How to Prepare an ESG Report: Part 1
Updated: Jun 29, 2022
In This Post:
ESG and Sustainability teams we speak with find reporting and communication to be the most challenging parts of their job right now.
We are synthesizing our research and experience to provide some guidance to ESG reporting that we think is broadly applicable.
This is Part 1 and the observation here is that so much of ESG performance is not only in what a company does but also in how well it communicates what it is that it does…so it may be time to break from tradition and find a reporting approach that works for you.
How to Prepare an ESG Report: Part 1
We always say that so much of ESG performance is not only in what a company does but also in how well it communicates what it is that it does.
ESG rating agencies are not running around taking actual measures of emissions, employee diversity, or independent board directors, rather, they are synthesizing information garnered from corporate reports, regulatory filings, publications, and similar other communications. Even at best, most ESG data circulating in the markets today is already at least one degree removed from the actual performance it purports to represent.
For corporate ESG and Sustainability teams, you are not only responsible for developing meaningful programs within your organizations and among stakeholders, but you are also responsible for how these programs are understood across markets and audiences. Let me repeat that again: You are responsible for how these programs are understood across markets and audiences.
Often the messages we think we are sending are not the messages which are actually being received. So again, much of ESG performance is not in what your company is doing but rather in how well you are communicating what your company is doing.
ESG reporting and communication are critically important. Perhaps it is knowing how important they are that leaves many ESG and Sustainability professionals identifying reporting and communication as the most challenging part of their jobs.
We analyze countless ESG reports over the course of a year and we also provide guidance to many companies in preparing their ESG reports. Throughout it all, we’ve developed a few broadly-applicable recommendations to assist in effective ESG reporting.
Today, we want to work through the first recommendation, and we’ll leave the others for future newsletters as it is already enough of a struggle to keep these pieces to a manageable length.
The First Key to Effective ESG Reporting: The Approach
The first thing to note about ESG reporting is that no one ever said that all things ESG had to be crammed into one report...yet this seems to be the practice most companies are struggling to maintain.
Our team analyzed 12 reports last week and not a single one of them was under 80 pages, not including any data indices or appendices. Over the last 12 months, we have read more reports stretching beyond 125 pages than we have reports wrapping up in fewer than 50 pages. The volume of work may be impressive, but the consistency and clarity in messaging--even among the best--is not.
The ever-expanding ESG report is a symptom of group-think. ESG is more important now than ever before, placing greater expectations--and stress--on ESG and Sustainability teams than ever before. When we are uncertain about how to optimize our ESG report, we look around at what a few other companies are doing and seek to emulate them. And so annual ESG reports are big and keep getting bigger.
But the history of ESG reports plays a big role in this too.
A Trip Down Memory Lane
Long long ago, when time was measured in shadows and distance in strides…or in the 1990s, ESG did not exist as ESG. Society was increasingly turning-on to the potential positive impacts companies could bring about while companies were increasingly turning-on to the goodwill and market positioning that they could develop by being perceived to do so, and at that moment we reached peak Corporate Social Responsibility (CSR).
At this time, ‘serious’ business was that which would ultimately be included in the annual financial report and everything else was ‘feel-good’ work falling under the umbrella of CSR and left to the marketing department to communicate as they saw fit.
Seeking to legitimize the stakeholder engagement and positive impact elements of businesses, a few organizations, and the Global Reporting Initiative (GRI) in particular, sought to elevate CSR to a level nearing that of ‘serious’ business. This is when the idea of the annual comprehensive CSR report emerged (and how it made its way into the various voluntary reporting frameworks we have today).
The logic was clear: If you want CSR to be ‘serious’ business, then what better way to accomplish this than by having CSR efforts reported in the same way as ‘serious’ business is reported--an annual report with data, appendices, indices, and a lay-out generally shadowing that of annual financial report replete with messages from the CEO and Chairperson of the board. Financial information would be in one annual report and all extra-financial information would be in a distinct yet remarkably similar report.
Fast-forward 30 years to today and ESG has fully subsumed CSR…and Sustainability, Impact, and Stakeholder Relations. ESG is now the dominant lens for all things traditionally considered as extra-financial. Even though this space has evolved remarkably over the last 30 years, the idea that financial information would be in one annual report and all extra-financial information would be in a distinct yet remarkably similar report has not.
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Now...Back to it!
Dormant Problems
The problem is that this framing does not work.
First, ESG is not CSR, is not Sustainability, and is not Impact--these concepts are all closely related, however, they are not interchangeable (as we have discussed before).
Second, and more importantly, ESG and so much of CSR, Sustainability, and Impact are not extra-financial. The world has changed and markets have evolved. Today, ESG is a strategic imperative and Sustainability is business strategy. Everything is financial.
Stakeholder capitalism is afoot. In fact capitalism has always been stakeholder driven, it’s just now we are all more willing to admit it and act on it as trying to deny it for so long has led to significant challenges. [We are not fans of the term ’stakeholder capitalism’ but are willing to flow along with the tide as we do fully agree with the conceptualization in spirit if not in name.]
And so the idea of companies issuing two distinct comprehensive annual reports, one financial and the other extra-financial, no longer makes sense. We keep doing it simply because it's how we’ve always done it.
However, and of critical importance to remember, strategic advantage is not born from mis-guided tradition.
A Clearer Future
Companies do not have to issue a distinct and comprehensive annual ESG report in the ways most are currently struggling to do so. What’s worse is that doing so likely doesn’t even serve the strategic development objectives of most companies. You should want to share information, context, and data, and there are plenty of other ways to do this more effectively and strategically.
When thinking about how to best communicate your ESG performance and efforts, we recommend first considering four key questions:
Who are the different audiences you are attempting to connect with?
Why do you want to engage these audiences?
How do these audiences engage with information? (Some may be voracious readers of reports, some may rely on third-party summaries and opinions, and others may rely on computer algorithms to process reports, as we discussed before, and so on.)
What message/information do you want these audiences to internalize?
Some disclosures and report formats are mandated, and so these are necessary, however, they are not wholly constraining. Some regulations require that certain ESG data be reported, but no regulations require that that data must be reported in one comprehensive report with no other reports ever being issued.
Think through these four questions and you may discover a novel approach to reporting that aligns with your business development objectives and provides strategic advantage.
Maybe your reporting approach would look something like this:
Integrate fundamental ESG data into your annual financial report (after all, these data are a reflection of corporate operations which are already included in the financial report).
Provide an ESG Strategy explaining what is important to the company, why, and what you are doing about it. Use this to discuss your programs and policies over the next two years but don’t include any performance data--it’s about explaining materiality and plans and keeping this accessible as a cornerstone document throughout the life of the strategy.
Release an ESG Performance Update on a monthly/bi-monthly/bi-annual timeline referencing your ESG strategy (above). This could be accomplished in less than five pages and ensures any performance data being internalized by markets/audiences is up-to-date and not behind by a year (as is often the case).
Develop an online Stakeholder Impact Hub engaging your various efforts and programs and making these accessible to interested stakeholders.
Or maybe it would look something more like this:
Leave any company information and background to your existing annual financial report and corporate website.
Append an annual ESG Performance Index to your financial report which effectively presents a table of all the metrics considered important. This Index need not be more than a few pages in length.
Or more like this:
Provide an ESG Strategy explaining what is important to the company, why, and what you are doing about it. Use this to discuss your programs and policies over the next two years but don’t include any performance data--it’s about explaining materiality and plans and keeping this accessible as a cornerstone document throughout the life of the strategy.
Publish performance data directly into voluntary reporting framework portals such as CDP or ESG Book and ensure the data is always up-to-date. Leave it to other market participants and stakeholders to find, interpret, and make use of these data as they see fit.
Or maybe even like this:
Continue with the single comprehensive annual report. Sure it places an undue amount of stress on your team but, after careful consideration, you simply can’t imagine how any other approach could ever provide the amazing results you are already getting.
Or consider any other of the nearly infinite approaches you could take. Many of these other options will break from what are currently touted by leading voluntary reporting frameworks and that is okay--they are voluntary after all.
Even so, you may also find you can develop a novel approach that incorporates the elements of some established reporting frameworks, such as the GRI or SASB, while also liberating yourself from some of the more constraining elements…and all toward better audience engagement and market outcomes.
Remember, ESG performance is not only in what a company does but also in how well it communicates what it is that it does.
The world is listening, markets are engaged, and people want information. Just because things have been done a certain way does not mean things must always be done this way. The landscape has shifted.
So, how can you most effectively engage the audiences you want to engage with the messages you hope to communicate? Start there.
What This Means For CSOs: So much attention in ESG reporting is given to getting information out that exactly how that information is understood and engaged, and by whom, is often overlooked. Yet we can’t stress enough that the market perception of your ESG performance is not only in what your company does but also in how well it communicates what it is that it does. We have yet to work with a company for whom the data and information evaluated by ESG rating agencies was 100% accurate. This is a cost of miscommunication and misinterpretation.
Before you charge forward on yet another year of ESG report preparation all the while wondering if you are optimizing your return on investment, take a moment to pause and return to first principles. Consider:
Who are the different audiences you are attempting to connect with?
Why do you want to engage these audiences?
How do these audiences engage with information?
What message/information do you want these audiences to internalize?
And then give yourself the freedom you need to explore different reporting strategies that might prove a better fit for what you are trying to accomplish.
Out in the World
A Quick Review of Recent News
ISSB Is Gearing Up and GRI is Evolving
Speaking of voluntary reporting frameworks, get ready to meet a new one! The International Sustainability Standards Board (ISSB), of the International Financial Reporting Standards Foundation (IFRS), has appointed two key individuals to the board and has now achieved quorum status and can get to work. The objective of the ISSB: “The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.
If you thought existing frameworks such as GRI, SASB, SDGs, TCFD, CDP, or WEF were lacking, then the good news is another framework is on the way (…but you should also be aware that all of these organizations are also collaborating towards harmony in their approaches).
On a similar note, GRI has released its new sustainability reporting standard for the Agriculture, Aquaculture, and Fishing sectors. This standard is designed to assist companies within these industry sectors to structure their sustainability and ESG disclosures.
What's most interesting is that, up until quite recently, the GRI operated a universal reporting standard applicable to all companies across all industry sectors. In 2021, upon review of its standard-setting process, the GRI opted to maintain a universal standard and now supplement them with industry-specific standards as well.
It's almost as if the GRI came to the conclusion that a one-size-fits-all approach to Sustainability and ESG reporting might not be the best after all...
What This Means for CSOs: There will always be plenty of voluntary reporting frameworks and there will always be disagreement over which ones get it right and which do not. Figure out what works best for you--engaging one particular framework in its entirety, engaging different elements of multiple frameworks, or foregoing such frameworks altogether--and remember that these are voluntary reporting frameworks.
Still Greenwashing, Seriously?
Two reports this past week really serve to drive home a message on good ESG communication.
The Business Roundtable, with the backing of its corporate members, excluding Microsoft and Salesforce, is advocating against the proposed SEC climate disclosure rule. Such action is in direct contradiction to the various high-profile Net-Zero pledges and programs these member companies have been making of late. With simple comments on a proposed climate disclosure regulation, the Business Roundtable has effectively transformed countless companies’ climate plans and policies into nothing more than greenwashing.
Similarly, an investigative article into Unilever’s continued, and increasing, reliance on single-serving plastic packaging even in the face of its high-profile campaigns to end such plastics certainly undermines the reputation of being a good corporate citizen Unilever has been carefully developing over 30 years. Sure, lobbying and loophole navigating marketing schemes can protect your use of such plastics, but is it really all worth the harm to the company’s reputation? Unilever was long the case-study darling of corporate sustainability but now seems to be playing on a field level with General Motors, whose GM, Mary Barra is currently Chair of the Business Roundtable.
It’s easy to get caught up in the excitement of a growing movement and to make commitments with the intention of being able to deliver, but when the bill comes due, you have to be able to deliver.
What This Means For CSOs: This one is simple: Do not commit or claim anything in your ESG communications that you cannot, or have no intention of, fulfilling. Any benefit to be made from greenwashing is short-lived compared to the consequences when it all comes to light…and it always comes to light.
In the end, reporting and communication are critically important components of ESG and Sustainability professionals' jobs...and perhaps more challenging than many may have anticipated. We are focused on this space and will have more to say in our next edition, in the meantime, please connect with us on Twitter and LinkedIn, or from our website to continue this discussion.