For the past two years, there have been several efforts to consolidate standards, but there are still far too many to choose from. Ultimately, convergence will be achieved in the next 2-3 years. So, what do you do in the meantime? First, get a handle on the standards and frameworks that are most prevalent. Next, chart a course that meets near-term needs, but also provides optionality as the industry evolves.
Reporting can fall under many names: Climate Disclosure, Sustainability, Corporate Social Responsibility (CSR), ESG, and the list goes on. In the last several years, some reporting is being more closely tied to corporate financial reports and the associated risk analyses.
There are myriad reporting standards, frameworks and protocols covering everything from greenhouse gas (carbon) reporting to full ESG reporting (see sidebar). Some of these standards are almost a quarter-century old, and others have appeared in the last couple of years. Frameworks and standards are different and often complementary. For example, most CDP reports (a standard) rely on the GHG protocol (a framework). Standards provide specific requirements as to what should be reported, including metrics, while frameworks provide guidance on how information is structured and reported. Many of these standards overlap one another, but no two are identical.
There have been multiple efforts to combine standards and frameworks into a common standard. But despite these attempts, the number of standards and frameworks remains dizzying.
The EU has proposed mandatory reporting based on the Commission’s proposed whose first set of standards would apply to certain large EU companies. The standards are planned to be adopted in October 2022. Gary Gensler, SEC chair, has signaled that climate disclosure rules will be coming for U.S. publicly traded companies soon.
How and When to Start
In the short term, ESG reporting provides company transparency and will satisfy multiple stakeholder groups. In the long term, it will position your company for a potential regulatory mandate or a new requirement from an important partner.
There are several reporting schemes that have broader use and acceptance, such as CDP, GRI, SASB, GHG Protocol and TCFD. If there is no clear mandate for choosing a standard, a company could develop an in-house reporting standard – one that draws from the relevant aspects of a handful standards, based on the company’s unique characteristics.
Prepare for ESG Reporting
– Is it right thing to do? Does it align with your corporate culture?
– Are there stakeholder requests?
– Are shareholders demanding it? Which reporting standard?
– Are there regulatory requirements?
– Determine what is material for your company and what is being requested by stakeholders.
Do not underestimate the level of effort and complexity involved in this. For carbon reporting alone, it may take several years to understand and quantify the aspects of your business that contribute to GHG emissions.
Develop methodology to turn raw data into reportable metrics. Electronic data gathering is best as manual data entry is fraught with opportunities for error. Many software vendors offer enterprise products (usually SAAS) that can help with data collection and reporting.
build your own reporting standard from the relevant and material elements that are contained within a variety of the more mainstream reporting standards and using the most widely accepted protocols.
(Note: Steps 5 and 6 should be worked in parallel with steps 3 and 4.)
If building your own reporting, it is advisable to develop a checklist of the most likely standards that your company may be called upon to report. Evaluate your own reporting elements against those standards, so you know what gaps you may need to bridge.
Keep your ear to the ground and stay informed of developments and how you might have to adjust your data collection and reporting to meet new requirements.
When it comes to ESG reporting, there are a multitude of considerations. Not only is there a wide array of standards and frameworks from which to choose, but there may be many different stakeholders tugging at your sleeve, each attempting to steer you towards their favored standard. These pulls, together with the thought of potential regulatory disclosure requirements, can be almost paralyzing.
The solution begins with understanding the landscape. Take stock of the internal and external forces that are driving towards ESG reporting and compare standards and frameworks that are a good fit for your business and stakeholder expectations. Without an explicit mandate, consider developing your own reporting standard that reflects the impacts and risks associated with your lines of business and utilizes select reporting elements from other standards. If done right, ESG reporting will add value to your company.
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