Not all risks to an organization are captured on its financial statement, and entities of all types face growing pressure from many stakeholder groups to disclose environmental, social, and governance (ESG) impacts.
The demand for ESG information is coming from a range of stakeholders — the investment community, employees, customers, vendors, the general public, and others. That’s because the measuring stick used to assess enterprise risk doesn’t always consider the materiality of the broad range of ESG topics. Increasingly, stakeholders are asking organizations to take a critical look at nonfinancial areas that haven’t previously been prioritized.
At present, no requirements exist in the United States for ESG reporting, and while several standards and frameworks are commonly used, organizations have the freedom and flexibility to present their ESG disclosures in ways that best support their strategic goals and objectives. Whether you’re just now thinking of ESG reporting or still early in the process, here are seven steps to help you prepare your ESG disclosures.
1. Define the goals for ESG reporting
Put simply, why are you choosing to make ESG disclosures? Is your goal to attract new investors, strengthen your company’s public image, or address employee concerns about important social issues? While the goals are limitless, they should align with your organization’s strategic priorities.
Keep the goals you define in mind at each step of the ESG reporting process to help guide decision-making. Otherwise, you run the risk of focusing on things that don’t support — or that detract from — your strategic goals or that aren’t relevant to your stakeholders.
2. Identify the target audiences for your ESG disclosures
Just as important as defining your goals is knowing your target audiences. Who are your stakeholders related to ESG disclosures, and why do they care? Are they investors who need to understand the benefits and risks before giving you their money? Are they customers wanting to affiliate with a brand that speaks to their values? Or maybe there are preconceived notions about your business among the general public or within the community you operate that you want to address.
Again, keep the audiences you identify in mind throughout the ESG disclosure process, or you could invest time and resources on information that doesn’t adequately address their concerns and distracts the organization from its focus.
3. Assess what ESG topics are material to your organization.
When it comes to ESG reporting, the concept of materiality holds a different meaning than it does with respect to financial reporting. Materiality from an ESG perspective refers to the impacts, risks, and opportunities that are relevant to the organization’s business operations as well as those that influence stakeholder decisions.
What’s materially relevant to a specific company varies widely and depends on the industry, size, customers, and other factors. In determining what disclosures are material to your organization, ask yourself what metrics you’re currently monitoring as well as what additional data or information could be helpful to include that you may not yet be collecting. Why are those metrics important for advancing your strategic objectives or to mitigating risks? Note that the disclosures can be financial or nonfinancial, quantitative as well as qualitative.
4. Collect the ESG data
Once you’ve determined the data and information you want to disclose, how will you gather it? If your organization is like most, it won’t all be neatly stored in the same place and in the same format. Do you have the capabilities to capture useful, reliable data for what you want to report, or will you need to invest in new software or data management systems first? How will you consolidate data from disparate sources across the organization so the information can be analyzed and reported?
Remember, not all ESG disclosures are numbers-driven. Often, ESG reporting includes a narrative about the strategies, actions, and processes you have in place as an organization, related to environmental, social, and governance topics. Where does that knowledge reside? If, for example, you plan to disclose efforts to increase diversity in your staff, has your HR department been involved well ahead of time?
Failure to think through the information-gathering phase means you may not be able to provide meaningful data or, worse, that you release incorrect data.
5. Decide how to disseminate your ESG reporting
How will you present ESG disclosures, and where will the information live so it’s accessible and useful to your stakeholders? Does it belong in regulatory filings? Is it supplemental to financial reporting? A glossy, standalone report? An interactive dashboard on your website? Ideally, the stakeholder groups you’ve identified drive how and where you distribute the information. This in turn impacts whether and how you create an accompanying narrative, select graphics, and allocate time and other resources required for production.
6. Determine the frequency of ESG disclosures
If your disclosures relate to financial materiality and are included in your regulatory filings, you have your answer. If not, data cycles — quarterly, fiscal year-end, or calendar year-end — can drive the timeline.
Keep in mind that regular and prompt release of data — accurate data — is essential for transparency and meeting stakeholder expectations. Reporting current data should be a top priority. If resources are limited, focus on scaling back the information you provide at the start and build it out more each year.
Many organizations release ESG disclosures annually, but there’s no hard and fast rule. Consider your goals and audiences and align the frequency of disclosures with your objectives and stakeholder demand.
7. Showcase improvement
Continuous improvement is a key part of ESG disclosures. Once you have your reporting program in place, include updates in subsequent reports to demonstrate your commitment to continuous improvement and to share progress on the material topics you identified.
In addition, regularly revisit the process of examining your material topics; it’s not a one-time exercise. And, as your organization gets more comfortable with making its ESG disclosures, your reporting should evolve and become more robust over time.
Keep up with a dynamic ESG landscape
ESG is evolving rapidly. Although there are currently no ESG requirements in place, there’s much discussion about whether organizations should follow a particular standard or framework, or a combination. This is good news in terms of flexibility, but without one global set of guidelines, it’s hard for investors and other stakeholders to benchmark and compare companies. If stakeholders can’t tell what a company is or isn’t doing, they‘ll draw their own conclusions about the impacts or look elsewhere for information. Your organization should be the one telling its story.
If you have questions about the ESG reporting process or you’re looking for guidance, don’t hesitate to contact one of our experts.
