New and evolving sustainability reporting regulations are pushing ESG (environmental, social and governance) considerations further up the corporate agenda, and with good reason – prioritising responsible business practices can yield numerous reputational and financial benefits. But many organisations are grappling with the reporting fundamentals: from building a skilled team to gathering reliable data, ESG executives are faced with a myriad of challenges. With investors, stakeholders and regulators demanding greater operational visibility, leadership teams need to implement effective strategies to meet these challenges head on.
Establishing the groundwork
ESG reports are a reflection of an organisation's willingness to build a better future, but translating vision into tangible results requires a systematic approach, and a steadfast commitment to transparency and accountability.
Here are three key steps you need to follow in preparation for the ESG reporting process:
Step 1: Assess regulatory requirements
Mandatory reporting is fast becoming the norm in multiple jurisdictions, but before you embark on the reporting process, you'll need to understand which regulations are applicable to your business. Assessing your organisation's operational and financial boundaries will help you identify relevant regulations and ensure compliance. Reporting requirements can vary depending on the framework, for example, the Corporate Sustainability Reporting Directive (CSRD), which governs ESG reporting in Europe, has staggered reporting timelines for organisations, depending on size, number of employees and turnover. Other jurisdictions, such as the UK, Singapore, Japan, Canada and Brazil, have begun the process of adopting the IFRS International Sustainability Standards Board (ISSB) standards.
Step 2: Identify key stakeholders and ESG focus areas
Stakeholders can be both internal and external and can include investors, employees, customers and suppliers. Once you've categorised and prioritised key stakeholders, you'll need to conduct a materiality assessment. This involves engaging with stakeholders to assess which ESG issues are material to them and, by extension, to the organisation at large. A materiality assessment will help you delineate the scope of your sustainability initiatives so that you can deploy your resources effectively.
In Europe and China's Mainland, companies are now required to conduct double materiality assessments (DMAs) which analyse both impact materiality and financial materiality. A DMA encompasses both the internal and external company perspectives: the internal perspective shines a spotlight on the ESG issues that are material to the organisation's operations, strategy and stakeholders. These include operational risks, resource management, employee well-being and alignment with corporate values and goals.
The external perspective looks at the impact of the external environment on the company's long-term sustainability performance. This may include factors such as societal trends, regulatory changes and stakeholder engagement feedback.
Step 3: Appoint report owners
Next, you'll need to appoint a report owner (or owners) to oversee the reporting process, gauge progress and ensure accountability. Though there isn't a one-size-fits-all approach to report ownership, ESG reports generally fall within the purview of the CFO. CFOs specialise in financial planning, cost reduction, risk management and compliance, and it's these vital skills that will ensure the success of sustainability initiatives and the robustness of ESG reports. In practice, however, and in organisations that have reached a high level of ESG maturity, CFOs and CSOs will often share the responsibility of compiling ESG reports, with CSOs taking the lead on ESG strategy, governance and data collection.
Navigating the complexities of ESG reporting
Organisations with well-entrenched sustainability policies will likely find it easier to navigate the complexities of ESG reporting. But most companies, regardless of size or industry, will encounter challenges that may compromise the integrity of the report. Reporting inaccuracies could lead to fines, penalties, legal liability and reputational damage, so it's imperative that sustainability teams find practical solutions to overcome reporting hurdles.
Here are some of the top ESG reporting challenges companies are grappling with right now:
Finding skilled resources
The scarcity of skilled resources is one of the most critical challenges organisations face on the sustainability journey. While there are millions of employees engaged in financial reporting, qualified ESG reporting professionals number in the thousands. This talent deficit is proving a hindrance for organisations as they struggle to adapt to ever-changing regulatory requirements.
Executive leaders responsible for spearheading ESG efforts, such as CFOs, and CSOs in particular, are often required to develop their "green skills" through training programmes and certifications. While this may help in the short term, the dynamic ESG landscape will continue to evolve, leaving ESG leaders with the daunting task of keeping up with regulatory changes while juggling strategy deployment, data collection and KPI tracking.
Companies will need to invest in training and development initiatives to empower their sustainability teams to drive the organisation's ESG agenda. Large corporations will also need to ensure that their non-financial teams are the approximate size of their financial teams in order to realise their ESG ambitions. Smaller companies with limited resources and budgets may have to partner with external service providers to establish an ESG reporting programme.
Integrating multiple stakeholder perspectives
Organisations must ensure that sustainability strategies reflect the diverse interests and concerns of both internal and external stakeholders, from employees to suppliers. The challenge here is harmonising stakeholder perspectives with organisational objectives; organisations need to deftly balance expectations with operational viability and profitability. Communicating the status of ESG projects and soliciting regular feedback are critical to ensuring that stakeholders remain involved, engaged and represented.
Overcoming data collection hurdles
Companies are now obligated to report on a wide spectrum of ESG issues, each requiring different data types and sources; the European Sustainability Reporting Standards (ESRS), for example, lists over 1000 individual data points. Gathering data from both internal and external stakeholders is a complex and time-consuming task which is often hindered by data silos and ineffectual cross-functional communication.
To streamline the process, organisations need to establish efficient data collection procedures and educate data stakeholders. Stakeholders need to understand what the objectives of the ESG programme are and how they should collect and submit data. Accuracy is key – incomplete or inaccurate data can lead to "unintentional greenwashing'' which occurs when companies (unknowingly) submit incorrect data that seemingly supports their sustainability targets. Unintentional greenwashing can undermine consumer trust, so implementing efficient data collection processes is paramount.
Measuring success
Measuring and verifying the success of ESG initiatives is another common reporting challenge, which is compounded by the lack of standardised metrics and industry benchmarks. Social and governance projects, in particular, are difficult to quantify and results may be subject to interpretation. To combat this, companies need to establish clear, measurable success indicators and engage third-party verifiers to ensure accuracy and reliability.
Outsourcing ESG reports: a strategic priority for business leaders
Given the complexities and potential pitfalls of sustainability reporting, many companies are opting to outsource ESG reporting to external service providers. A key benefit of this approach is that external service providers can assume the administrative burden of compiling reports, giving the in-house ESG function the freedom to focus on creating long-term value for stakeholders.
Other advantages of outsourcing ESG reporting include:
Specialist expertise – service providers stay on top of ever-changing reporting regulations and have the specialist skills required to deliver accurate and reliable ESG reports based on best practice.
Stability and continuity – loss of expertise and operational disruption are some of the risks associated with maintaining an in-house reporting team. External service providers have the appropriate mechanisms in place to ensure stability, continuity and seamless knowledge transfer.
Quality and efficiency – service providers embed processes and controls for gathering and analysing data to ensure a smooth and efficient reporting process.
Risk reduction –outsourcing ESG reporting reduces the risk of disclosure errors that can result from miscalculations or misinterpretation.
Technology – ESG service providers have access to leading-edge technologies that can expedite the reporting process and ensure greater visibility and reporting accuracy.
In today's competitive business landscape, sustainability reporting is proving to be a key differentiator. Effective ESG reporting can drive greater business value, but a single misstep can lead to reputational and financial damage. By outsourcing the reporting process, organisations can reduce risk and administrative effort, and focus instead on building sustainable organisations that uplift people, protect the planet and maximise profit.
To view the original article click here
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.