The push for ESG disclosures is accelerating, as a variety of stakeholders are interested in the ESG risks and the strategic responses of companies. ESG disclosures are central to providing senior management, investors, employees, regulators and other stakeholders with the transparency and information they need to make informed decisions. These stakeholders require clarity within ESG communications to better understand company strategy, consistency of methodology and the comprehensiveness of reported metrics.
In interview rooms around the world, employees are asking how companies are addressing climate change, diversity and inclusion and other key ESG topics. Employers should be prepared to answer and have systems in place to report on those issues because they are going to be held accountable for them with metrics to measure performance.
The world's largest asset managers and private equity companies have stated their expectations for ESG reporting, and investors are voting based on ESG matters. From investors to employees to customers, and all stakeholders in between, disclosing your posture and performance across material ESG concerns is becoming table stakes.
There already exists a convoluted ESG reporting environment. Organizations can select from a blend of voluntary guidelines, mandatory requirements and instructional frameworks. Regional variations also exist, complicating matters for global organizations. This environment makes the endeavor of ESG reporting non-trivial and, in our view, a strategic imperative for all organizations to begin setting their direction on.
Be Proactive — The Time is Now
Enterprises that want continued access to capital (and potentially lower financing costs) should not only have an ESG strategy and a dedicated program in place, but they must also communicate that strategy to investors, rating agencies and other stakeholders.
Rather than wait until reporting requirements are in place, it is important to get ahead of it now. Issuers do not want to be scrambling to respond to mandatory reporting requirements. Doing so can lead to a significant risk of errors and other data quality concerns. That is because the data needed to report on ESG is typically non-financial data (although some financial data is often incorporated in ESG reports) that is not routinely subject to internal controls. Rather, ESG data is from systems that are, at least currently, not integrated into the overall reporting landscape.
Companies must be deliberate when setting up ESG reporting programs. It is better to be proactive than reactive, as it can take months to launch and integrate a proper data management system, and even longer to set up a well-functioning ESG governance structure.
As time goes on, companies are going to start realizing the business value of their ESG programs. There are many transmission channels for the risks and opportunities associated with ESG to find their way into the income statement, balance sheet and overall business decision-making. For example, a company's focus on reducing energy usage by transitioning to LED lighting will lower utility bills while reducing expenses over time.
Still, there are considerable challenges around the data required to produce ESG metrics for reporting in a consistent and scalable manner. Disconnected systems, multiple platforms and geographic locations make centralized data capturing and aggregation a challenging and time-consuming task with a high potential for error. Within a company, aggregating data for the purposes of calculating various ESG metrics can be problematic due to a lack of consistency in how the data is reported or measured across regions. Comparing data over time and across an organization's peer universe can also be complex due to changes in methodologies or company structure over time. In addition, given that ESG disclosures are voluntary, self-disclosure could lead to potential issues around greenwashing and expose companies to reputation and legal risks down the line.
ESG Reporting Challenges
The multiple standards and frameworks have added to the complexity and challenges around ESG reporting. Organizations could be spending considerable time and effort to comply with the requirements across the different frameworks as stakeholders demand greater transparency.
The proliferation of ESG reporting standards and frameworks, all with varying degrees of complexity, often leads to confusion around what to comply with. In addition, the definition of materiality for ESG is not akin to materiality in the financial reporting sense and drives the need for an ESG materiality assessment at the start of any ESG reporting initiative.
Reporting on multiple frameworks can quickly become overwhelming for companies that do not have adequate resources. The absence of a dedicated ESG team could result in various aspects of ESG reporting being assigned to different functions within the organization. Inadequate controls, lack of proper governance structure and misaligned incentives could lead to disengaged stakeholders, poor data quality and a failure to institutionalize and scale the ESG disclosure process.
Another challenge is that the self-disclosed nature of the ESG reporting process could potentially incentivize organizations to cherry-pick metrics and calculations. Such a strategy exposes such organizations to accusations of greenwashing from key stakeholders such as investors, customers and regulators, hurting their brand as well as exposing them to potential future legal risk.
The options for ESG reporting and disclosures are myriad. While not yet mandatory to report, it is only a matter of time1. Leaders need to get ahead of the curve now and prepare for the inevitable mandates.
FORVIS and ESG — How We Help Clients
ESG is About…
- Boards and Senior Management hyper-focused on ESG matters
- Business models and strategies need to adapt to changing trends and expectations
- Opportunity to imbue meaningful change to company culture and performance
- Impact of ESG risks may be highly material depending on industry
- Adeptness at managing ESG risks factoring into assessment of management's capabilities
- New mitigation strategies need to be developed and implemented
Communicating with Stakeholders
- Disclosure allows for communication with many stakeholders at once
- Opportunity to demonstrate commitment to material ESG concerns
FORVIS supports its clients with training and education. Many organizations do not know where to begin when it comes to ESG reporting frameworks. We help them get up to speed and quickly implement the key steps to kick-start their ESG journey.
This journey may include the following activities:
- Stakeholder Mapping: Ensures a robust ESG dialogue with those most impacted by a company's actions. A comprehensive and complete mapping exercise will help ensure all key stakeholders have been identified and their key concerns and interests addressed. The output will help inform all aspects of the ESG process, from ESG strategy to target and goal setting to framework selection and communication.
- Scope & Materiality: Stakeholders and investors expect companies to identify and focus on the ESG matters that are material to them. Not all ESG topics will be the focus for each company given the varying nature of businesses across industries and geographies, as well as their impact on the environment and society. Thoroughly assessing scope and materiality drives prioritization of material ESG matters and leads to better alignment with strategy and the impactful allocation of capital.
- Data: ESG data may be sourced and derived from a variety of structured and unstructured data sources, many of which have not had the same level of process and control implementation that systems supporting financial disclosure have had. Companies need to establish a data management program as a foundational governance mechanism to ensure high-quality data and control for all ESG reporting.
- Strategy: Understand that ESG risks and opportunities impact strategy and ESG disclosures provide insight into how a company links ESG to its business. Crucial to this are senior management discussions around the implications of making commitments across material ESG topics and embedding ESG considerations into day-to-day business routines. The integration of ESG into a strategy setting is what truly makes a program sustainable for the long-term.
- Governance: Establishing a robust governance model surrounding ESG initiatives, from the board of directors on down, ensures the appropriate level of focus and strategy integration. Many stakeholders benefit from coordination to drive projects forward and a mechanism for collaboration. Formal governance establishes accountability that sets the tone on the company's commitment to the ESG program and related considerations. Setting this foundational item is a key for success on the large-scale transformation that ESG initiatives (and reporting) entail.
- Program Management: Like any large-scale transformation, implementing an ESG reporting process requires robust program management to monitor execution and drive accountability across the organization. ESG reporting is a complex process that cuts across regions and functions within an organization, requires buy-in from various stakeholders and a well-thought-out implementation strategy. A robust program management framework will provide the formal oversight and management needed to ensure success.
Conclusion—Understanding What's Right for Your Organization
To understand how the different ESG frameworks apply to your organization and determine which is best suited for your goals, stakeholders, and resources, give us a call or contact us. From a materiality assessment and stakeholder analysis to your ESG strategy and execution of that strategy, going it alone can be difficult. Our professionals can guide the process, helping you understand the different options you have when getting your ESG program off the ground.
Jared Forman, SCR, FRM, FSA, CERA, leads the ESG and Climate Risk advisory practice at FORVIS. He focuses on helping clients overcome the challenges with ESG program set-up, materiality assessment, ESG data and reporting, climate risk management and implementing solutions for controlled and efficient processes. His background covers modeling, data management, reporting, risk management and managing large-scale change initiatives. Jared is Sustainability and Climate Risk (SCR) certified by the Global Association of Risk Professionals (GARP) and is a credential actuary and risk manager.