Reporting and disclosure on environmental, social, and governance (ESG) issues gained momentum during the last decade, reaching a crescendo in 2021. Investors’ appetite for more sophisticated ESG reporting has spurred organizations to rethink and evolve their ESG reporting strategy, optimize processes, and disclose proactively, deeply, and consistently. Companies within and across sectors are raising the ESG bar with greater transparency and a commensurate focus on underlying performance. Whether your goal is to be recognized as an ESG leader, function as a well-governed company that manages ESG risks and opportunities, or simply avoid the bottom quartile of ESG ratings, you can advance your reporting strategy.
This blog outlines the major industry trends driving organizations toward more advanced ESG reporting. It also provides recommendations to not only meet investors’ needs, but to leverage ESG reporting to improve performance, compete more effectively, establish leadership positioning, manage risk, and build a more resilient organization.
The Changing ESG Landscape
Every leading investment firm is or soon will be covering ESG.
Investments. Interest in ESG investing across all asset classes shows no sign of slowing down. In 2020, 85% of CFA Institute members said they consider ESG in their investing.1 The number of professional investors implementing ESG has grown 18% since 2018.2 Leading asset managers now delineate disclosure requirements, often recommending or even mandating corporate disclosure in accordance with third-party disclosure frameworks, and may augment third-party research with their own.
Raters. The rater and framework landscape continues to evolve. Leading ESG-focused research and rating organizations are still extremely important to the investment community. Investors increasingly consider other factors beyond ratings and scores, and may focus on raters’ underlying data and analysis.
Public disclosure. Many raters expect some data to be publicly available for consideration or credit. This gives you the opportunity to focus on providing information in the public domain, as well as your data provision process and materiality assessment work. The number—and adoption of—public disclosure frameworks has mushroomed in recent years.
Advanced ESG Reporting: Crucial Priorities to Consider
Organizations are being pushed toward more advanced ESG reporting. It is no longer enough to undertake any of these steps alone:
- Responding to rater questionnaires
- Providing or verifying data sought by raters
- Addressing leading public disclosure frameworks
- Disclosing ESG information
- Generating corporate responsibility or sustainability reports
ESG reporting is not a linear evolution, and it doesn’t follow a step-by-step progression. Every organization must prioritize what it will focus on based on its own strategy, company, culture, and appetite to enhance its reporting. Additionally, your company should remain cognizant of what your peers are doing to avoid being labeled as a laggard by investors and rating organizations.
Here are five considerations for advancing your ESG reporting.
1. Approach ESG reporting as a continuous, incremental improvement process
First and foremost: no matter where you are in your ESG reporting progression, you must continually identify those topics and metrics that matter not only to investors and raters, but also to your customers, employees, vendors, and other key stakeholders.
Periodically review both the internal and external benefits of your disclosure, including:
- Your proactive public reporting
- Your reactive responses to research and rating organizations’ ESG metrics or questionnaires and
- Third-party disclosure frameworks
Consider how you can leverage all three.
Use the lens of ESG raters and frameworks to identify, hone, and assess ESG issues and metrics. Determine which topics and metrics are one-offs and which ones are emerging themes to monitor.
To prioritize which ESG topics you report on, revisit your overall reporting objectives. Verify that they align with your short-term and long-term goals. For example, you can set internal goals to achieve ESG outcomes or to gain leadership recognition through a prestigious index, rating, membership, or disclosure benchmark.
While disclosure alone is critical, consider how you can leverage your disclosure data to improve your overall business performance. Selecting metrics and data closely correlated with business objectives will foster accountability and clearly communicate priorities across your organization. Embed disclosure and response management into your continuous improvement processes.
As you undertake periodic materiality assessments with different lenses into the issues and metrics that could affect your company and stakeholders, use these learnings to inform your strategy, goals, targets, and disclosures. Align your reporting objectives with performance objectives, whether internal or external.
The types of investors you most want to attract will likely change over time. Consider the strategies and disclosure plans needed to attract a bigger pool of investors and improve your performance.
2. Better leverage research organizations, rating agencies, and disclosure frameworks
Think strategically about which rating organizations matter to you and the ESG ratings landscape as these will change over time. You’ll need to include big players, such as MSCI and Sustainalytics, and consider including other leading or sector-specific raters and frameworks as well to bolster your reporting. If eligible, consider industry-centric raters such as S&P’s Corporate Sustainability Assessment for Dow Jones Sustainability Index to benchmark your performance.
Consider these attributes for each rating organization and framework:
- The rating organization’s direct or indirect influence on a high percentage of assets under management (investor reach)
- Whether the rating organization manages an index
- Rating organization or framework influence, prestige, and rate of adoption
- Ability to address a specific strategic stakeholder group
To get the most out of your relationship with external research and rating organizations, share your ESG information proactively with them. Know which ones assess you, whether the assessment occurs with or without your participation, and the information sources they reference.
3. Enhance the scope and depth of your reporting
Measure what matters. Typical industry metrics may not tell your company’s ESG story as well as you would like. That’s when it’s time to think about creating custom metrics, which highlight how you measure KPIs and performance. The goal is to augment disclosure rather than avoid key disclosures.
With the availability of a broad spectrum of third-party ratings, custom metrics are not a requirement. However, they are worth considering as you advance your ESG reporting practices. In fact, the Global Reporting Initiative (GRI) encourages organizations to include custom topics and metrics, opening the door for you to incorporate metrics specific to your organization into your GRI reporting.
Companies at the forefront of ESG reporting are likely to develop innovative custom metrics. Use custom metrics to disclose to investors your unique competitive advantage and to reflect the metrics that matter to your firm and stakeholders.
Seeking transparency into your supply chain is an increasingly good business practice as it arms you with information regarding your company’s broader impacts. Be specific about expectations for your suppliers and codify those expectations for standardized reporting.
Broaden internal engagement to gain different perspectives and enhance your ESG reporting scope and depth. Rather than relying solely on one or two leads for reporting, leverage subject matter experts across your organization to aggregate diverse perspectives and create a holistic approach.
Including data from across the organization in your ESG reporting also improves employee engagement by expanding accountability and distributing the workload. More engagement does mean that you will need to simplify oversight and maintain control by implementing structured tools for assigning and overseeing work.
Messaging consistency is critical. Focus not only on your communications strategy, but your overall ESG strategy. Synchronize the two by paying attention to—and reporting on—both risks and opportunities.
4. Streamline, automate, and improve reporting processes
Many organizations struggle with the workload and time-sensitivity of ESG reporting. While the resources required for report planning, data collection, oversight, and disclosure are substantial, automation makes this process as efficient as possible.
Streamline and simplify processes and workflows with software tools and partners that allow you to do more with less.
- It’s often challenging to cross-reference metrics among different rating organizations and frameworks for different reporting needs, such as the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI). However, tapping resources that embed this information can lessen duplicative disclosure work and lower the hurdle to taking on additional frameworks and ratings by leveraging commonalities across your disclosures.
- Automation allows you to collect data previously siloed throughout the organization for a more complete picture of your ESG efforts and successes. Automation also helps ensure that as your ESG team grows and adds more key players, your organization preserves institutional memory, maintains information consistency, and makes the insights of past processes and decisions available to all team members.
5. Apply the same rigor to ESG reporting as you do to financial reporting
Over time, ESG reporting will likely be subject to the same level of scrutiny and auditability as conventional financial reporting. Some global regions and industries have already established heavily regulated metrics.
It’s critical to have systems and processes in place to add rigor to data reporting and close the gap between financial and ESG reporting.
Align your financial disclosures, such as annual reports, 10Ks, proxies, and earnings calls, with your ESG public disclosures. While many companies currently report risks differently in their 10K than in their ESG disclosures, investors expect consistency—if not convergence—of messaging across different disclosure vehicles. They will increasingly hold companies accountable for inconsistencies or big omissions. Proactive alignment will help you prepare to meet those expectations.
Third-party verification is emerging as a best practice. This verification ensures data is accurate before public release, and lessens the likelihood of rating organizations needing to ask you to correct or augment data. At a minimum, tune processes and apply internal auditing rigor to reported data.
Verifying data decreases the risk of expensive litigation that can run into the hundreds of thousands of dollars due to inaccuracies or errors, bolsters trust, and can reduce the cost associated with proxy proposals. Select portions of data to audit rather than all data to manage cost. Only 3% of organizations verify all their ESG data with external third parties, while 36% rely on partial third-party verification.3 Choosing quantifiable rather than qualitative data will make the process less onerous and costly. Provide restatements when necessary.
Advancing ESG Reporting with Nasdaq OneReport
Strategic ESG reporting and disclosure requires time, dedication, and expertise. Make the best use of your resources by engaging Nasdaq’s OneReport to improve your processes and effectiveness.
Nasdaq OneReport’s central repository keeps quantitative and qualitative information, supporting references, documentation, and communications data all in one place. This allows you to avoid duplicative work while simplifying and advancing your entire ESG reporting process.
With Nasdaq OneReport, you can:
- Assign roles, delegate work, track data, and monitor status
- Observe trends in requested topics and metrics to inform materiality
- Integrate relevant topics and metrics sought by leading ESG research and rating organizations and frameworks into your reporting
- Create accountability with an audit trail of both numbers and narrative text
- Educate and engage colleagues with embedded resources and guidance
- Embed best practices for clear and concise reporting
- Preserve institutional memory by tracking information shared internally and externally with rating organizations and stakeholders
- Impart a sense of ownership among a broader team
Effective reporting and disclosure enhances your ESG performance, lowers risks, identifies business opportunities, and creates a more sustainable business model. ESG management reflects strong corporate governance, which attracts ESG investors, increases your valuation potential and appeal to a broad range of investors, and lowers your cost of capital.
Advancing and evolving your ESG reporting strategy is an opportunity to create a virtuous, reinforcing loop of improved disclosure and performance. Ultimately, you are building your organization’s resilience, strengthening corporate governance, and owning and honing your ESG narrative.
1. CFA Institute, Future of Sustainability in Investment Management: From Ideas to Reality https://www.cfainstitute.org/-/media/documents/survey/future-of-sustainability.ashx
2. Natixis Investment Managers, ESG Investment Reaches Critical Mass; Ongoing Momentum Depends on What’s Driving the Demand, Finds Natixis Investment Managers Survey https://www.businesswire.com/news/home/20210422005347/en/ESG-Investing-Reaches-Critical-Mass-Ongoing-Momentum-DepeESGnds-on-What’s-Driving-the-Demand-Finds-Natixis-Investment-Managers-Survey
3.Deloitte, Sustainability Disclosure Goes Mainstream https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/us-aers-hu-deloitte-esg-now-sustainability-disclosure-goes-mainstream.pdf