The Basics on Today’s ESG Reporting
What is ESG reporting?
ESG reporting encompasses both qualitative discussions of topics as well as quantitative metrics used to measure a company’s performance against ESG risks, opportunities, and related strategies. Companies report ESG information for many reasons. The terms ESG, sustainability, and corporate social responsibility (CSR) often are used interchangeably to describe nonfinancial reporting. For purposes of this paper, when we describe ESG information we also are referring to these other forms of reporting. ESG reporting enables companies to do the following:
- Communicate key ESG risks and opportunities and how these issues are managed.
- Organize business dependencies and impacts on the environment and society.
- Communicate their resiliency to shifts in the environment and society.
- Credibly demonstrate how they execute on their purpose to drive value for all stakeholders.
Many narrowly associate ESG solely with climate change or the company’s carbon footprint. Although climate change is encompassed within the environmental component of ESG information—and has received a lot of market attention and has interdependencies with other ESG elements—it is only one element under the broader ESG umbrella. Through ESG reporting, companies that effectively integrate ESG considerations into their business strategy and risk management practices can communicate how such considerations impact their business and are relevant to their stakeholders.
How is ESG information presented?
With the exception of certain governance information, companies typically are not required to prepare and present ESG information in US Securities and Exchange Commission (SEC) filings unless it is a disclosure that is deemed to be material. Outside of SEC filings, some industry regulators require companies to report certain ESG metrics. For example, the Environmental Protection Agency requires major fuel and industrial gas suppliers to report greenhouse gas emissions. In these instances, these disclosures are very industry specific and usually limited to a few metrics. However, more and more companies are voluntarily preparing and presenting ESG information beyond industry and SEC requirements, to describe their long-term value creation strategies and to meet the demands of investors and other stakeholders. The location of the information varies. Disclosure mechanisms include sustainability reports, CSR reports, a dedicated sustainability company website, integrated reports, or SEC filings (e.g., 10-K, 8-K, Proxy, annual report). The growing proliferation of voluntary disclosures of ESG information by companies reflects a fundamental shift in how such ESG data are increasingly used by investors and other stakeholders to make decisions.
The building blocks of reliable, comparable, and relevant ESG information begin with a foundation of quality reporting by company management. In a landscape of multiple frameworks and standards, the challenge for companies to determine how to communicate relevant information and what specific ESG information to report to stakeholders is real. There are various frameworks and standards that management can use to determine which ESG information to disclose.
of investors surveyed said that sustainability disclosures should be audited in some way, according to a 2019 McKinsey and Company study
The Task Force on Climate-related Financial Disclosures (TCFD) is a well-known framework that provides principles-based recommendations for managing and reporting on climate risks globally.
Common standards used by companies today in their ESG disclosures include those issued by the European-based Global Reporting Initiative (GRI) and the US-based Sustainability Accounting Standards Board (SASB). GRI standards focus on the presentation of socially material information to various stakeholders that can be tailored to local geographic needs. SASB standards focus on industry-specific, financially material sustainability information for global investors. As a result, the disclosures under these standards may be complementary and can be used in an efficient manner to meet the information needs of a company’s critical stakeholders.
For those ESG disclosures a US company decides to provide, it is not required to follow any specific framework or standard for preparing and disclosing ESG information. However, following established frameworks and standards provides investors and other stakeholders with transparency on how the company decided which ESG information to present and what requirements it followed to calculate the metrics disclosed. Companies that do not follow a standard or framework will not have established parameters to govern how and what they disclose, which could lead to a less balanced or incomplete picture of the ESG information. Investors also may find it more challenging to use ESG information that has not been prepared in accordance with frameworks and standards, as it may be less comparable to the ESG information prepared by other companies.
Even when companies prepare ESG disclosures in accordance with standards and frameworks, investors should be aware that there are different considerations for metrics and disclosures across different standards and frameworks. Metrics prepared and presented in accordance with the same standards may be more comparable. Some companies may use a standard for certain metrics, but the standard may not be fully adopted and therefore may not include all disclosures necessary to provide a balanced picture based on those standards. Companies may present a metric that is bespoke to them because they do not have the information necessary to present the metric in accordance with a specific standard. Although this approach is allowed under certain standards, the leading practice remains to report in accordance with recognized standards as they relate to the business.
It is important for users of ESG information to understand whether the information has been presented in accordance with a framework or standard and whether there have been adjustments to make a metric bespoke to the company. Transparent disclosure in the ESG information can help users consider whether the information is comparable to that of other companies and consistent with information the company has previously disclosed. Those charged with governance play an important role in instilling discipline related to transparent reporting in accordance with recognized frameworks and standards.