ESG reporting: not a nice to have any longer – but a must have.
By Giuseppe Cais
The context
The rise of ESG reporting is accelerated by 3 main drivers, partially competing:
- the diffusion of new specific regulations,
- the behaviour of financial investors,
- the spontaneous and voluntary behaviours of companies themselves.
As a result of that, most of the companies have quickly had to set up reporting systems to capture data and KPI to be represented in innovative ways/templates.
Issuers have experienced an urgent need to collect/process/communicate ESG related information to the financial investors on a regular basis, in order to better highlight their sustainability characteristics.
Driver 1: regulatory developments
ESG reporting has rapidly become a regulatory issue for the corporate sector: although partially different in each country, laws or regulations have been introduced in recent years to identify both the companies subject to ESG reporting obligations and the nature of the obligations.
The regulatory push has resulted in a number of initiatives aimed at identifying standards and reporting tables for specific areas of business.
In all Western countries, and particularly in the European Union, legislation is progressing towards extending ESG reporting requirements, with a clear trend towards increasing the number of companies and entities involved and the scope of reporting.
Driver 2: Investors’ behaviour
Financial investors have progressively introduced the use of ESG information in the assessment of financial investments (equity, debt, credit, etc.).
Compulsory or not (depending on local regulations), the presence of an ESG investment policy has become a standard practice for professional investors. Although there are still many different models for collecting and estimating ESG ratings, as well as ways of using this information in the various investment processes, there is no professional investor who has not established how to manage the ESG topic in their investment processes.
Driver 3: Spontaneous companies’ initiatives
In the last five years, there has been a proliferation of spontaneous initiatives taken by companies in the ESG area: although the adoption of ESG policies is not specifically required by legislation (except for financial investors), thousands of companies have however taken it upon themselves to voluntarily embark on the incorporation of ESG policies.
Among the many spontaneous ‘accreditation’ initiatives, there are thousands of companies that have spontaneously submitted to a specific ‘Benefit Corp’ certification, which allows them to signal to customers/shareholders/investors the presence of a beneficial intent in the company’s actions, promoted in a holistic and pervasive way in company processes.
In some contexts, specific certifications have become common (e.g. in the “environmental” sphere) useful for managing the most critical elements for the core business of the individual company.
Reporting schemes and types of reporting
Companies have quickly had to set up reporting systems to capture the data to be represented in the templates proposed by authorities, investors or certification bodies.
Reporting systems have a peculiar “scope”, as they are completely transversal with respect to business processes: they have to cover and describe how the company manages environmental [E], social [S] and governance [G] issues: with few exceptions, the collection of data and statistics on these issues is not directly managed by corporate ERPs, which generally focus on core business and/or vertical business processes.
Typically, in the absence of dedicated information systems, companies fulfil their reporting obligations by building a “patchwork” where each single corporate office/function produces a part of the KPI, limited to the issues of direct competence and management (e.g.: HR provides data on the composition of the workforce; General Counsel provides data on the composition of corporate bodies; Energy manager provides data on energy consumption).
Ideally, the sustainability framework is guided by specific corporate bodies that are also empowered to engage in dialogue with external stakeholders: even in this area, the systems for recording and processing are not usually standardised.
In short, reporting processes have not yet reached maturity (as is the case in the financial sector, where the CFO directly oversees the chain of corporate information for which he or she manages reporting), but are being defined in individual companies according to their sensitivities, the way they are organised and the resources and systems available, with the constraint of the applicable regulations.