Nasdaq ESG Solutions

Modern companies have an increasing number of reasons to engage shareholders and stakeholders and explain how they are addressing corporate social responsibility (CSR). Because business operations have an impact on society and the environment, the CSR model expands beyond conventional financial reporting to encompass multiple dimensions such as people, planet, and profit. These factors overlap and influence each other.

Environmental, social, and governance (ESG) investing continues to grow and new regulatory standards are beginning to require sustainability disclosures. As a result of these trends, among others, companies’ management teams have determined that CSR issues are material to business operations.

Reflecting CSR’s new operational significance, companies have adopted the practice of publishing annual CSR reports as way of communicating their goals, strategies, and progress. In addition to engaging internal and external stakeholders, CSR reports are used by rating agencies to evaluate and rank company CSR performance, which can have significant consequences in terms of investors and access to capital, among other considerations.

But the case for CSR reports goes beyond investor relations, brand image, or even compliance risk. A strategic approach to CSR reporting can serve as a planning and control tool for management, as well as drive business value and generate return on investment.

So, how can companies get the most out of their CSR reports?

Based on findings from an IBM Institute for Business Value survey of 2,500 executives across 22 industries, 76% of these business leaders reported that they now consider CSR and ESG efforts an integral part to their business strategies. Moreover, most of these executives believe CSR is a “revenue enabler,” and more than one-third expect these initiatives to boost profitability and innovation. Effective use of CSR reports can contribute to achieving positive outcomes in multiple ways.

First, a report is a highly visible communication tool that can promote internal and external engagement. Key external audiences include regulators, shareholders, the broader investment community (such as rating agencies), and customers. A CSR report can perform an important compliance function in jurisdictions that already require CSR disclosures.

More generally, by providing an annual benchmark that highlights successes, a CSR report may be used to support marketing efforts and enhance brand value, which may have a positive impact on customers and other stakeholders. A CSR report may also be used internally to improve engagement with employees or attract new employees who share similar values.  

Second, when CSR efforts are treated as integral to business operations, the annual process of generating a report can be used in a strategic way to support planning and control. Not only can the reporting process help management define goals and priorities, but collecting and disclosing relevant data can contribute to tracking progress and determining whether tactics are effective. In addition, publicly communicating strategy and outcomes contributes to accountability for achieving objectives, especially when impact assessments are included.

Finally, CSR reporting will require additional compliance considerations as regulatory scrutiny of sustainability disclosures increase. The EU Commission adopted its Corporate Sustainability Reporting Directive in 2021, and the first reporting requirements took effect in 2022. Also, the new European Sustainability Reporting Standards (ESRS) are due to be implemented in 2024. The US Securities and Exchange Commission (SEC) formed a Climate and ESG Task Force in 2021 and proposed new rules in 2022 to improve climate-related disclosures for investors, with new policies expected to be finalized by October 2023. These regulatory trends are expected to continue in both the EU and the US. Other jurisdictions around the world have already enacted disclosure requirements or are moving toward implementing new requirements.

There is no universal template for optimal CSR reporting because no single approach to writing and publishing a CSR report will match the unique circumstances of every company. But some general guiding principles do apply across businesses and industries. A good place to start is to conduct a materiality assessment by objectively assessing key ESG topics that are considered important to external and internal stakeholders.

According to Nasdaq ESG Advisory, four principles should guide CSR reporting:

• Understand the expectations of your key stakeholders
• Identify the ESG topics, metrics & KPIs that matter most to your business
• Monitor and compile necessary ESG data & information
• Communicate a balanced message effectively to your stakeholders

Within the framework of those general principles, details will make a critical difference for credibility. Reporting reliable and verifiable metrics goes a long way toward establishing trust and transparency. Plus, meeting expectations for data quality can mitigate any potential concerns about greenwashing.

These frameworks are only a few of many, which is good news and bad news. On the positive side, the existence of rigorous (but voluntary) reporting frameworks gives companies more potential matches for their needs, and they provide shareholders and stakeholders with credible benchmarks. However, each framework has a different emphasis and methodology, limiting comparability. Moreover, the lack of alignment among the various frameworks complicates matters for companies and end users of CSR reports.

Executives have identified inconsistency among standards as an obstacle for their CSR efforts. Adding to the complexity, many companies need to use at least two reporting frameworks, with more than a third using three or more, according to a report by Deloitte. For example, Bank of America uses the SASB, GRI, and TCFD frameworks to serve the different priorities of stakeholders, investors, and clients.

The outlook for CSR in general will be shaped by evolving standards, changing technology (i.e., CSR reporting software), and shifting priorities. In turn, CSR reporting will be influenced by those developments. How these trends play out will depend on economic conditions. If inflation and slower growth (or even recession) take a toll on consumer activity, companies may place greater emphasis on how CSR efforts contributes to return on investment (ROI).

Regardless of economic uncertainty, some trends probably have too much momentum to stop. A recent analysis by S&P Global identified several key themes for 2023 and beyond that ultimately will be reflected in CSR reports, including:

• Increasing regulatory pressure and litigation risk.
• Rising costs associated with climate risks (accelerating investment in resilience).
• Growing concern about water-related risks, human rights impacts in supply chains, and biodiversity or nature-related risks.

For CSR reporting, the most salient factor may be the ongoing digital transformation, primarily in the form of CSR reporting software. To manage the growing complexity of CSR issues and best practices, companies increasingly will need to adopt digital management platforms that automate data collection, auditing, and analysis and that also integrate with reporting frameworks. A 2022 Deloitte survey of executives on ESG issues concluded that “accurate ESG reporting requires effective use of technology” but also found that a majority of leaders believe their companies needed to invest more in technology to improve measurement, reporting, and disclosures. A particular challenge will be bridging the wide gap between collecting data at the front end of the process and sharing it with stakeholders at the end point. As an example of such a solution, Nasdaq Metrio™ provides end-to-end sustainability reporting software that streamlines the way companies collect, analyze, and share ESG data.

The processes involved in preparing disclosures will only become more “complex and expensive” for companies, according to the Harvard Law School Forum on Corporate Governance. Technological support can also help in this area. Nasdaq Metrio's Framework & Disclosure Management module is purpose-built for ESG disclosures, can populate questionnaires, help manage ESG data, and reduce time-consuming reporting tasks.

One thing is clear about the future of CSR reporting: Best practices will not stand still or settle on a fixed consensus anytime soon. That means companies will need to take a proactive approach to growing, adapting, and improving their CSR programs.

Companies at different stages of the CSR journey will face distinct challenges, but they do share a common need for collaboration and support. Corporations at all stages can benefit from the specialized guidance of outside expertise. Notably, for companies that aim to attract capital and enhance value creation, the Nasdaq ESG Advisory team works to empower business operations with a defined, aligned, and forward-thinking ESG strategy.

Companies that already have advanced CSR programs need to avoid becoming complacent. In many ways, the real work of making measurable difference is just beginning, and stakeholders are becoming more demanding. The challenge will be adapting to changing expectations, opportunities, and compliance issues in order to maintain their position as leaders. A trends analysis by the Sustainability Institute predicts a tricky balancing act: “Given that no one action is likely to appease every stakeholder, companies must continue to thoroughly evaluate their relationships to ensure that their efforts maximize positive shareholder impact while still creating business value.”

Companies that have not yet integrated CSR strategy into business operations still need to build those relationships that companies with established programs are trying to balance. Earlier-stage operations likely will face mounting pressure from shareholders and stakeholders, but the current confluence of stricter regulatory compliance and more mature stakeholder expectations also provides an opportunity to get in the game at a time when opportunities are more clearly defined than in the past. They can take advantage of proven methods and practices that CSR pioneers may have been forced to learn through trial and error.