Published: January 26, 2024
Contributors: Tom Krantz, Alexandra Jonker
ESG reporting is the disclosure of information about business operations in relation to environmental, social and governance (ESG) areas of the business.
The goal of ESG reporting is to use data to measure how a company’s ESG initiatives compare with industry benchmarks and targets. It also provides stakeholders with valuable insights that can inform decision-making, highlighting potential opportunities and risks that might affect the valuation of a company.
One of the main differences between ESG and topics like sustainability or corporate social responsibility (CSR) is the notion of motivation versus outcomes. Sustainability and CSR function as the business model or methodology that motivates a company and its employees to act in the best interest of civil society. ESG reporting, on the other hand, is the outcome of those initiatives and provides stakeholders with the ESG data needed to inform decision-making.
This guide summarizes what sustainability-forward organizations look for in their ESG software platform to help achieve their goals.
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As stated, the three main components of ESG are environmental, social and governance.
Refers to whether the organization is operating as a steward of the environment and covers sustainability issues such as greenhouse gases (GHG), loss of biodiversity, carbon emissions and pollution.
Refers to the impact the organization has on people, culture and communities, and explores areas like diversity, inclusivity, human rights and supply chains, among others.
Refers to how the organization is directed and controlled and includes topics like executive compensation, board management practices, data, security and fraud.
Across today's capital markets, businesses are heavily scrutinized by stakeholders. A company's reputation can have a direct impact on its bottom line. The investor community, in particular, demands ESG metrics to ensure that companies are sound investments and also align with their values (i.e., climate change, CSR, etc.).
Having a comprehensive ESG strategy ensures a business is operating in accordance with ESG regulations, identifying potential opportunities and risks and acting in the best interest of its stakeholders. Through ESG reporting, companies can show how they're meeting milestones and targets laid out in their ESG strategy while keeping stakeholders informed of the materiality and impact of the strategy.
Materiality is when organizations focus on ESG issues that are more relevant to them and likely to have a measurable impact on the business. To determine materiality, organizations can identify potential ESG risks and their consequences. From there, companies can use a "risk matrix" approach to forecast which areas to prioritize based on their risk profile and the potential severity.
The other side of materiality is impact and influence. Organizations assessing their ESG reporting approach may find it beneficial to consider the ESG factors they can most directly and rapidly influence. Using an action priority or impact effort prioritization matrix, organizations can quickly identify their environmental impact and determine where to focus sustainability efforts. They can then use the insights to determine which ESG reporting framework is best suited to help them realize their goals.
Organizations may also consider double materiality, which finds itself at the intersection of both materiality and impact. Double materiality encourages companies to consider materiality from two viewpoints: financial materiality and materiality to the market, the environment and people. Double materiality recognizes that an organization is responsible for managing its own financial risks by looking inward. At the same time, organizations are expected to look at the outward impacts of its decisions and operations on people and the environment. By applying the concept of double materiality, organizations can identify the impact from both a financial reporting and non-financial reporting perspective to ultimately shape a more holistic ESG strategy.
Beyond the reporting process, tracking ESG metrics is good business for several reasons:
Across the globe, each region has its own set of ESG disclosure requirements. For instance, in Europe, ESG reporting is mandated and enforced by several regulatory bodies whereas in the United States, the Securies and Exchange Commission (SEC) only requires companies to report on information that may be material to investors. Understanding the nuances around ESG reporting is key when it comes to deciding which ESG reporting framework is right for the organization.
A comprehensive ESG report does more than simply allow stakeholders to see a company’s performance as it relates to ESG initiatives. It can also help forecast potential ESG risks. Having a system that tracks ESG metrics through annual reports can be invaluable, especially given that many sustainable development and corporate governance initiatives are carried out over multiple years.
Today’s organizations are expected to provide greater visibility and transparency around business operations so that stakeholders can weigh the risks and rewards of investing. By tracking ESG metrics, companies can satisfy stakeholder demand and improve their optics, which can lead to higher ESG scores.
An ESG score is used to track a company’s ESG performance, providing greater visibility into its operations for investors, stakeholders and regulatory bodies. Organizations that provide more robust ESG reports typically score higher, whereas those that don’t track or showcase their ESG performance will often have a lower ESG score.
In the United States, the SEC is responsible for rooting out any ESG-related misconduct such as greenwashing or fraud. However, third-party organizations like Bloomberg, S&P Dow Jones Indices and others will measure the potential impact of ESG risks to determine the economic value of an organization. This rating, or ESG score, is used in conjunction with other economic data to determine whether it’s worth investing in an organization.
In Europe, regulations around sustainable investing are mandated across capital markets. As such, organizations are expected to report ESG metrics rather than encouraged. However, a new proposal to the European Commission aims to tighten up ESG reporting by creating new guidelines for ESG rating providers using previously established ESG reporting frameworks.1
ESG reporting frameworks provide guidance on which ESG topics an organization should focus, as well as ways to structure and prepare information for disclosure. There are several options for companies looking to disclose ESG information. No matter what framework is chosen, accuracy, automation and auditability lay at the center of sound ESG reporting practices. Organizations that adopt these practices through a specialized ESG reporting solution are best prepared for the rapidly shifting ESG landscape.
Choosing the right ESG framework depends on the organization’s business objectives, geography and sector, among other factors. However, it’s encouraged to use a method that relies on established frameworks and standards. And while there are several avenues to explore, the breadth of reporting frameworks can be roughly categorized into three groups: benchmark, voluntary and regulatory.
Benchmark ESG reporting frameworks require responses to all questions in the framework and typically have a scoring element. Prominent frameworks include:
Carbon Disclosure Project (CDP)
The CDP is a framework for companies to provide environmental information to their stakeholders, consisting of environmental governance and policy, risks and opportunity management, environmental targets as well as strategy and scenario analysis.
Global Real Estate Sustainability Benchmark (GRESB)
The GRESB is a global tool used primarily by investors to determine the sustainability performance of real estate and infrastructure portfolios and assets worldwide.
Voluntary ESG reporting frameworks allow organizations to select the questions they want to report against. Scoring is usually not included in these frameworks, which include:
Global Reporting Initiative (GRI)
The GRI is a globally applicable guidance framework that provides standards detailing approaches to materiality, management reporting and disclosure for a full range of ESG issues. Today, GRI standards provide a roadmap for companies looking to create their own sustainability reports.
Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD was explicitly designed to address climate risks to the business. The TCFD helps organizations across the globe articulate how ESG performance is most likely to materially impact future financial performance and value creation.
Regulatory ESG reporting frameworks are like benchmark frameworks in that all responses are required, but not always scored. These frameworks and reporting requirements are also required by government bodies, and include these notable examples:
Corporate Sustainability Reporting Directive (CSRD)
The European Union’s CSRD prescribes rules for organizations to report sustainability disclosures across several topics pertaining to environmental and social issues. Companies subject to the CSRD must report according to European Sustainability Reporting Standards (ESRS).
Sustainable Finance Disclosure Regulation (SFDR)
The SFDR aims to standardize the reporting of ESG metrics for financial products and entities within the EU. It does so by mandating that reporters publish a Principal Adverse Impact statement detailing their disclosures. The SFDR will act in concert with the EU taxonomy and the CSRD to form the basis for the EU sustainable finance agenda.
ESG frameworks are used by organizations for the purpose of publicly reporting detailed environmental, social and governance (ESG) metrics of the business.
ESG reporting has surged in prominence as investors and financial institutions discover that sustainability risk is investment risk.
The Task Force on Climate-related Financial Disclosures (TCFD) seeks to keep investors better-informed about companies' climate-related risks.
Sustainability in business refers to a company's strategy and actions to eliminate the adverse environmental and social impacts caused by business operations.
The Corporate Sustainability Reporting Directive (CSRD) requires businesses to report on the environmental and social impact of their business activities, and on the business impact of their ESG efforts and initiatives.
Net zero is the point at which greenhouse gases emitted into the atmosphere are balanced by an equivalent amount removed from the atmosphere.
Footnotes
1 Sustainable Finance: Commission takes further steps to boost investment for a sustainable future (link resides outside ibm.com), European Commission, Ferrie, 13 June 2023