Last updated on October 13th, 2023
While 95% of the largest global companies disclosed their environmental, social, and governance (ESG) impacts in 2021, the reporting landscape continues to be rife with swiftly changing regulations and a myriad of unknowns. Suffice it to say that the challenges of ESG reporting are real and recurrent.
Reflecting on their 2023 joint benchmarking study, the International Federation of Accountants (IFAC) and the Association of International Certified Professional Accountants revealed that “significant hurdles remain when it comes to providing consistent, comparable, and high-quality sustainability information for investors and lenders.”
Although industry has come a long way in forwarding its commitment to sustainability, there’s much terrain left to cover. The field of ESG reporting is still a Brave New World.
But why, in 2023, is this still the case?
This post will be dedicated to unpacking this very question. First, we’ll provide a brief overview of the current sustainability disclosure landscape. Then, we’ll look at some of the common challenges of ESG reporting and propose strategies and tips for mitigating them.
“The field of ESG reporting is still a Brave New World.”
Navigating the Chaos
As Earth’s systems continue to show signs of instability, ESG reporting is becoming increasingly vital to companies everywhere. Many stakeholders are concerned, from investors to employees, and they’re more inclined to make choices based on their conscience.
Reputational capital has never been more at stake.
While organizations know that robust ESG performance can yield business benefits, forward motion isn’t always linear. The challenges of advancing on your ESG journey are real, with tangible consequences for getting it wrong.
For the C-level and senior leaders, this has provoked a whole new set of anxieties—beyond the regular existential ones. Simply put, not adhering to new ESG requirements puts an entire business at risk. A 2022 study of 1,300 ESG decision-makers identified that they’re most concerned about the financial consequences of regulatory action (59%), as well as the potential for investors to withdraw support (57%), loss of sales (48%), and reputational damage (48%).
Moreover, growing investor concerns surrounding greenwashing necessitate more robust sustainability disclosures. It’s not enough to just talk the talk—you need to start walking. Yet, this is easier said than done, especially if you’re at an early stage of ESG maturity.
A 2023 report by PwC on Canada’s largest public companies sheds light on some of the challenges of ESG reporting:
- Companies are starting to prioritize sustainability disclosures but are ill-equipped for forthcoming mandatory reporting obligations.
- Many Canadian companies still view ESG and financial reporting as distinct procedures, hindering their capacity to generate value through integrated reporting.
- Although investors increasingly rely on ESG reporting, Canadian companies are overlooking significant opportunities to enhance the credibility of their sustainability disclosures.
Sound familiar?
In what follows, we’ll take a closer look at some of the most frequently encountered ESG reporting challenges and propose tips and strategies for mitigating the chaos.
The Challenges of ESG Reporting
ESG Reporting Challenge #1: Measuring & Quantifying ESG Factors
Which ESG topics should our company report on? Which metrics do we select? And, how do we even quantify and measure them? These are common questions that companies of all sizes grapple with, leading to roadblocks in ESG program advancement.
Let’s examine what’s driving this uncertainty:
- No unified or “universal” standard: The absence of a unified ESG reporting standard has resulted in the emergence of numerous sustainability reporting frameworks, surveys, and initiatives to engage shareholders and data providers, each with their unique approaches and prerequisites. Consequently, organizations frequently find themselves in the position of having to determine which sustainability aspects to emphasize, what to disclose, and which metrics to use. This lack of standardized ESG reporting metrics poses a significant challenge, hindering performance comparison and decision-making for organizations and investors.
- Determining material topics: Companies increasingly prioritize identifying and disclosing pertinent ESG factors that align with their operations and stakeholder interests. However, the task of determining which ESG topics deserve attention becomes intricate in the absence of regular materiality assessments; in fact, many companies only conduct one every two or three years, which is insufficient to keep up with rapidly evolving investor expectations, emerging trends and issues, and shifting reporting frameworks.
- Subjectivity and complexity: ESG factors encompass various performance measures. These are commonly referred to as qualitative and quantitative metrics or indicators that capture corporate ESG performance. However, some of these factors are more subjective than others, making their measurement and quantification challenging. For example, evaluating social factors like employee satisfaction, community engagement, and human rights practices involves capturing qualitative aspects that are inherently difficult to quantify.
Strategies to consider
To address these specific ESG reporting challenges, organizations can:
- Engage ESG reporting experts: Seek guidance from ESG reporting experts or consultants with in-depth knowledge of the various sustainability frameworks and the ESG reporting process. These experts can provide valuable insights, assist in interpreting sustainability guidelines and standards, and offer recommendations for effective reporting and narrative presentation. In particular, earlier-stage companies could benefit from guidance on measurement selection, financial materiality, peer benchmarking, etc.
- Use established frameworks and standards: Organizations can utilize established reporting schemes such as the Global Reporting Initiative’s GRI Standards or the IFRS Foundation’s Sustainability Disclosure Standards. These standardized reporting frameworks can help with the selection of relevant ESG metrics, promoting comparability and transparency.
- Elevate the intangible: Develop innovative approaches to more effectively capture and communicate the intangible aspects of your ESG performance. One approach is to utilize qualitative indicators and narratives alongside quantitative metrics. This allows organizations to provide a comprehensive view of their ESG performance, highlighting the qualitative achievements that may not be easily quantifiable but are nonetheless significant.
ESG Reporting Challenge #2: Data Collection
A common roadblock in corporate sustainability reporting pertains to the burdensome data collection process.
More often than not, efficient data collection is hindered due to:
- Data fragmentation and silos: Manually gathering relevant sustainability data from diverse sources within the organization can be complex, particularly if the data is dispersed across departments and systems. Indeed, fragmentation seems to be the name of the game. Spreadsheets are prone to error, and disparate systems often have no way of speaking to one another (at least, not in a way that a human can readily comprehend). And, because data banks are siloed, integration or system interoperability is not readily available.
- Inefficient and convoluted workflows: Inefficient and complex workflows are one of the byproducts of the traditional siloing of ESG data. Because corporate sustainability is inherently a cross-functional exercise, nearly every department tends to oversee some aspect of it. From human resources to building operations to finance, coordinating the data collection, reviews, and approval from these various teams can be arduous and prone to error.
- Data complexity and scope: ESG reporting covers a broad spectrum of environmental, social, and governance issues, each with its own set of indicators and data requirements. Tracking and collecting data across these diverse dimensions can be complex and resource-intensive. In addition, relevant ESG data might be hard to come by: it may be proprietary, confidential, or difficult to access, particularly when it comes to supply chain information or indirect environmental and social impacts.
Strategies to consider
When addressing data collection challenges, you can:
- Invest in data collection systems: Consider an ESG data management solution for automated data collection. This will streamline data collection, validation, and analysis processes, reducing the resource and time-intensive nature of collecting ESG data from multiple sources.
- Engage internal stakeholders: Involve relevant departments and personnel within the organization, such as sustainability teams, finance, operations, and human resources, to ensure comprehensive data collection. Collaborate across departments to establish clear responsibilities and processes for data collection, ensuring a coordinated effort to manage ESG data effectively.
- Conduct regular materiality assessments: Avoid the unnecessary collection of irrelevant data or non-material topics by conducting regular materiality assessments. This will help you to stay on track and keep your data collection process aligned with the evolving ESG landscape. With changing stakeholder expectations, emerging trends, and shifting reporting standards, conducting regular assessments helps ensure your reporting remains up-to-date and relevant.
ESG Reporting Challenge #3: Data Management and Verification
Your data is now collected, but it still needs to be managed and verified for accuracy, completeness, and reliability. At this stage, it’s natural for organizations to grapple with the ESG reporting challenge of data management and verification.
Typical challenges include:
- Limited (or absent) data governance: Robust data governance is crucial for maintaining data integrity. However, it’s common for organizations with relatively lower levels of ESG maturity to lack a solid data governance framework, or, if one is in place, it might be on the flimsy side. Without proper governance, data can become outdated, inconsistent, or subject to manipulation.
- No single source of truth: The absence of a centralized system of record (SOR) hinders efficient data collection, management, and auditing within organizations. Moreover, there’s a higher likelihood that institutional knowledge will be lost should key personnel leave.
- Limited data quality and reliability: Relying on manual methods often results in incomplete or inconsistent data and an overreliance on self-reported information without independent verification. Moreover, data verification can be complex and resource-intensive, particularly when dealing with large datasets or relying on third-party information.
Strategies to consider
Data verification and management in ESG reporting isn’t for the faint at heart. Let’s explore several tips that can help reduce your burden:
- Implement robust data verification practices: Conduct regular data verification exercises to ensure the accuracy and reliability of the collected data. This can involve third-party verification or data validation techniques to identify and rectify inconsistencies or errors.
- Invest in a centralized system of record (SOR): Consider adopting a robust data management system or SOR that automates data governance, verification, and validation. Better quality control and auditability is a key benefit. As a single source of truth, a centralized SOR naturally improves the reliability, robustness, and consistency of your non-financial data. In turn, this helps ensure external verification and audit readiness for your sustainability disclosures.
- Enhance transparency and disclosure: Promote transparency by clearly communicating data sources, methodologies, and assumptions used in ESG reporting. Provide detailed explanations and context to help stakeholders understand the limitations and potential biases in the data.
ESG Reporting Challenge #4: Stakeholder Engagement and Communication
Another frequently encountered challenge in ESG reporting pertains to managing relationships with stakeholders, which is critical to driving long-term sustainability success. While regular engagement is imperative for understanding stakeholder expectations, gathering data, fostering trust, etc., it’s common for organizations to struggle with these activities.
But what exactly makes stakeholder engagement so difficult?
- Diverse stakeholder groups: ESG reporting involves engaging with a wide range of stakeholders, including investors, employees, customers, communities, NGOs, and regulatory bodies. Each stakeholder group has unique interests, perspectives, and information needs, making it challenging to communicate and engage with all of them simultaneously.
- Varying levels of knowledge + complexity: Stakeholders have different levels of familiarity and understanding of ESG issues, reporting frameworks, and terminology. Communicating complex ESG topics—and large volumes of data—in a way that is accessible and meaningful to diverse stakeholders isn’t always immediately apparent. Moreover, making the data understandable and relevant requires careful interpretation, analysis, and contextualization, which can’t be achieved overnight.
- Transparency and trust concerns: Stakeholders increasingly demand transparency and assurance regarding ESG performance. However, ensuring the accuracy, reliability, and consistency of reported data can be challenging, leading to concerns about greenwashing or misleading information. Indeed, a lack of robust data management, verification processes, and streamlined communication makes trust hard to come by.
Strategies to consider
What can your team do to overcome the abovementioned challenges?
- Identify key stakeholders: Do you know who all of your stakeholders are? A helpful first step is to conduct a stakeholder mapping exercise to identify the individuals, groups, and organizations with a vested interest in your organization’s sustainability performance. Divide them into two key groups: internal (e.g., senior management, board members) and external (e.g., customers, suppliers, investors, distributors, regulators). What is most critical for them? What do they prioritize?
- Develop an engagement strategy: Develop a comprehensive strategy that outlines the objectives, methods, and frequency of engagement. Begin early in the ESG reporting process and continue on an ongoing basis. You can think about how you will:
- Involve your stakeholders in decision-making
- Solicit their input
- Provide progress updates
- Establish communication channels
- Tailor communication to stakeholder needs: Meet your stakeholders where they’re at by communicating clearly and in a way that resonates with their needs and priorities. Consider how you can:
- Prioritize clarity and simplicity: Present complex ESG information clearly and concisely, avoid jargon, and provide succinct explanations.
- Utilize visuals and infographics: Use visual aids, charts, and infographics to communicate complex data effectively and highlight key insights.
- Be mindful of audience relevance: recognize the specific interests and perspectives of different stakeholders, such as investors, customers, employees, regulators, NGOs, and the local community; deliver targeted communications accordingly.
You’re not alone.
Mitigating the chaos of a swiftly-changing ESG reporting landscape isn’t a simple undertaking—nor can it be achieved overnight. The challenges of ESG reporting are real and burdensome, creating frustration for forward-thinking organizations across sectors and industries.
This is precisely why a growing number of global enterprises are turning to ESG data management solutions to consolidate their sustainability data, streamline their disclosures, and own their narrative for key stakeholders.
Scalable and agile, Novisto’s pure-play ESG management platform goes beyond data. From rigorous data management to keeping pace with changing ESG practices, we’re here to evolve your sustainability story—for the long term.
Request your free demo today.
