Environmental, Social & Governance Briefs

ESG Reporting: A Route Through a Maze

October 08, 2018

This column was originally published in Transform.  

There has been dramatic growth in ESG (Environmental, Sustainability and Governance) investing during the past 20 years – but along with this positive trend comes an equally dramatic rise in ESG reporting requirements, and a proliferation of rating agencies and assessment tools. 

How are companies coping with this development? The Conference Board surveyed 61 sustainability executives to find out. The bottom line: while ESG reporting can be onerous, it’s possible to manage and improve the process – and there are multiple benefits to be gained from it. 

Key issues in ESG reporting

Some of the negative aspects of ESG reporting include: 

• Providing ESG information is a heavy lift. Companies take 18 workdays, on average, to respond to each ESG information request, and typically respond to more than one such request each year. Among reporting initiatives, collating responses for RobecoSAM and CDP reports are the most labour intensive, requiring 40 and 30 workdays, respectively. 
• Reporting is often a company-wide effort. ESG information requests involve collating information from many functions, from communication and HR to investor relations, legal and procurement.
• The array of ESG ratings and tools is disordered and confusing. Survey respondents’ concerns include:
  • Lack of transparent methodology
  • Ambiguous scoring systems
  • Frequent changes in methodology without any formal communication
  • Lack of industry-specific assessment and scoring methodology
  • Redundancy of requests among agencies without uniform formatting
  • A surfeit of assessments, leading to survey fatigue.

Approaches to Managing the Burden of ESG Reporting

ESG initiatives are here to stay, so considering ways to manage the burden can be beneficial in the long run. 

• Standardise reporting. Leading companies are proactive. They monitor ESG reporting trends and work to introduce relevant metrics as part of their regular sustainability reporting cycle. 

They can also:

• Incorporate relevant findings from best-practice guides on non-financial reporting 
• Introduce internal reporting processes to manage information requests better.
• Practice selective reporting. Companies should consider engaging their stakeholders, including investors, ahead of time to gauge their expectations about A surfeitESG information requests. That way, they can prioritise what is important to stakeholders. To do this effectively, it helps to be transparent, and to communicate the company’s selective approach to stakeholders.
• Leverage results. The heavy lift of reporting has an upside: companies do value the feedback of rating agencies. Agencies (such as CDP, DJSI, EcoVadis and others) provide feedback reports and/or best-practice forums to reporting companies. Smart companies use those results in several ways:
  • To improve the company’s own sustainability practices.
  • To publicise results – demonstrating the company’s sustainability credentials and engaging employees and shareholders.

The expectation is that, over time, ESG initiatives will be rationalised, and that the industry will adopt a simpler, more holistic framework to assess ESG performance. The Task Force on Climate-related Financial Disclosures (TCFD) is one such initiative – it is specific to climate-related issues only, and has the potential to become the standard for climate reporting. Furthermore, it might be possible to apply its principles to assess other ESG issues as well. Lastly, it is yet to be seen whether a government-mandated ESG standard could lead the way for uniform ESG assessment.

Survey

The Conference Board surveyed senior sustainability executives, all members of its Sustainability Councils in Europe and the US, to gather their views on ESG initiatives. The 61 respondents were from diverse industries, including financial services, ICT and manufacturing. More than 50% of the companies have revenues of between $30bn (£23.1bn) and $80bn.

Initiatives

There are more than 200 ESG agencies and initiatives. Many rely on publicly available information, but some rely on information submitted by companies. Some of the most recognised initiatives include Bloomberg, CDP, DJSI, EcoVadis, FTSE4Good, MSCI, and Sustainalytics.