Summer marks the arrival of reporting season, which typically runs from June to August and includes annual ESG/sustainability reports. As organizations disclose their sustainability performance metrics from the prior year and share their future commitments, taking a close look at best practices in ESG data disclosure is especially relevant as the next topic of our Building a sustainable business blog series.
Collecting ESG data for internal use—whether it is to establish a baseline of current activities, set goals for the future or measure progress—is a valuable endeavor. But developing a strong disclosure approach to validate and share this information with stakeholders will take your sustainability program to the next level.
There can be an understandable trepidation when it comes to sharing ESG data, especially if you have not yet reached your targets. However, ongoing reporting keeps your organization accountable to its commitments while building trust with key stakeholders. Moreover, as sustainability becomes a bigger priority for consumers, employees and investors, companies will need to have a solid reporting framework to fulfill new regulatory requirements and a growing public appetite for corporate transparency.
Select a reporting framework
With your ESG data in hand, you should choose at least one reporting framework that aligns to your stakeholders’ needs. Many companies globally currently rely on two well-established sets of standards to measure and report sustainability metrics. The Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) both provide comprehensive frameworks and guidance for sustainability reporting.
Using GRI and/or SASB for your reporting framework ensures methodological consistency across organizations and industries. You can also be assured that your key performance indicators (KPIs) will match the metrics widely used to measure impact across environmental, social and governance initiatives.
Though the differences between the two sets of standards are myriad and nuanced, companies trying to decide between GRI or SASB should keep the original question in mind: who are your stakeholders?
If you’re a private company primarily concerned with disclosing to customers and employees, the GRI framework is a great fit. GRI is an international organization with over two decades of experience in the sustainability reporting space. The GRI standards are broader in scope and will help you build a strong foundation of widely recognized, consistent ESG metrics.
For publicly traded companies, the SASB standards accommodate a broader range of stakeholders. Unlike the GRI framework, SASB focuses on financially material issues that are of interest to investors and shareholders. These metrics provide a view into how a company can continue its operations long-term through risk reduction and responsible resource management.
When we began disclosing our ESG data in 2009, we integrated a few elements of these international frameworks. But by 2013, we had started aligning our report to the GRI framework. Even so, our early data collection methodology involved manually inputting data into a spreadsheet, a process that later developed into a more robust and sophisticated in-house system.
As you mature in your sustainability journey, you will likely find yourself in the same position that we are in today: using both GRI and SASB to shape our disclosure framework and to share our company’s material issues and impacts with key stakeholders.
As sustainability reporting standards and governing bodies change, we will evolve our approach. For example, in recent years investors have become increasingly interested in the Task Force on Climate-Related Financial Disclosures (TCFD), which provides recommendations on the information that companies should disclose to support the assessment and pricing of climate-related risks. We disclose against a portion of TCFD through our annual CDP Climate Change and Water Security disclosures and are working to incorporate the full framework in our reporting activities.
Reference your materiality assessment
As I discussed in a previous post, conducting a materiality assessment is critical to identifying and prioritizing your organization’s sustainability focus areas. This essential exercise also allows you to determine which ESG metrics are key for your organization. Both GRI and SASB have built-in materiality assessment tools that will guide you through this process.
A materiality assessment also allows you to assess your organization and confirm the data points that your stakeholders will find most beneficial.
Some example questions that we have used to inform our reporting include:
- What will assure investors that your organization is well-positioned to navigate future climate risks?
- How can you be transparent while protecting privacy with your workforce about diversity, equity and inclusion efforts, safety, and other employee concerns?
- What do customers want to know about the environmental and social impacts of their consumption habits?
The answers to these questions will help you shape and focus your sustainability reporting and develop standardized KPIs. In our annual sustainability report, we disclose against specific KPIs that are aligned to GRI and SASB.
Sustainability reporting done right also requires time and resource investments. Given evolving requirements and the increased interest in sustainability performance and metrics, the need for third-party data verification will continue to grow. It is critical to have an unbiased expert outside of the organization review your ESG data to confirm that your data collection process is sound and that the data you are disclosing is accurate. This lends an additional layer of credibility to your reporting efforts while providing confidence in your approach moving forward.
A caveat about unfavorable results
The concept of sustainability reporting has shifted significantly over the past decade. No longer are sustainability reports simply a venue for organizations to share positive stories about their environmental and community activities. Telling feel-good stories about your company is not a true measure of ESG performance.
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It goes without saying that at times, companies may not have the most favorable ESG data to disclose. For example, one of your sites may be consuming more water than desired, or you may have yet to drive significant progress toward a labor practices target.
Does this mean that you can simply choose to not report the data?
The answer is no: once you have set your framework and committed to reporting against specific KPIs, you must prioritize transparency and not shy away from telling the full story, even when you’ve missed on certain targets.
The good news is that you can and should use this opportunity to disclose your action plan. Sustainability reporting allows you to assess your performance, identify areas for improvement, and then take decisive action to remedy existing issues. Without measurement, there is no progress. If you are not where you want to be yet, collecting and disclosing ESG data will allow you to set a baseline for future goals and devise a plan.
Even if you have a ways to go in reaching your targets, having a defined action plan keeps your organization accountable while driving steady progress. If you can build trust, communicate your ESG data effectively, and demonstrate a plan to achieve your goals, your stakeholders will understand that your current disclosures are a part of your sustainability journey but by no means the destination.
The future of ESG disclosure
By now, it should be clear that sustainability reporting is not a passing fad, especially with the Securities and Exchange Commission (SEC) considering a proposal to mandate climate-risk disclosures by public companies. It is also important to keep in mind the EU taxonomy for sustainable activities, the Sustainable Finance Disclosure Regulation (SFDR) and UN Guiding Principles on Business and Human Rights. Additionally, Europe is considering increased reporting requirements under the Corporate Sustainability Reporting Directive (CSRD).
Even over the course of my time at Flex, I have seen a significant uptick in demand for higher transparency into ESG data and sustainability initiatives. ESG disclosures will become more ubiquitous and standardized over time, which will make it easier for investors, customers, and employees to measure how organizations perform against their peers.
In addition to GRI and SASB, ESG rating agencies – including Institutional Shareholder Services ESG (ISS ESG), Morgan Stanley Capital International (MSCI) and Standard & Poor´s Global (S&P Global) – are now being used by investors to assess companies in their funds and portfolios. Investors and customers also consider the CDP’s guidelines for climate, water and supply chain. Looking forward, organizations will be asked to report on their ESG data with greater rigor and frequency, and we are already seeing companies integrate this information into the annual reports provided to shareholders.
Organizations should be thoughtful and thorough as they develop their disclosure framework and take an incremental, phased approach. One common mistake is in assuming that getting off the ground will be a quick process, whereas the reality is that reaching a place where you are confident publishing a sustainability report and comprehensively disclosing against recognized frameworks can often take 3–5 years.
Disclosing ESG data may not always be a comfortable or straightforward process, but it is a critical practice for organizations that want to be successful in a world where stakeholders are invested in building a sustainable future.