ESG Reporting : Outside-in or Inside-out?

ESG reporting has become a critical component of corporate responsibility and transparency. But businesses often see it as a compliance exercise focusing primarily on meeting regulatory requirements. They start by identifying the reporting frameworks they need to adhere to, then work backwards to gather the necessary data. This 'outside-in' approach, while sometimes necessary, is insufficient to produce a meaningful and impactful ESG report.

A more effective strategy is to adopt an 'inside-out' approach. This involves starting with an understanding of your business's material ESG issues, i.e. the environmental, social and governance issues that are most relevant to your business and stakeholders. These are the factors that significantly impact your business operations, financial performance, and reputation, as well as your business's influence on the external environment. Some common examples of material ESG issues include climate change, water usage, waste management, human rights, labour practices, supply chain transparency, and board-diversity. These issues can vary across industries and organisations.

After you have identified your business's material ESG issues, the next step is to collect and analyse relevant data. This data collection process should be guided by your materiality assessment. In other words, you should focus on collecting data that specifically relates to your material ESG issues.

Next, define your target audience. Who are you trying to reach with your ESG report? Are you primarily targeting investors, regulators, customers, employees, or a broader range of stakeholders? Understanding your audience will help you tailor the content and tone of your report accordingly.

Only after you have a clear picture of your material ESG issues and your target audience should you turn to the available frameworks and standards. These frameworks provide valuable structure and guidance, but they should not dictate the content of your report. Instead, they should be used as tools to enhance your disclosure and ensure consistency.

Challenges in implementing an inside-out approach can include:

• Determining which ESG issues are truly material to your business can be complex and time-consuming.
• Involving a wide range of stakeholders in the materiality assessment process can be challenging.
• Implementing a robust inside-out ESG reporting process may require dedicated resources and expertise.

By overcoming these challenges, businesses can reap the benefits of an inside-out approach, which can include:

• Avoiding unnecessary data collection and reporting by focusing on material issues.
• Creating an ESG report that’s not just a tick-box exercise.
• Understanding material ESG issues will help identify potential risks and opportunities.
• Creating a tailored report that addresses the concerns of specific audiences.

In conclusion, while compliance with ESG reporting frameworks may be essential, adopting an inside-out approach by prioritising material ESG issues, collecting relevant data, understanding the target audience, and leveraging frameworks strategically, businesses can create ESG reports that are not only compliant but also impactful and aligned with stakeholder expectations.