The Challenges of ESG Reporting

Environmental, social, and governance (ESG) issues play a more important role in the way companies make decisions. Interest in ESG has been steadily rising over the last few years with the latest reports saying an estimated $41 trillion will be allocated to ESG funds by the end of 2022. With this investment, ESG won’t be taking a backseat as it’s quickly becoming one of the main forces shaping markets, asset classes, and a company’s place within them.??

While we know the importance of ESG and why committing to an ESG strategy is pivotal for your business, there are still a lot of questions surrounding this topic. We spoke to Jenny Herald, our VP of Product Evangelism, to tackle some of the most interesting questions from our recent webinar with the Financial Times on "Improving the Accuracy of ESG Reporting".

In this article, we’ll be answering questions related to ESG reporting challenges and the possible evolution of ESG reporting frameworks to help you understand:?

• Why ESG cannot be addressed in a meaningful way without also managing accurate reporting up and down the supply chain?
• How expensive the ESG reporting burden might be for companies?
• If a reporting framework (similar to food labelling) is coming in the foreseeable future?

Can ESG be addressed in a meaningful way without also managing accurate reporting up and down supply chains? ?

The simple answer to this question is no. We all know the accuracy for reporting up and down the supply chain is challenging because we mainly rely on self-disclosure, without the existence of audits.

One of the biggest problems with self-disclosure is it leaves ESG reporting definitions open to interpretation, which is why we’re seeing some companies get in legal trouble for greenwashing, for example. Without managing accurate reporting up and down supply chains from even the GHG protocol perspective (scope 1, 2, and 3), accuracy in reporting against emissions is unverifiable, and the same applies to the other attributes that need reporting against.??

While voluntary disclosure is a good place to start, it won’t take us all the way. Treating ESG data with the same degree of scrutiny and respect as financial data, however, will. That is precisely why initiatives such as the ISSB, which aims to deliver a global base line of sustainability disclosure standards, or LP DDQ, developed to help investors understand and evaluate material ESG risks and opportunities in their investment practices, is an important step in the direction of enabling consistent disclosure. ESG auditing would be the next logical step in approaching ESG data the same as financial data. Unfortunately, these mechanisms aren’t presently in place, partly due to there not being a standard definition of what the elements in the disclosure should be.??

How expensive will the reporting burden of ESG compliance be for companies???

It is going to be an expensive exercise in general for any company. That being said, big companies are better equipped in terms of resources, so they will have the opportunity to build or buy their way into ESG compliance. There are various ways they might do that from an environmental perspective. For example, they might buy carbon credits or they might buy technologies to help them with their compliance exercise of reporting and disclosures. The third option is they might build that capability or competency in house, as they are more likely to have the resources for that.?

Small and mid-sized businesses will have a hard time with it as well. ESG reporting is complex and expensive. To that extent, the EU Commission has proposed simpler reporting standards for those businesses than the ones applied for big companies. This would make it easier for small and mid-sized companies to report on sustainability related attributes while reducing administrative costs.??

However, ESG reporting is a heavy lift for companies, regardless of size, and we need to bear that in mind. There is still a lot of manual processing and collection of data, and this is where the use of technology can be leveraged to automate, so manual entry is reduced. ESG compliance will evolve and become standardized over time, likely driven by General Partners (GPs), Limited Partners (LPs), or regulators. Once compliance evolves, the technology solutions will follow.?

Do you foresee a reporting framework where businesses have something akin to food labelling (i.e. listing its ESG metrics like CO2 content, water use, waste/recycling, DE&I, gender pay gap, reporting transparency)??

While ESG metrics such as CO2 emissions, water usage, DE&I are certainly important, it is unlikely that we will see a framework requiring companies to list these elements on their labels in the near future. This would require a considerable effort in terms of coordination and alignment.??

As a function of prioritization, the focus right now is on the convergence in the ESG framework itself. Presently, companies are using a mix of generally accepted frameworks, but the ultimate goal is to move towards establishing a globally accepted ESG framework. This is a necessary step in terms of being able to ensure disclosure accuracy, transparency, and enable the creation of ESG auditing.??

However, due to increased consumer carbon awareness on one side, and the growing pressure on organizations to decarbonize on the other side, we are starting to see companies list their carbon footprint on product labels in Europe, such as Oatly and Nestlé Germany. Both companies are members of the Together for Carbon Labelling initiative, an initiative for more CO2 transparency in the food industry. Research suggests that although it's likely consumers would react positively to carbon labelling of food products, changes in the food system are unlikely without external pressure from food policy makers.?

Learn more about ?ESG frameworks and ESG reporting in our latest guide.