ESG Reporting: Integrated Thinking for ESG

Peter Walsh

A small group of practitioners have been working on the concept of green accounting for decades, arguing that only by placing a tangible, financial value on the environment can we properly manage and protect it. Critics argue that we need to value intangible assets in their own right, and reducing the human experience of nature to a dollar value is reductionist, simplistic, and probably impossible. How much is the view from Mt Everest worth?  Or a swim in a clean ocean on a hot day?

Nonetheless, the environmental economics movement took a big step forward with the creation of the European Union Emission Trading Scheme, which allocated a price to GHG emissions, and codified industry’s right to emit GHGs into costed and tradable allowances. Similar trading schemes sprang up around the world, and extended to “assets” such as biodiversity and renewable energy. Suddenly the tree huggers were rubbing shoulders with the pin stripe set from Wall Street and London City. The cost of pollution had been made explicit, and the environment had become a business.

The intense focus on ESG is accelerating this trend, as financial professionals find themselves needing to disclose the sustainability performance of their portfolios. This is sending shock waves through the sector, as practitioners more accustomed to comparing EBITDA are now having to understand how companies interact with nature and communities, and what impact that has on their businesses. There are a range of reporting standards, and the recently released EU Taxonomy is another important step in setting an industry standard for evaluation. This highlights the need that sustainability managers have been grappling with for decades; the need for integrated approaches and systems.

Companies are being required by their Boards, Investors and regulators to provide this new ESG data. With the worlds of environmental management and finance colliding, a new language is being developed that both parties can understand, but only with education on both sides. Professionals who have become adept at GRI reporting standards now need to provide financial grade data, and this brings a new set of challenges.

Key Challenges for ESG Reporting

Many companies are finding their current data collection and reporting processes are not able to provide the rigour required. Typical flaws that result in inadequate ESG reporting quality can include:

  • Responding to established reporting frameworks without due consideration of and alignment to corporate priorities. A strong materiality assessment is required to ensure disclosures meet the needs of internal management as well as those of external stakeholders.
  • Failure to establish strong organisational processes to support data flow. Buy-in from shop floor to executive management is necessary to ensure the process is effectively implemented.
  • Lack of rigour in data processing, from varied collection techniques, multiple standards across different parts of the business, data silos, varied competencies amongst personnel, and definitional variations based on national or regional approaches.
  • Extensive complexity arising from multiple reporting taxonomies and standards, and variation in ratings agencies requests. Demonstrating a definitive performance for any given aspect can be difficult when asked to express it in multiple ways.
  • Inadequate technology support, effective ESG disclosure can only be achieved with an enterprise-wide platform that is closely integrated with business processes, and captures real life, on the ground data as it originates from operations.

By carefully deploying appropriate processes and technology, companies will be able to overcome these hurdles, and present a clear and fair picture of their performance.  This will allow them to build their own narrative, tell their own story, and to effectively manage their own performance.