ESG Reporting
Get a firm grip on the changes
by Dr. Alex Gold
There was a time when environmental and social issues were considered separate from the business of generating revenue and creating value. To borrow the words of SEC Commissioner Alison Herren Lee, “Those days are over.” Environmental, social and governance (ESG) issues are now firmly accepted as critical drivers of financial performance.
This paradigm shift has helped to solidify the expectations of companies regarding their ESG strategy and reporting. Organizations are expected to apply two complementary lenses:
Understanding how the organization positively or negatively impacts people, the environment, and the economy. This lens is referred to as “impact materiality” because it seeks to define where the organization’s impact on external stakeholders is greatest.
Looking at a subset of ESG issues that create or erode enterprise value, whether from the firm’s own impact or the impact of external factors, such as climate change.
This lens is referred to as “financial materiality” because it seeks to define risks and opportunities by their potential to affect revenues, expenses, and other indicators of enterprise value.
In essence, while companies have managed environmental and social impacts as nice-to-have “corporate social responsibility” initiatives in the past, the financial consequences of ESG issues have caused companies to elevate sustainability to a must-have consideration.
Comprehensive ESG reporting against both impact materiality and financial materiality is also a must-have. Investors use company ESG reporting to satisfy the growing demand for sustainable investment, employees use ESG reporting to confirm that their employer aligns with their values, customers use ESG reporting to understand the impact of their purchases, and others use ESG reporting to hold companies accountable for their impacts on sustainable development objectives. Given these interests, a company with weak or non-existent ESG reporting would face significant pressure from investors and other stakeholders.
Key standards to use
Solidifying company expectations on ESG has helped the various sustainability reporting standards articulate how they can be used together as part of a comprehensive corporate reporting system. The key standards to have in mind, with respect to understanding financial and stakeholder impacts of ESG, are the SASB Standards and the GRI Standards.
The Sustainability Accounting Standards Board (SASB) Standards have emerged as a useful starting point for understanding financial materiality. This is because SASB has completed years of engagement with companies, investors and subject matter experts to identify the most likely financially material ESG issues across 77 industries and has issued industry-specific standards and metrics that seek to enable comparable reporting by organizations within each industry on their most material ESG topics. Furthermore, the SASB Standards will soon consolidate into the International Financial Reporting Standards (IFRS) Foundation, as it sets out to develop a comprehensive global baseline of sustainability-related disclosure standards by the end of 2022. Getting started with the SASB Standards will enhance an organization’s preparedness for these global standards.
The Global Reporting Initiative (GRI) Standards have been widely adopted by companies and other institutions to understand the importance of ESG from a stakeholder impact lens. GRI standards are organized by topic along with universal standards, and organizations are suggested to conduct a materiality assessment through stakeholder consultation to determine the most significant sustainability impacts to report on.
Many companies use both SASB and GRI standards in their sustainability reports to convey a more holistic view of corporate performance on ESG issues and meet the needs of a broader range of stakeholders. Several resources, such as A Practical Guide to Sustainability Reporting Using GRI and SASB Standards and the collaboration announcement between the IFRS Foundation and GRI, help communicate how SASB/IFRS standards can be used together with GRI.
Pulling it all together with integrated thinking
In order to truly integrate ESG into business models and value creation, and not simply comply with reporting standards, companies should use the Integrated Reporting Framework to drive integrated thinking within the business. The Integrated Reporting Framework specifies how companies can link their material ESG indicators to its core business and strategy. Like the SASB Standards, the Integrated Reporting Framework will be consolidating into the IFRS Foundation, and will underpin the forthcoming global baseline of sustainability disclosure standards.
Many companies, especially those in the U.S., believe that integrated reporting requires overhauling statutory disclosures. The reality is that there are a variety of pathways to applying integrated reporting, all of which help companies use the reporting process to genuinely integrate ESG throughout their strategy and operations – achieving integrated thinking.
Do it yourself or ask for help?
Many people accept that hiring an accountant to do your taxes is a good financial decision. Accountants can protect you from overpaying by tailoring your tax liability to your individual circumstances, maximize your tax refund, and ensure your taxes are filed legally.
Working with an outside expert on your ESG reporting can have similar benefits. Experts can help you devise an efficient disclosure structure that aligns with global frameworks and stakeholder interests, while promoting conciseness, connectivity, and readability. They can lead data collection processes that encourage internal stakeholders to think strategically about their contributions to ESG performance – even if ESG isn’t officially part of their responsibilities. Finally, experts can ensure your reporting is aligned with emerging regulation.
The multiplicity of stakeholder interests, combined with the complexity of environmental and social change, means that there is no quick fix to ESG reporting. Attempts to minimize or reduce ESG reporting come with significant risks of omission – which can lead to accusations of greenwash, shareholder proposals, and loss of stakeholder trust. Investing in comprehensive ESG reporting minimizes these risks, while offering benefits in the form of improved stakeholder sentiment and enhanced internal understanding of the links between ESG and company performance.
Dr. Alex Gold
Alex Gold has a PhD in climate change risk management. He is an expert in delivering integrated reporting, corporate sustainability strategies, scenario analyses and the TCFD, as well as helping companies respond to key ESG investor benchmarks.
Born and raised in the USA, Alex spent over a decade as a professional in Australia and is a dual citizen of both countries. He heads up BWD’s New York office.
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