Climate-related Financial Disclosures (TCFD), Climate Disclosure Standards Board (CDSB) and International Integrated Reporting Council (IIRC). These organizations are typically not-for-profit, their frameworks are usually available at no cost, and their business model is based on supporting services, including audits and training.

Standards – The second group are organizations that provide content that companies can use to guide them on what information needs to be disclosed. Examples of these are Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB). Again, they are typically not-for-profit, with their published standards being freely available on their websites and their business model based on supporting services.

Assessments – The last group are those organizations that provide some kind of rating and ranking on companies’ ESG disclosures. These organizations can be broken down into two additional classifications:

Those that a company signs up to voluntarily and submits requested data to. These organizations will then evaluate the company’s overall status from an ESG perspective and publish their findings. They are typically not-for-profit and keep the wheels turning through consulting services. Examples of these are Carbon Disclosure Project (CDP) and Dow Jones Sustainability Indices (DJSI).

Those that aggregate publicly available data, without explicit permission, to compile and publish various companies’ overall ESG status. These organizations specialize in research and typically sell their evaluations commercially. Examples of these are Bloomberg, Thomson Reuters and S&P Global.

There are also multiple public and private companies that provide value-added products and services across the ESG ecosystem.

How does all this help us cut through the chaos and set about producing an ESG report?

First and foremost, the following decisions have to be made:

  • You need to start by deciding which frameworks you would like to follow from a guideline perspective.
  • Next you need to decide which standards you would like to implement from a content disclosure perspective.
  • And lastly, you need to decide if you would like to voluntarily submit your disclosures to assessors so you can be rated and ranked.

Importantly, you have the flexibility to combine multiple frameworks, standards and assessors based on your requirements which would be impacted by things like:

  • Your industry, where different market sectors may have specific frameworks, standards and assessments that are generally used and accepted.
  • Your stakeholders, where different stakeholders would advocate the frameworks, standards and assessments that align closely with their areas of interest.
  • Your location, where different frameworks, standards and assessments would hold different levels of acceptance depending on how widely used they are in that region.

By way of example, a common approach would be to take the TCFD framework as the guiding methodology on how to report, and then apply a combination of SASB, for investor-driven disclosures, and GRI, for more broadly driven disclosures, as the standards on what is material and therefore what needs to be reported on. Finally, you may elect to submit your ESG data, which would be part of your disclosure, to CDP for rating and ranking.

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