4 Steps in the ESG Reporting Journey: What Needs Solving?
Let’s start by looking at the ESG reporting journey — the key players and their desired outcomes and pain points. The objective here is not a tactical step-by-step walkthrough but a 40,000 foot view of the overall ecosystem to understand flow and relationships. Ultimately, this view will help you pinpoint the problems that need solving and appreciate the complexities upstream and downstream.
We’ll meet five characters across the journey — reporters (or companies), auditors, regulators, raters/rankers and investors. While there are countless other stakeholders — customers, suppliers, partners, employees, civil society are just a few examples — we’re going to focus on these five to keep it simple. We’ll also focus on these five stakeholders to illustrate something quite unique about ESG reporting — how the consumers of an ESG report go on to influence the scope and approach in an iterative way.
Every process starts with understanding what matters to stakeholders in order to shape the ESG strategy and define the scope of the report. Remember, this is a voluntary report until the SEC says otherwise. Voluntary means defining what to report and how to report it. While the creative license may appear to be liberating and energizing at first glance, ESG leaders will tell you it is anything but liberating.
Defining what matters to stakeholders is a highly subjective exercise — take a look at an example survey below — how can a company select the “material” topics to report against when there is so much dispersion in what matters?
On one end of the cost-benefit spectrum, a company can take the all-in approach of reporting against the universe of all topics relevant to their industry to satisfy every last stakeholder. On the other, a company can cherry-pick the topics where they’ve crushed their goals and run the risk of being perceived as “greenwashing.”
After selecting the “material” topics, the company then has to align with various reporting frameworks (e.g. GRI, SASB, TCFD) and raters/rankers (e.g. CDP, Sustainalytics, EcoVadis) and manage a process to ensure they are aligning with each of the framework/standard/rater/ranker requirements.
You hopefully understand the challenge now — (a) different stakeholders value different metrics , (b) there is no prescriptive set of rules instructing companies to report against x but not y, (c) there is incremental cost and risk of disclosing more.
Key Problem(s) that need solving: These three conditions create the first big pain point in ESG reporting — understanding what matters to various stakeholders, setting the ESG strategy and scoping the ESG report within the capability and capacity constraints of the organization. Once the material topics are defined, the very next challenge is maintaining the complex matrix of fragmented reporting requirements for each of the frameworks/standards/raters/rankers.
Once the ESG strategy is created and commitments and goals set, the next step is operationalizing it — drafting the policies and driving initiatives to improve ESG performance.
Policies and procedures document the company’s approach to ESG. They include policies around corporate use of renewable energy, approach to DE&I, mitigation of supply chain risk and pay and rewards policies, as examples.
Once policies are drafted, teams can get to work monitoring and addressing the issues critical to the ESG strategy. For the E — these issues can include decarbonization, mitigating or removing emissions, wastewater treatment or sustainable packaging, amongst others.
HolonIQ, a market intelligence platform brought together a global team of energy, environmental and infrastructure innovators to create a taxonomy for climate innovation to illuminate various solutions in the Climate Tech ecosystem.
Similar opportunities exist to improve the performance of S and G metrics — improving employee health and well-being, improving board diversity, de-risking supply chains, strengthening cybersecurity and privacy defenses are just a few examples.
How are these ESG performance initiatives driven? In more mature ESG organizations, core ESG teams typically serve in a PMO role, collaborating with functional leaders responsible for various ESG topics to execute, measure and analyze. In less mature organizations, the core ESG team will take a more hands-on role to driving change.
Key Issue(s): ESG performance improvement initiatives are endless, but the three key questions ESG teams ask themselves in this stage are:
- Do we have to improve the performance of the underlying metric or do we have to improve how we’re disclosing it to the world?
- Who do we need to collaborate with to improve performance and how is this ESG initiative integrated with our broader corporate strategy?
- How do we manage the overall portfolio of ESG performance improvement initiatives and how do we know if we are successful?
Alright, so you now have an ESG strategy and a series of initiatives to improve your ESG performance. Now you have to measure how you’re doing, gather the data and analyze the results. Where and how do you do this?
First, think about all the metrics that need to be captured. A Fortune 500 company is likely to have over 100 metrics across E, S and G topics. Certain topics may be qualitative, others quantitative. Some topics may already be captured in existing tools (e.g. health and safety data in EHS management system, human capital data in human capital management systems), others may be captured off-line in spreadsheets or physically in three-ring binders or on Post-It Notes. Seriously.
Regardless of where the data is kept, it needs to make its way to a central repository. And it needs to be an auditable repository with some semblance of internal controls and governance. Independent, external audit of ESG data isn’t a requirement yet, but if the EU is any indication, its coming — investors care about the reliability of ESG data as much as its comparability and consistency.
Key Issue(s): A reporting organization may need to manage upwards of 100 disparate metrics across E, S and G. These metrics may be qualitative or quantitative and they may already have a system of record or they may not. ESG teams need to devise controlled processes to capture, aggregate and analyze the data reliably.
Once all the ESG data is gathered, analyzed and validated, the next step is reporting. Reporting is not a one-click extract of a table from an ESG system, instead it is a marriage of numbers and narrative, a careful telling of the ESG story to stakeholders through various outputs that must be consistent, cohesive and trustworthy.
These outputs include the company’s annual ESG report, Proxy Statement, 10-K, updates to the company’s ESG microsite, submissions to various raters/rankers, or ad-hoc press releases.
Now imagine the company adheres to GRI, SASB, and TCFD frameworks and submits to CDP, EcoVadis and Sustainalytics rating services. Different metrics need to be reported for each framework and rater/ranker submissions. Any inconsistencies could lead to stakeholder scrutiny and potential downgrades.
The numbers and narrative on each output need to be consistent, aligned with the requirements of the various frameworks or raters/rankers and auditable.
The core ESG team is typically responsible for gathering data and drafting the report, then taking it through various rounds of review including functional leaders, Legal, Internal Audit, Investor Relations, ESG governance committees, C-Suite and the Board. Then they take it through the design process, where professional design agencies apply branding and graphic design to bring the report to life. So many stakeholders, so much linear collaboration, so many interdependencies!
Key Issue(s): Multiple outputs x Multiple frameworks x Multiple stakeholders = Complex collaboration and orchestration of a time-constrained process
The ESG Talent Market: A Pervasive Problem
There’s a land grab on for good people right now, because the day we all hoped would be here is here: Everyone and their brother and sister is interested in sustainability and ESG.
Any article about ESG problems that need solving would be incomplete without mentioning the talent shortage in the ESG market.
The root cause of the problem is that the demand for ESG talent has grown exponentially as it quickly became a must-have. LinkedIn’s Global Green Skills Report 2022 points out that the share of green talent in the workforce has grown 38.5% from 2015 to 2021. At the same time, supply has lagged behind — colleges and universities don’t exactly give degrees in ESG. Professionals have to learn the ESG domain knowledge and mechanics of reporting on the job. Not only that, but they have to be proficient at leading change within organizations.
All of this means that organizations are on a race to recruit individuals who have learned these skills on the job or to develop the talent in-house. PwC announced a $12 billion plan to create 100,000 new ESG jobs by 2026. Other consultancies have followed suit.
While we wait for the supply of ESG talent to catch up to demand, there will continue to be a demand for services and technology that upskill, upscale, reduce inefficiencies, improve quality and consistency and generally enable organizations to make their small-but-mighty ESG teams mightier.
Here’s a TL;DR version of the 4 steps in ESG reporting, the goals at each step and the pain points worth solving for