When it comes to sustainability and ESG strategies, organizations have moved beyond simply adopting measures such as switching to compostable straws. Instead, they are incorporating sustainability into various aspects of their business, including practices, processes, product development, operations, and overall strategy.
In 2024, organizations worldwide will face new regulatory reporting requirements designed to increase the transparency of environmental, social, and governance (ESG) impact and progress. To generate reliable reports, they will need to reimagine how they are collecting and analyzing their data. This article delves into what ESG reporting is, the importance of reliable, accurate data, the existing reporting frameworks as well as the new regulations applicable starting next year, and how organizations should prepare for the future of ESG reporting.
- ESG reporting is an essential tool for organizations to demonstrate their commitment to sustainability and responsible business practices. It covers environmental, social, and governance (ESG) factors that provide stakeholders with information on how organizations manage their impact on the environment and society while ensuring accountability.
- ESG reporting benefits companies by helping identify and manage risks, attract talent, and create long-term value for shareholders.
- In 2024, organizations will face new regulatory reporting requirements designed to increase the transparency of ESG impact and progress. These new elevated standards for reporting ESG impact, risk, and opportunities will require refining and potentially reconstructing data management systems, processes, and controls.
- Businesses must identify material ESG issues, improve ESG data collection and management, adopt emerging technologies, use established reporting frameworks, and engage with stakeholders to generate reliable ESG reports and demonstrate their commitment to sustainability and responsible business practices.
Introduction to ESG Reporting
Environmental, social, and governance (ESG) reporting is an essential tool for organizations to demonstrate their commitment to sustainability and responsible business practices. It represents a framework for assessing and reporting on an organization's environmental, social, and governance performance, having evolved from a voluntary practice to a mandatory requirement in many areas. In the past, companies would only disclose ESG information if they chose to, but now, they are being held accountable for their ESG practices through regulation and market pressure. ESG reporting covers a range of factors, such as:
Environmental factors refer to an organization's impact on the natural environment. This includes the organization's carbon footprint, energy usage, water consumption, waste management practices, and other environmental impacts. ESG reporting on environmental factors provides stakeholders with information on how the organization is managing its impact on the environment and its progress towards achieving sustainability goals.
Social factors refer to an organization's impact on society. This includes the organization's labor practices, human rights policies, community engagement, diversity and inclusion, and other social impacts. ESG reporting on social factors provides stakeholders with information on how the organization is managing its impact on society and promoting positive social outcomes.
Governance factors refer to an organization's management and governance practices. This includes the organization's board structure, executive compensation, risk management practices, and other governance practices. ESG reporting on governance factors provides stakeholders with information on how the organization is managing its operations, reducing risks, and ensuring accountability.
The evolution of ESG reporting can be traced back to the early 2000s when the concept of sustainability reporting emerged. This led to the creation of the Global Reporting Initiative (GRI) in 1997, which developed a framework for sustainability reporting. In 2006, the United Nations Global Compact launched the Principles for Responsible Investment (PRI), which encouraged investors to consider ESG factors when making investment decisions. In recent years, there has been an increased demand for ESG data from investors, stakeholders, and regulators and high pressure at international level to reach a common agreement on regulating Scope 3 emissions and to transparently introduce companies’ engagements under the public eye.
Why Do Scope 3 Emissions Play a Big Part in ESG Reporting?
Scope 3 emissions occur from sources owned or controlled by other entities in the value chain (e.g., materials suppliers, third-party logistics providers, waste management suppliers, travel suppliers, lessees and lessors, franchisees, retailers, employees, and customers).
According to the UN Global Compact, Scope 3 emissions account for a massive 70% of the average corporate value chain's total emissions, so it’s crucial that companies tackle Scope 3 emissions to limit global warming to 1.5°C. Consequently, multiple regulators such as: the US Securities and Exchange Commission (SEC), the European Commission, the Science Based Target initiative’s (SBTi) are pushing companies into committing to reduce their carbon footprint and to publicly disclose their strategies. For example, SBTi’ s Net Zero standard saw more than 3,000 organizations globally affiliating with it. Additionally, the International Sustainability Standards Board (ISSB) drafted recommendations requiring qualitative information to explain how reported emissions were calculated.
The increased demand for ESG data and the introduction of mandatory reporting requirements are creating a new era of ESG reporting, forcing companies to take ESG reporting seriously and rethink their data strategies to ensure accurate, reliable, and timely ESG reporting.
Benefits of ESG Reporting
ESG reporting provides numerous benefits for companies, investors, and society as a whole. For companies, ESG reporting helps them identify and manage environmental and social risks, improve their governance practices, and enhance their reputation with stakeholders. ESG reporting can also help companies attract and retain talent, improve their access to capital, and create long-term value for shareholders.
For investors, ESG reporting provides valuable information on a company's sustainability performance and risk exposure, enabling them to make informed investment decisions. ESG reporting can also help investors identify long-term growth opportunities and mitigate risks associated with environmental and social factors.
Finally, ESG reporting benefits society by promoting transparency, accountability, and sustainability practices among companies, contributing to the achievement of global sustainability goals, and addressing urgent environmental and social challenges.
New Regulatory Reporting Requirements and Standards
In 2024, organizations around the world will face new regulatory reporting requirements designed to increase the transparency of ESG impact and progress. For many, it will entail gathering more granular data from across their operations and value chains.
According to KPMG’s 2022 Global CEO Outlook, 69% of CEOs see significant stakeholder demand for increased transparency and reporting on ESG matters (up from 58% in 2021). Additionally, more than one-third believe their organizations struggle to narrate a compelling ESG story.
Expected new legislation based on the European Union’s Corporate Sustainability Reporting Directive (CSRD), adopted in December 2022, will require roughly 50,000 organizations to issue ESG reports to regulators, many for the first time. As part of the CSRD, the first set of draft European Sustainability Reporting Standards (ESRSs) were released. The ESRSs are much more rigorous in scope and depth of disclosure requirements. From 2024 onwards, companies will have to report on over hundreds of metrics and targets. In addition to tracking performance on climate change, the circular economy and pollution, organizations should be transparent about how they tackle biodiversity loss, and reductions in resource and water use. Social challenges like the treatment of workers, within their own organization and across the value chain, are also part of the new CSRD.
The Importance of Data in ESG Reporting
Although many companies have already been reporting on their sustainability performance for some time, the CSRD will require a new level of disclosure, with ESG reporting now a board-level priority. Companies need to disclose their policies and targets across a wide range of areas, including emissions reduction targets and resource conservation plans.
To achieve this, they must set up processes to gather ESG data, evaluate ESG performance, and report in an appropriate, auditable way. ESG data is also used by investors to make informed investment decisions, by regulators to monitor compliance, and by consumers to make purchasing decisions. However, collecting and managing ESG data can be challenging, as it is often dispersed across different business units, systems, and locations, making it difficult to collect and consolidate. Any small error or inconsistent data can be misleading. For example, if a company reports lower greenhouse gas emissions than it actually produces, investors may overestimate the company's sustainability performance and invest more than they would otherwise.
To ensure accurate and consistent ESG reporting, companies need to establish robust data management systems and processes. This includes identifying ESG data sources, collecting and consolidating data, verifying data accuracy, and ensuring data consistency across reporting periods. They also need to go under a substantial change management exercise because no matter how mature an organization’s infrastructure may be, elevated standards for reporting ESG impact, risk, and opportunities will require refining and potentially reconstructing data management systems, processes, and controls.
How to Report on ESG
To generate reliable ESG reports, organizations need to reimagine how they are collecting and analyzing their data. Reliance on historical or siloed data introduces problems of accuracy, relevancy, and consistency—all impeding cohesive reporting and informed decision-making.
What are the steps that organizations can take to generate reliable ESG reports?
- Identify relevant ESG data sources: Organizations need to identify relevant ESG data sources, both internally and externally. This includes data on environmental impact, social responsibility, and governance practices.
- Collect and consolidate data: Once relevant data sources have been identified, organizations need to collect and consolidate the data. This may involve data from different business units, systems, and locations. Companies can use automated data collection tools to streamline the process and ensure accuracy.
- Verify data accuracy: ESG data can be subjective and open to interpretation, so it is crucial to verify its accuracy. Organizations can use third-party verification services or conduct internal audits to ensure that the data is accurate and reliable.
- Analyze data: Once the data has been collected and verified, organizations need to analyze it to identify trends and patterns. This may involve using data analytics tools to identify key performance indicators and benchmark against industry standards.
- Report data: Organizations need to report ESG data in a clear, concise, and standardized manner. This may involve using established reporting frameworks, such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), or the Task Force on Climate-related Financial Disclosures (TCFD).
- Continuously improve: Generating reliable ESG reports is an ongoing process. Organizations need to continuously monitor and improve their ESG practices and data management systems to ensure that they are reporting according to the latest regulations.
How to Start with ESG Reporting?
Starting with ESG reporting can seem daunting, but by taking a strategic approach, it can be a manageable process. Here’s what you should do:
- Identify your ESG issues: Start by identifying the ESG issues that are most material to your organization. These are the issues that have the most significant impact on your business and are of most interest to your stakeholders.
- Develop a reporting strategy: Once you have identified your material ESG issues, develop a reporting strategy that aligns with your business objectives and stakeholder expectations, considering the reporting frameworks that are most relevant to your business.
- Collect ESG data: To report on your ESG performance, you need to collect relevant ESG data. Identify the data sources that you need to collect from across your organization, such as energy usage, water consumption, and employee diversity.
- Analyze ESG data: Once you have collected your ESG data, analyze it to identify trends, patterns, and areas for improvement. Use this information to set targets and develop action plans to improve your ESG performance.
- Report your ESG performance: Once you have collected and analyzed your ESG data, report your ESG performance in a clear, concise, and standardized manner. Consider using online reporting tools to make it easy for stakeholders to access and understand your ESG performance. Then use stakeholder feedback and external reporting frameworks to identify areas for improvement and develop action plans to address them.
By making sure you deliver compliant, reliable and timely ESG reports you can demonstrate your commitment to sustainability and attract investment from socially responsible investors.
Preparing for the Future of ESG Reporting
To prepare for the future of ESG reporting, companies need to take a strategic approach to collecting and analyzing their ESG data. Here are some steps that organizations can take to prepare for the future of ESG reporting:
Stay Up to Date with Regulatory Developments
Keep up to date with regulatory developments in your jurisdiction and globally. Monitor changes to reporting requirements, reporting frameworks, and disclosure standards to ensure that your reporting is up-to-date and compliant.
Improve ESG Data Collection and Management
Improve your ESG data collection and management processes by streamlining data collection, automating data management, and verifying data accuracy. Ensure that your data collection processes are consistent, transparent, and auditable.
Adopt Emerging Technologies
Adopt emerging technologies such as artificial intelligence (AI), machine learning, and blockchain to streamline ESG data collection and management. AI can help organizations analyze large volumes of ESG data, identify patterns, and trends, and generate insights that can inform decision-making. Blockchain technology can provide a secure and transparent platform for ESG data sharing, allowing stakeholders to verify data accuracy and trace data sources.
For example, the YAROOMS carbon dashboard and workplace emissions tracking tools are making it easier for companies to reduce their environmental impact and operate in a more socially responsible manner. Businesses will find it easier to achieve their net-zero CO2 goals by having access to a real-time carbon dashboard that integrates with building management systems or that can estimate based on energy bills. It simplifies the process of tracking and reporting on each location’s CO2 Scope 2* emissions (generated by the use of office facilities) as well as the company’s Scope 3* emissions (generated by employee commutes and working from home).
Digitize and Automate
Automation and digitization play a critical role in ESG data collection and management. Automated data collection tools can streamline data collection processes, reduce errors, and improve data accuracy. Digitization enables organizations to collect and manage data electronically, reducing the need for manual data entry and improving data quality. This, in turn, makes it easier for organizations to report on their ESG performance.
Engage with Stakeholders
Engage with your stakeholders, including investors, customers, employees, and suppliers, to understand their ESG reporting expectations and concerns. Use their feedback to improve your reporting and prioritize your ESG initiatives.
If way back in 2017, Morgan Stanley released a study that found that 86% of Millennials were interested in sustainable investing, or investing in profitable companies that operate, while having a positive social or environmental impact, fast forward five years, it’s safe to assume sustainability has become one of the reigning priorities in the mind of the investor — and one that is very closely aligned with the investor’s perception of a company to be profitable for the long term.
The new era of ESG reporting requires organizations to rethink their data strategies to effectively collect, manage, and report ESG data. To generate reliable reports, organizations need to establish robust data management systems and processes, stay up to date with regulatory developments, thoroughly identify their material ESG issues, adopt emerging technologies to improve data collection and management and continuously monitor and improve their ESG performance.