ESG Reporting: Audit and Preparation Guide
Environmental, social and governance (ESG) reporting covers sustainability, community involvement and management and decision-making ethics. ESG reporting is increasingly important for several reasons.
ESG reporting allows companies to highlight their performance in non-financial areas. Consumers often prefer to buy from companies that perform well in areas like sustainability and community development. Investors who purchase shares in companies also seek businesses with strong ESG performance.
Finally, some countries have laws that require companies to meet certain benchmarks related to pollution and wages. Companies need to create reports to show that they meet these regulatory requirements.
Here is a closer look at the three components of ESG:
- Environmental: Environmental performance usually focuses on pollution control, sustainability, use of water and other natural resources, energy use and greenhouse gas (GHG) emissions.
- Social: Social performance involves positive interactions with the local community, fair pay and treatment of workers and health and safety policies. It can also involve support for charities or causes.
- Governance: Governance involves transparency, fair decision-making and a lack of conflict of interest by executives and other company stakeholders. This area also involves good conduct.
ESG audits assess performance in these areas and reports provide insights to investors, the public and regulators.
The importance of ESG reporting
ESG reporting is the way that companies showcase their ESG efforts and strategies. Investors and consumers can then use these reports to find companies with strong performance in the areas that are most important to them.
A 2021 survey by Ipsos found that 65 percent of Canadian investors considered ESG factors when choosing assets. Only 27 percent claimed they primarily considered high-return securities. Younger investors were more likely to focus on ESG, with 71 percent in the 18-34 age group and 65 percent in the 35-54 demographic placing importance on ESG factors. However, a majority (60 percent) of those over 55 also considered these non-financial factors.
Consumers also care about ESG claims. According to McKinsey, 60 percent would pay more for products with sustainable packaging. The consulting firm also found that an increasing number of companies are making ESG claims. Transparent reporting allows companies to back up their ESG claims with proof and data.
The legal and regulatory requirements of ESG reporting
Regulators in the U.S. and Canada are developing or have already introduced ESG reporting requirements for publicly-traded companies. In the European Union, public and some large private firms already need to comply with the Corporate Sustainability Reporting Directive. This rule requires disclosures related to ESG performance, with reporting requirements going into effect for the 2024 financial year.
These trends show that more jurisdictions are implementing non-financial reporting requirements. Failure to comply could lead to fines or other penalties. Companies could also suffer public relations damage from a failure to disclose ESG performance.
Preparing your organization for ESG reporting
Companies and organizations have well-defined processes for financial reporting. However, ESG reporting standards are not as clearly defined. In some cases, businesses must create their own standards and then make reports that show their adherence to their internal guidelines.
ESG goals, made with input from stakeholders, employees, executives and consumers or clients, are an important part of this process. Companies also need to collect quality data to use in reports. This information can include areas that may eventually be part of reporting requirements.
Finally, ESG reporting requires the assembly of a team with the knowledge and skills to handle the data, analytics, record-keeping and legal aspects of reporting.
Building an ESG strategy
An ESG strategy requires careful analysis of business operations, needs and challenges. Organization is essential for creating a well-defined strategy with clear goals and steps. Here are the different components of an effective ESG strategy:
- Defining relevant ESG issues: Organizations have different challenges depending on their processes, location and industry. Listing relevant issues will help the company decide where to focus its ESG efforts.
- Setting goals and benchmarks: Well-defined aims help a company quantify its ESG efforts. Specific figures can show progress and improvement, which will prove movement in the right direction toward ultimate goals.
- Creating a review process: Companies need to lay out the process for reviewing ESG efforts and making changes. This step is essential because business challenges and needs evolve quickly and companies may need to alter operations to adjust to new market trends or regulations.
Data is essential to the review process. Companies need a system to collect, secure, store and manage information related to ESG efforts. An organization may also choose dynamic audit solutions, which continuously assess ESG data to give ongoing insights into performance.
Assembling your ESG team
Companies need employees with knowledge of ESG strategies, compliance requirements and other factors to oversee reporting processes.
- Legal experts help companies comply with reporting requirements or prepare for upcoming regulatory changes involving non-financial reporting laws.
- Data collection specialists create a system to compile data for reporting. This network could include information entered by employees or received from sensors and other devices.
- Analysts look at the data and visualize it for reports and to aid ESG-related decision-making and strategy development.
Finally, internal auditors provide an objective analysis of ESG efforts. They can look at operations and data collection methods to ensure accuracy, compliance and effectiveness.
Navigating the ESG audit process
Auditors review the essential components of a company’s ESG practices as they relate to company goals and strategies and compliance requirements. In many cases, auditors will use Global Reporting Initiative (GRI) standards or follow guidelines from the Sustainability Accounting Standards Board.
The auditor assesses the environmental impact, emissions and other sustainability factors and ensures data collected is accurate and complete. The audit will also include an investigation of information related to labor practices, employee treatment, wages and health and safety performance.
The audit may include an assessment of governance and the transparency and structure of decision-makers within the company.
Using technology in ESG reporting and auditing
Companies can streamline their ESG reporting and auditing by automating parts of the process.
For instance, robotic process automation can handle the data collection from sensors or human sources and use it to autofill audit reports so that companies can have the latest information to inform ESG strategy decisions.
A framework for automated information collection can remove objectivity and ensure transparency in the reporting process.
ESG factors are increasing in importance, with investors and consumers considering companies’ ethics and sustainability. ESG reporting requirements are already in place in some areas and other jurisdictions are developing regulations. Businesses can develop reporting processes now to respond to the increased importance of ESG performance.