The acronym ESG stands for Environmental, Social and Governance. Organizations are increasingly disclosing ESG-related information voluntarily, with the process becoming standardized through the GRI, TCFD, etc. Writing a well-structured ESG report is the result of a methodical series of steps, from designing the strategy to selecting key performance indicators to actually tracking and reporting on the company’s performance.
What is an ESG report?
An ESG report is a report published by a company or organization about the environmental, social, and governance (ESG) impacts of its operations. It enables the company to be more transparent about the risks and opportunities it faces. ESG reporting is an ideal and effective means of enabling companies to answer in a single document a wide variety of questions that stakeholders may raise.
What should be included in an ESG report?
The goal of an ESG report is to build transparency, raise stakeholder awareness and enable informed decision-making by investors. It should therefore delineate the risks and opportunities with sufficient potential to impact the company’s long-term operational and financial performance. ESG reporting encompasses both qualitative disclosures and quantitative metrics that measure a company’s performance with respect to the risks, opportunities, and strategies that fall under the three pillars of Environment, Social & Governance.
Some examples of topics are:
- Environment: Climate change and carbon emissions, pollution and waste, biodiversity, deforestation, energy efficiency, electronic waste.
- Social: Customer satisfaction, human rights, health and safety, data protection and privacy, gender and diversity, community relations.
- Governance: Board diversity, business ethics, audit committee structure, tax transparency, corruption and instability, lobbying, whistleblower programmes.
For a more detailed breakdown of topics, you may find this graphic from PWC helpful:
Difference between ESG & Sustainability
According to the Green Business Bureau, the difference between ESG and Sustainability is a matter of precision. In a business context, sustainability may mean different things to different entities and is applied as an umbrella term of doing good. This refers to ethical and responsible business practices. Embedded into this term are concerns for social equity and economic development. ESG points to a specific set of criteria that remove the ambiguity surrounding the term sustainability, organized under three key pillars.
How do I structure an ESG report?
Currently, there is not a unified global standard or regulation regarding the structure of an ESG report. However, there are some frameworks that are applied in specific countries or industries, while others refer to specific issues, such as the Task Force on Climate-related Financial Disclosures (TCFD). In Europe, reporting standards are commonly drawn from the Global Reporting Initiative (GRI), which represents the global best practices for sustainability disclosure.
The European Union’s Sustainable Financial Disclosure Regulation (SFDR) which came into effect in March 2021, is a set of technical standards for disclosures by financial market participants. It imposes comprehensive sustainability disclosure requirements covering a broad range of environmental, social & governance (ESG) metrics at both entity- and product-level. Organizations are expected to report on the existing impacts and risks of their operations, and the policies and initiatives that address them, as sustainable investment objectives.
The European Commission’s new proposal for the Corporate Sustainability Reporting Directive (CSRD) which will come into effect in late 2022 will also require more companies to report on ESG-related topics, and go beyond the previously mandated non-financial issues.
As each of these standards and frameworks vary in scope, a well-structured ESG report depends heavily on their requirements.. However, they all share a few key features. The first is alignment with the organization’s broader sustainability strategy. The data included in an ESG report is selected according to the ESG issues which are “material” or most relevant to the organization’s values, growth, and vision. These material issues are selected through a process involving all organization stakeholders.
Once these issues are identified, the Key Performance Indicators that make up the content of the ESG report must be specified. This includes the benchmark against which performance will be measured, as well as the reporting boundaries. The qualitative disclosures and quantitative measures of performance fall within this context.
Finally, the report should be a concise, clear snapshot of the organization’s activities, policies, and performance on ESG factors for investors. The audit processes for financial and non-financial information should be clearly stated as well.
Example of good ESG Reports:
IBM’s recently released 2021 ESG report is a good example of a clear structure for an ESG report. For the organization of key concerns, they draw from the Global Reporting Initiative (GRI) Standards, the Sustainability Accounting Standards Board, the Task Force on Climate-Related Financial Disclosures (TCFD), the Stakeholder Capitalism Metrics, and the United Nations Sustainable Development Goals.
The report first outlines IBM’s ESG strategy in the context of the organization’s core values on which it is built. Each section of the report clearly outlines the business risks and opportunities, followed by a description of ‘highlights’ of policies, activities, and actions that make up the risk management strategy. Clear quantitative data is also provided for each KPI. In addition, there are several links to supplementary information, such as Codes of Conduct, other relevant reports, and details of initiatives and programs.
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