What is ESG Reporting? Defining the Framework for Sustainability and Social Impact Reporting

ESG is becoming strategic for every business and data management will be a key driver to succeed.

By Orly GlickMarch 28, 2022 5 min read

ESG is becoming an inherent part of every business decision making process and strategic roadmap, and when coupled with business impact, will create a resilient, profitable business together with doing good. The Journey is still early and data management will be a key driver to success.

In our connected world, companies face rising pressure to provide information beyond financial accounting. Investors, policymakers, consumers, employees, and other stakeholders are looking to evaluate businesses’ actions on climate change and responses to social problems and conflicts.

The emergence of ESG can be linked to different elements and events throughout the past years, some historical, some regulatory, in addition to the emerging culture of stakeholder capitalism. Gen Y, Z and Alpha by now form a large percentage of such stakeholders and they are a major driving force behind the change.

Corporations’ activities influence asset allocation by asset managers thus influencing corporate decision-making. This also comes as a result of emerging regulation where in Europe the SFDR calls asset managers to report their ESG practices and in the US the SEC just released a proposal for climate disclosures for US public companies. The proposals would require public corporations in the US to report different ESG topics, mainly related to climate risks. Mr. Gary Gensler the Chair of the SEC came out with an important tweet right before the proposal saying:

If it’s easy to tell if milk is fat-free by just looking at the nutrition label, it might be time to make it easier to tell if “green” or “sustainable” funds are really what they say they are. 

pic.twitter.com/RbabGQmUXQ— Gary Gensler (@GaryGensler) March 1, 2022

There is no one global set of standards or parameters for reporting corporate sustainability and social impact, however, there are several commonly used standards and frameworks of reporting environmental, social, and governance metrics – ESG such as GRI, SASB, TCFD and others.

ESG provides a framework to communicate strategies and performance on a range of social, ethical, and sustainability issues. Companies planning to incorporate ESG factors into their operations should first identify which topics are relevant to their business and then measure their activity. Each applicable or “material” issue is grouped under one of the three pillars of ESG alongside tens or sometimes hundreds of other non-financial indicators specific to their operations or industry. This creates a very complex data set.

Here is a snapshot of the issues and topics that comprise each ESG pillar:

Environment: Climate change is one of the defining challenges of our era, putting a spotlight on the private sector’s emissions and other environmental impacts. With scrutiny and regulation on climate issues likely to grow more stringent, key stakeholders such as institutional investors are looking at ecological stewardship as a pivotal component of long-term success. Key metrics include GHG emissions, supply chain emissions, energy efficiency, water usage and effluents, waste management, and natural resource stewardship.

Social: Social factors define how an organization manages its interactions with stakeholders within and outside the organization, including customers, employees, suppliers, and local and indigenous communities. When reviewing social performance data, observers aim to assess the organization’s contribution to the local economy as well as its efforts to foster diverse and inclusive workplaces, promote and protect employee safety, and maintain an ethical supply chain.

Governance: How management conducts and fosters its work environment is critical to a company’s reputation and competitiveness. The corporate governance aspect of ESG aims to measure commitment to company values, the workflow of the corporate hierarchy, and factors that affect decision-making. The strongest performers take steps to actively manage risk, prevent corruption, and ensure a diverse and transparent board of directors.

Integrating ESG into business strategy

Companies will have to incorporate ESG practices into their strategy. Tactical initiatives vary, but at their core, corporate responsibility actions demand companies take accountability for their impact and be transparent around existing discrepancies and areas of improvement.

In the ESG transformation journey companies will have to develop workflows and processes that will help them collect hundreds of data points that would then be used for the ESG/sustainability report but more importantly, will help them define – what are the right actions that would support and align ESG with business impact. Data will be a key driver and gathering the right data, normalizing it and leveraging it properly in tactical and strategic decision making would be key for the success of the ESG transformation journey.

Stakeholders now want to see not only just a mere sustainability report, but a well thought out plan on how the company incorporates and plans to embed ESG into the tactical and strategic plan, into daily language and action. Technology could tremendously support this effort. And data will be the key driver to success.

Share your thoughts with us about the ESG transformation journey and ESG data at esggo.com