How Companies Can Produce Better ESG Reports

How Companies Can Produce Better ESG Reports

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With an urgent report on climate change from the U.N. and increased public pressure, environmental, social, and governance (ESG) issues will likely become larger priorities for businesses around the world. To better understand these reports, as well as how to improve them, GLG’s Veronica Mabry hosted a teleconference for our clients with John Pabon, founder of Fulcrum Strategic Advisors and author of Sustainability for the Rest of Us: Your No-Bullshit, Five-Point Plan for Saving the Planet. Below are a few select excerpts from the teleconference.

Can you give some history on sustainability reporting and where things stand currently?

Since about 2011, there’s been a massive uptick in companies reporting and disclosing ESG issues. That year, around 20% of the S&P 500 reported sustainability reports. By 2019, that number reached 90%. KPMG’s 2020 edition of its annual study around sustainability reporting and disclosure found that about 96% of the world’s largest 250 companies are now producing some form of a sustainability report on their performance.

Looking at the private investment space is quite interesting, because we see it often as a few steps behind, which is not the case. About 95% of LPs are either currently evaluating and reporting on ESG risk factors, or are planning to do so in the coming year. A massive study by EY revealed that “41% of firms with more than $15 billion in assets said that ESG was one of their top three priorities, right behind growth and talent.” That shows the importance of monitoring and reporting on ESG issues.

What are three of the biggest challenges with sustainability reporting right now?

The first is really the fox guarding the henhouse. A lot of sustainability reports are self-reported. That immediately calls into question their validity, objectivity, and accuracy. None of that’s to say that companies are purposely misleading, although some of them do.

But when somebody is creating these reports, they may not have the expertise in how to do it appropriately, so numbers are bound to get messy, and information confused. That same KPMG report found that only about 51% of people trusted the information in sustainability reports. The second challenge is information overload. Sustainability reports can be dry. Many companies try to report on everything and end up with massive documents.

The last challenge is there are too many cooks in the kitchen. The GRI, the Global Reporting Initiative, is the big kid on the block when it comes to reporting standards, but there’s an alphabet soup of other ones. You also have the CDC, Aria 100, SASB, UNPRI, and on and on. The big four consulting firms have now created their own standards and guidelines that they use themselves and are encouraging companies to use.

How do global corporations tackle this when they have operations everywhere? What would you advise them to do?

The level of adaptation that needs to happen depends on the size of the business and how much exposure they’ve had to sustainability. For smaller businesses, or those that are just starting on their sustainability journey, adaptation should be simple. Don’t overwhelm yourself with everything going on, just focus and get started on that journey. Pick a few key guidelines, then join industry associations that can help you keep track of legislation and global changes.

For larger businesses, or those more involved in the sustainability space, there’s an even bigger pressure to adapt and comply. I would hope they have dedicated teams, especially around legal, public affairs, and governance, that can keep an eye on a lot of changes.

But the biggest issue, especially at corporations with global operations, is that sustainability reporting still sits in that nice-to-have column. It’s usually in the comms and public affairs space, which is fine, but that’s not the most strategic approach. It should flow across several departments.

A lot of times I’ve seen that sustainability will be handballed to a junior staff member in other regions. But if something goes wrong, a crisis erupts, it’s not easy for that junior staff member to solve any issues. So watch out: while your operations in your U.S. HQ might be strong, pay attention to what’s happening in regional headquarters. There’s an increased need for regional reporting. It makes sense to now have a U.S. sustainability report, one for China, another for the Asia-Pacific.

What are other reporting best practices?

The first and most important element of transparency and reporting is around materiality. You must understand what is most important for your business and what’s most material to your operations and stakeholders. The foundation of reporting and disclosure is knowing what to report and disclose on — not trying to do everything and end up with a 500-page document.

What that also helps you to do is to focus your report. But these focused reports need to have a multiyear view. It doesn’t make any sense to have a report, for example, one year about human capital, the next about energy, followed by supply chain and logistics. The point is to be able to monitor how you’re hopefully improving each year. You also want clear communication. Many times these reports get bogged down in jargon, end up too big, and communicate nothing. So, Marketing 101: remember your audience and communicate clearly.

Next, be brutally honest, don’t greenwash. Give the reader some credit. With these reports, a lot of times companies are hesitant to start, or hesitant to disclose what’s happening. A lot of times legally you can’t disclose everything, and you probably don’t want to, but from a PR perspective, it’s important to get ahead of issues by being honest and putting it in the report.

If you’ve done something bad, put it out and improve on it. Consumers will be far more forgiving if you do that versus letting an issue blow up in your face.

Where do you see this landscape changing within the next five years, outside of the need to look deeper in the supply chain?

Unfortunately, sustainability fell to the backburner as companies tried to stay alive over the past year. Of course, we’re not out of the woods yet. Longer term, I expect a few changes to happen in the reporting landscape. The first is that we’re likely to see smaller, standalone reports, versus these massive reports that are built into an annual report. I also think there’ll be a push toward more digital, real-time reporting. A lot of companies do this already. They have dedicated websites where consumers can go in and don’t have to wait year on year to find out what a company is doing. There’ll be more oversight from the government in reporting on SDG or Paris Climate Accord commitments.

About John Pabon

John Pabon is the founder of Fulcrum Strategic Advisors and author of Sustainability for the Rest of Us: Your No-Bullshit, Five-Point Plan for Saving the Planet.