The winds of change are among us, and perhaps they've been gaining momentum for some time. Since the turn of the century, the world has seen a vast increase in the adoption and prioritization of environmental, social, and governance (ESG) initiatives as well as ESG disclosures and reporting. But what is the standard for ESG reporting? Why should organizations be on top of disclosures? And where can we expect to go from here? Continue reading for a look into:
- The driving forces for ESG reporting
- What standards are in place today
- Where you should start
- What's next for ESG reporting
Why ESG Reporting?
The pressure has been on for organizations to adopt ESG initiatives for over a decade – and more pressure has built up in the last year alone. Four key parties are driving the demand for ESG and disclosures:
- Employees
- Consumers
- Business partners
- Investors
Each of these are critical stakeholders for organizations, and their demand for solid ESG initiatives and reporting stem from social movements, demands for sustainability, the call to mitigate climate change – all of which should be a big deal to organizations. Simply put, these priorities are desirable to investors and key stakeholders. The more you can prove your commitment to ESG, the more you go from checking a box to value-added.
That's all well and good, but what framework will help you meet your goals and satisfy stakeholders? What can your organization start reporting on now?
Read: ESG Investing Prompts a (Slow) Response to Climate Change Risk
What's the Standard?
The fact of the matter is, it varies. In the US, most ESG reporting is still voluntary. In the EU, they've established the Non-Financial Reporting Directive, which requires affected companies to report on the policies they've implemented concerning environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity of company boards. New Zealand recently became the first country in the world to implement mandatory TCFD reporting, aligning with the Task Force on Climate-related Financial Disclosure (TCFD) standards.
Despite this, much of the world – especially the US – still relies heavily on voluntary reporting standards. This begs the question, what standards and frameworks should organizations use to meet stakeholder demands and prepare for future regulations – which at this point are eminent.
Where Do I Start?
NAVEX Global's VP of ESG Solutions, Karen Alonardo, recently spoke at the Master Class How to Overcome Common ESG Program Challenges, where one of the biggest questions was "What framework should I use, and what metrics should I track?"
Here are some highlights from Karen's response:
Determine your end goal. Start by asking yourself, where do you want to go? What is it that your company trying to accomplish around ESG and sustainability initiatives? Once you understand your end goal, you can begin to determine which of the frameworks can get you there.
Are your goals focused on investor interest? Karen says that she often ends up looking to the Sustainability Accounting Standards Board (SASB) and their 77 industry standards, which tend to look at ESG through the investor's lens. Many frameworks, like SASB's, have identified the metrics that you can include in your reporting. Finding the standard for your industry is a great place to start and to understand what metrics are recommended for your industry and organization.
Do you want to focus on social metrics? The Global Reporting Initiative has been around for many years. It has established a great framework that incorporates environmental, economic, and social metrics, which could align nicely with Social goals you're trying to accomplish.
Are you broadening your initiatives? Perhaps your program is really advanced, and you've already reported to GRI, or perhaps the Carbon Disclosure Project, and want to know what you should do next. Start by looking internationally at the UN's Sustainability Development Goals, or the World Economic Forum. These can provide you with direction for your goals and ESG initiatives.
Once you have decided where you need to go, you can begin to work towards your end goal. From there, you can start to focus on advancing your program.
While navigating the ESG reporting landscape may be confusing, organizations that track towards any of the leaders (SASB, CDP, etc.) will be well-positioned for success once unified reporting standards do come along.
What's Next for ESG Reporting?
We have seen ESG gain an incredible amount of attention in the past decade alone, and that does not seem to be slowing down. In fact, all signs – including those from the SEC – indicate that more regulatory requirements are imminent.
Acting Chair Allison Herrin Lee recently gave a statement on the Review of Climate-Related Disclosure on February 24, 2021, in which she said:
Now more than ever, investors are considering climate-related issues when making their investment decisions. It is our responsibility to ensure that they have access to material information when planning for their financial future… Ensuring compliance with the rules on the books and updating existing guidance are immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.
Whether regulation comes swiftly or continues to loom in the air, it is time to identify your end goal for ESG. The case has been made time and time again for the value added by ESG; it can't be treated like another "check the box" initiative come regulation time.
