Management and reporting quality of environmental social and governance (ESG) issues are positively related with corporate performance and compliance:
- According to LSE, climate change-related litigation has skyrocketed. Between 1986 and 2014, there were only 800 cases, but the number of cases between 2015 and 2022 has already surpassed 2000, where around 500 litigations began after 2020.
- Some of climate change related litigations affecting major firms such as Royal Shell. Shell has been ordered by a Dutch court to decrease its GHG emissions by at least 45 percent by 2030 compared to 2019.
- Regulations change rapidly. For example, starting in 2023, the CSRD will force many EU corporations to submit their non-financial disclosures.
- PwC research indicates that, before making a purchase, 49% of consumers look at a company’s ESG procedures.
- NYU found that effective ESG practices provide financial protection for companies at the time of fluctuations.
- According to MIT, the main cause of the Great Resignation is a discriminatory workplace culture and governance. Therefore, a comprehensive ESG strategy is a way to combat disruptive employee turnover.
These statistics suggest that, under the current paradigm, ESG reporting, its quality and managing ESG risks are a matter of survival for corporations. To guide executives to prepare effective ESG reports, we introduce our top 6 ESG best practices.
1. Design organizational structure
In order to provide detailed ESG reports, make choices to improve company operations in a way that is more ecologically and socially responsible, and keep track of the sustainability action plan, organizations need a team to handle the following duties:
- Measuring the current state of ESG practices of companies.
- Determining short and long term ESG KPIs (such as decreasing gender pay ratio from 1.2 to 1.1 until 2024 and to 1 until 2026).
- Determining strategies to achieve KPIs.
- Aligning internal departments’ operations with ESG strategies of companies.
- Monitoring progress towards KPIs.
- Auditing the consistency of ESG reports and reliability of data used.
- Disclosing the reviewed ESG reports to the public at predetermined dates.
- Designing ESG stories for companies that can be used to enhance retention of stakeholders.
2. Determine which metrics to disclose
Since ESG reporting has recently become crucial for corporations, deciding which metrics to include can be a tough question for executives. In general ESG metrics should be:
- Holistic: Some businesses regard the ESG framework as being environmentally weighted, focusing on measures such as carbon footprint, water use, and the percentage of recycled material utilized, among others. But the ESG framework indicates that corporations’ environmental, social, and governance activities are essential to “sustainable business.” As a result, ESG reports must contain measurements or policies such as CEO pay ratios, child labor percentages, supplier code of conduct, and so on.
- Unbiased: ESG reports should help firms reduce their negative environmental and social impacts. To do so, businesses should not mask their weaknesses by focusing on indicators where they shine. Companies can prevent bias by collaborating with a third party to determine which indicators to include or by adopting a worldwide reporting standard such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), or Dow Jones Sustainability Indices (DJSI).
- Comparable: Companies must use the same calculations and units to observe improvements. For example, if total water use is reported in liters in one year and gallons in another, it will cause confusion.
Executives should keep in mind that due to compliance, some metrics may need to be reported. For example, in 2020, the UK implemented legislation prohibiting the trade of agricultural commodities cultivated on deforested land. According to the NYSE, after 2020, many global companies will consider such laws to be widespread and they begin reporting their land use to demonstrate that they do not contribute to deforestation.
Besides the metrics that organizations are required to disclose by law, materiality maps can be used to choose which other metrics to include. NYSE presents an example of a materiality map (See Figure 2). It should be noted that this is only a representation of a case and does not imply that waste management is a lower priority for reporting.
Figure 2: Materiality Map:
By reading our Top 14 ESG Metrics CEOs Must Disclose in ESG Reports article you can find out 14 metrics to disclose for your ESG reports.
You can also read our Top 10 Metrics to Assess the Circularity of Businesses article to enrich environmental metrics you can use in your ESG report.
3. Collect and verify data to measure metrics
It is impossible to report without collecting data. Regularly issuing ESG reports necessitates an automated method of gathering and evaluating data to ensure that they are published on time and with high accuracy.
Gathering data for calculating some ESG metrics is easy. For instance, to calculate gender pay ratio, employee’s payroll info and gender would be enough. Such data is recorded in accounting and HR departments.
Calculating carbon footprint, or resource productivity, on the other hand, are more challenging tasks for collecting data because companies might need data from their suppliers. Consider the case of an automobile manufacturer who wishes to determine its resource productivity, which is defined as revenue divided by the mass of virgin materials utilized in production. Collaboration with suppliers is the only way for a car manufacturer to know the exact quantity of virgin materials used if sheet metal is outsourced.
Cloud supply chain ERP systems solutions allow organizations to transparently share data from their operations if they agree to collaborate, which can help to streamline data collection from third parties. There are also carbon footprint calculator tools that automate the carbon footprint measurement process.
Another crucial part of releasing a high-quality ESG report is data verification. Companies should implement mechanisms to double-check data accuracy by communicating with appropriate departments.
Working with a third party can enhance the reliability of ESG reports. For example, 53% of S&P 500 firms work with third parties (audit or engineering consultants) to demonstrate that they are transparent in their reports.
4. Set a strategy for improving metrics
ESG reporting is about more than just identifying a company’s non-financial costs. It should include a road map for firms to reduce their environmental and social effects. Firms should clearly state their target KPIs and explain why they are important. Explaining the rationale by referring to UN goals or international treaties such as the Paris Agreement can be an effective approach to do so.
It is advisable to focus on the strategies where the potential return/effort ratio is high. Often, such an approach forces companies to fight against their real pain points. For example, it makes little sense for an energy firm that primarily utilizes coal-fired power plants to prioritize lowering single-use plastic cups.
Firms also disclose their progress towards goals on each report to show stakeholders improvements and effectiveness of their strategies.
If your organization aims to reduce its carbon footprint you can read our 5 Ways to Reduce Corporate Carbon Footprint article.
To improve supply chain sustainability our 7 Ways to Improve Your Supply Chain Sustainability article might help.
To close the circularity gap and enhance resource efficiency you can read our Top 6 Circular Economy Best Practices for Businesses article.
5. Prepare a simplified version of your report for customers
Consumers are concerned about companies’ ESG practices, as shown in Figure 3, and nearly half of them analyze companies’ ESG practices before buying their products. However, it is unrealistic to expect consumers to read 30-40 pages of ESG reports which include lots of confusing metrics.
The best thing businesses can do is keep consumers informed about their ESG developments using brief texts and lots of visuals on social media.
Executives can use simple real-life examples to replace technical ratios. For example, telling an average customer that “our green energy initiative results in a reduction of 46.000 metric tonnes GHG emissions” is confusing, but telling them “thanks to our green initiative, we reduce our GHG emissions as much as removing 10.000 cars from the road” is more understandable. (An average car emits 4.6 tonnes of GHG per year)
You can read our 5 Ways ESG Reporting Boosts Business Performance article to learn how much good ESG practices affect customers, investors and workers.
Figure 3: Effect of ESG practices on consumers:
6. Review policies and industry practices regularly
ESG is in its infancy, so its rules and industry standards are still evolving quickly. Firms are also developing new, more streamlined measures/methods for reporting/improving their ESG activities.
As a result, ESG reporters should constantly monitor what is going on in the ESG domain.
Firms can partner with consultancy firms that have a larger talent pool to receive up-to-date information by focusing on ESG-specific news. Additionally, because consultants deal with a variety of firms throughout time, engaging with them may bring fresh methods to improve ESG procedures.
Please contact us if you have further questions regarding ESG best practices:
This article was drafted by former AIMultiple industry analyst Görkem Gençer.
Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.
Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.
Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.
He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.
Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.
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