Introduction
ESG reporting is no longer a mere checkbox exercise, it’s an integral part of a company’s identity, influencing investment decisions, shaping public perception, and steering corporate strategies. To help you navigate this evolving terrain, we’ve compiled a comprehensive guide to five key ESG reporting trends that are set to make waves in 2023.
In this blog, we’ll delve into these emerging trends, shedding light on how they will influence businesses, investors, and society at large. Whether you’re an ESG enthusiast, a sustainability professional, or simply curious about the future of responsible business practices, our exploration of these trends will provide valuable insights and empower you to make informed decisions in the rapidly changing world of ESG reporting. So, let’s embark on this journey to uncover the five ESG reporting trends that will shape the corporate landscape in 2023 and beyond.
Understanding Non-Financial ESG Disclosure
Non-financial ESG (Environmental, Social, and Governance) disclosure encompasses a wide range of factors that don’t have a direct monetary value but are integral to a company’s overall performance and reputation. It sheds light on how an organization operates ethically, treats its employees, interacts with the environment, and contributes to society.
Non-financial ESG disclosure is a pivotal component of corporate transparency, providing stakeholders with a comprehensive view of a company’s efforts and impacts beyond profits and losses.
Why Non-Financial ESG Disclosure Matters
Non-financial ESG disclosure encompasses a wide array of factors that don’t neatly fit into traditional financial reporting but hold immense importance for investors and society at large. These factors include environmental impact, diversity and inclusion initiatives, supply chain ethics, human rights practices, and much more. These disclosures offer a more holistic view of a company’s operations and their impact on the world.
- Environmental Stewardship Beyond Carbon Emissions
While carbon emissions have been a central focus of ESG reporting, emerging trends show a shift towards a more comprehensive approach to environmental stewardship. Companies are now disclosing data on water usage, waste management, biodiversity conservation, and circular economy initiatives. Investors are increasingly concerned about how businesses are managing their ecological footprint, not just in terms of carbon but across all environmental aspects.
- Diversity, Equity, and Inclusion (DEI) Metrics
Diversity, equity, and inclusion have moved to the forefront of ESG reporting. Investors are looking for companies to disclose information about their efforts to create diverse and inclusive workplaces. This includes data on gender and ethnic diversity in leadership positions, equal pay practices, and initiatives to promote inclusion. Companies that excel in DEI metrics are likely to be more attractive to socially conscious investors.
- Supply Chain Transparency
Supply chain ethics have gained prominence due to concerns about child labor, forced labor, and environmental degradation in supply chains. Investors are demanding greater transparency into where and how companies source their materials and labor. Ethical supply chain practices can have a significant impact on a company’s reputation and risk profile.
- Human Rights and Social Impact
Beyond diversity and supply chains, investors are interested in how companies address broader human rights issues. This includes efforts to ensure fair labor practices, prevent human rights violations, and support community development. Investors are recognizing that social impact goes hand in hand with financial success.
- Technology and Data-Driven Reporting
Advancements in technology have made it easier for companies to collect, analyze, and report on non-financial ESG data. Artificial intelligence, big data analytics, and blockchain technology are being harnessed to provide more accurate and real-time information. These innovations are making non-financial ESG disclosure more robust and accessible.
- Integrated Reporting
Integrated reporting, which combines financial and non-financial data into a single cohesive narrative, is gaining traction. This approach provides a holistic view of a company’s value creation, helping investors understand the interplay between financial performance and ESG factors.
How should companies report non-financial information?
The current landscape sees businesses acknowledging their far-reaching societal footprints. The way they present non-financial data is pivotal, serving as a cornerstone for cultivating trust and illustrating their unwavering commitment to sustainability and responsible corporate behavior.
GRI – Global Reporting Initiative
- International organization for independent standards
- It issues GRI standards for companies to report non-financial information.
- These standards help businesses identify impacts on climate change, the environment, human rights, and corporate governance.
- The most widely used standards among global corporations
- Standards are non-mandatory and non-binding; however, the proposed Corporate Sustainability Reporting Directive (CSRD) and the forthcoming mandatory European Sustainability Reporting Standards (ESRS) are based on the GRI structure
- ESRS is a set of standards (analogous to IFRS) companies must comply with when reporting sustainability information.
- Via high quality reporting (GRI), organizations are able to better understand, communicate, and manage their contributions to the United Nations Sustainable Development Goals (UN SDG).
Sustainability reports are an ideal and effective means of enabling companies to answer in a single document a wide variety of questions that stakeholders may raise.
However, creating a Sustainability report can be challenging, as it must meet the requirements of the reporting methodology and have the right balance of information from the individual agendas. Moreover, the companies need to determine how to communicate relevant information and what ESG information and indicators to report.
5 ESG Reporting Trends Defining Corporate Strategies
Here, we introduce five emerging ESG reporting trends that are set to reshape the corporate landscape in 2023 and beyond, offering insights into how businesses are navigating the path toward greater environmental, social, and governance responsibility.
1. Regulatory Changes
In the corporate landscape, there is a swift and substantial surge in mandatory ESG reporting regulations, particularly in the European Union and the United States.
Within the EU, the Corporate Sustainability Reporting Directive (CSRD) has emerged as the most recent regulatory framework concerning ESG and non-financial reporting. Its primary objective is to accelerate the EU’s progress towards achieving Net-Zero status. This represents a notable advancement from the existing EU regulation, the Non-Financial Reporting Directive (NFRD), as it significantly expands the scope of mandatory reporting companies, increasing the number from 11,600 to approximately 49,000.
In parallel, the United States is also on the brink of regulatory changes. The Securities and Exchange Commission (SEC) is set to introduce a proposed rule on mandatory climate-risk disclosure, slated for launch in 2023 if it gains approval. As of March 2022, the SEC unveiled a fresh proposal, requiring public companies to integrate reporting on their carbon emissions and progress in emission reduction alongside their financial performance.
This proposal mandates that all filers disclose greenhouse gas emissions falling under Scope 1 and Scope 2, which are emissions occurring on-site and under the company’s control.
2. Accountability and New Corporate Board Demographics
As ESG performance becomes a greater focus in the boardroom, companies are having to consider how best to hold themselves accountable. One way to accomplish this is to tie leaders’ compensation to positive ESG outcomes. Companies are increasingly including ESG metrics of some type in their incentive compensation schemes for top executives.
In some companies, ESG and sustainability responsibility lies with the full board. Others assign diversity, equity, and inclusion (DE&I) and human capital management issues to the human resources committee and sustainability oversight to audit or governance committees. The exact assignments will vary with each company’s specific needs and culture, but it is becoming critical to assign accountability and ensure sufficient governance oversight within a board.
Corporate board demographics are changing too. Companies are now looking to assemble boards for ‘tomorrow’, today. For example, recruiting ESG expertise on the board has become critical and hiring a DE&I lens now is more than ever.
3. Natural Capital and Biodiversity
At the Conference of the Parties of the UNFCCC (COP) in 2022, there was an emerging theme of natural capital and the need to priorities the preservation of biodiversity. The risks resulting from a loss of nature and changes to natural capital have the potential to disrupt society and the stability of the global economy. Whilst most research on financial risks related to natural capital has historically focused on climate change, there is a growing awareness of the risks associated with other aspects of natural capital, such as water stresses, resource scarcity and the loss of biodiversity.
Biodiversity-related corporate reporting is a fast-moving, developing area, and there is ongoing work to create harmonization, particularly related to measurement and disclosure. Companies should not wait for globally agreed frameworks or perfect tools to be available to approach the topic of biodiversity and nature. Companies should begin to understand and manage biodiversity and nature-related risk and opportunities and to prepare to respond to the introduction of frameworks such as the Taskforce on Nature-related Financial Disclosures (TNFD).
4. ESG Data Quality and Analytics: Advancing Measurement and Transparency
With more regulation and investor pressure, there is no doubt that companies will need a process to produce high quality, defensible ESG data that is more aligned with financial reporting requirements.
For investors, a company’s ESG performance is only as good as its data quality. Bad quality data can result in inaccurate reporting, lack of transparency, and potential backlash from stakeholders if your efforts are deemed unreliable. Demanding data transparency is the way investors can ensure that the ESG information provided is accurate and not misleading.
Advances in technology and software solutions to enable in-depth ESG data analysis are increasing the expectations for ESG data quality and transparency. Once good quality primary data is collected, software solutions enable ESG performance data to be aggregated, compared and benchmarked across various global metrics, KPIs and frameworks.
5. Transparency in Scope 3 Emissions Disclosure
The reporting of Scope 3 emissions (GHG emissions that are not produced directly from the reporting company but from the activities of its value chain), will continue to rise, and will continue to be a challenging area for many. Communication, collaboration and shared goals are key to achieving successful Scope 3 disclosure. However, even if you have a high level of buy-in both up and down the value chain, there are still complexities around the data itself and the methodologies used to calculate emissions.
Leveraging Scope 3 resources to understand where your material impacts lie, where to start with data collection and how to focus on data quality and coverage over time, will ensure that a journey to reliable Scope 3 data is followed.
Investors are embracing Task Force on Climate-related Financial Disclosures (TCFD) as part of evaluations
The extensive use of TCFD disclosures reflects the challenges that investors could face in obtaining information about a company’s existing climate-related risks and opportunities from other sources, as well as the climate-related impact on a company. The TCFD recommendations provide companies with a comprehensive framework to report the impact of climate risks and opportunities systematically, making it easier for investors to analyze a company’s potential financial impact due to climate change.
Conclusion
In conclusion, the evolving ESG landscape holds critical implications for both businesses and ESG-focused investors. As the demand for high-quality ESG data grows, it’s essential to establish robust data management processes now. This changing landscape offers businesses the opportunity to enhance transparency and demonstrate leadership. Those who neglect ESG performance risk falling behind, particularly in the face of increasing regulatory changes, accountability demands, and the need to protect natural capital and biodiversity. Moreover, a focus on ESG data quality, Scope 3 emissions reporting, and the widespread adoption of TCFD disclosures are reshaping the ESG landscape. Staying ahead of these trends is key to shaping a sustainable future for all.
