By Mark Paterson (Currie), Michael Diegelmann and Justus Fischer (cometis)
Doing your first ESG (environmental, social and governance) report is not as simple or straight-forward as it seems. In no way are we trying to deter you from producing your first ESG report. It is one of the most important reports a company does for responsible investors and key stakeholders.
Yet, our experience with first-time reporters, together with our analysis of the quality and level of ESG reporting by the world’s biggest companies, has yielded fresh insights about ESG reports. Like doing anything for the first time you get things wrong. So, why not avoid as much wrong-doing as possible by looking at five big mistakes made by first-time ESG reporters.
1. Failing to prioritise the ESG topics
Trying to report about too many ESG topics is a big mistake for many first-time reporters. This is what makes a materiality assessment so important in ESG reporting. A materiality assessment enables a company to figure out what to report on – the most material ESG topics.
It is best practice to do the assessment based on the Global Reporting Initiative (GRI) Standards. These look at the significance of a company’s ESG impacts, and the influence each ESG topic has on stakeholders’ decisions. As part of the assessment the ESG topics are prioritised into three groups – highly material, material and important. This gives the report focus.
A failure to prioritise the topics can mean that the report does not cover those topics that matter most. As a result, the standard of disclosure and level of transparency in the report are lower.
2. Thinking the data for reporting will be easy to get
One of the reasons why first-time reporters build walls of text with fluffy words is because the data for measuring progress is difficult to obtain. It’s a mistake to think it will be easy to get.
Why? Well, because it takes time to source data. Sourcing data usually relies upon the cooperation of several people across a company. It requires robust systems and reliable sources. It requires that the people preparing the report understand the business, the entities it controls and the relationships it has. They must also resist the enthusiasm of the marketing department.
Also, quality data requires the company to be measuring the right things in the first place. It’s wrong to think that the company’s information technology system will “spit out” the necessary data when the time comes. Usually, these systems are designed without ESG in mind.
So, think about sourcing data sooner rather than later. If time permits test the capacity of your people and reporting to generate data before committing to a date for publication.
3. Using no recognised framework to structure the report
You’ve got the data? Good. But how do you make all this information available to your stakeholders? Well, you might think, that can’t be too hard, the letters E, S and G say it all, so let’s just have a section on each of them and stuff all the information into it!
Don’t do this. Your stakeholders don’t want to sift through the improvised structure of your ESG report to find the information they’re looking for. So, what should you do? Use ESG frameworks and standards. Most of them have been created in an intense exchange with various business stakeholders and you can use them free of charge to structure your report and make your information easier to be found, especially by international investors.
Convinced? Great. But which one should you use? Well – that depends on your specific needs. If you want to give your report an overall structure, the GRI standards might be your weapon of choice: In Germany, for example, roughly 90 percent of all listed companies in the two biggest indices DAX and MDAX are structuring their reports according to the GRI. But other frameworks such as SASB, UNGC or TCFD are also gaining in popularity: 60 percent of companies of the ASX300 use at least one more framework than just GRI. And that’s where it gets tricky: Yes, you can, and probably should, reference more than one framework – just evaluate carefully which ones fit the needs of your organisation the best.
4. Setting no goal or targets
You have the data and you have the report. Splendid. But what’s that? Are you sure you haven’t forgotten something? You’ve painted a great picture of your status quo, delivering vast amounts of relevant data – but where are your goals and targets, where do you want to make progress in the future?
This might seem like a dreadful exercise; aren’t you just making yourself vulnerable by formulating goals and targets – especially if you fail to reach them? Yes, you are, and that’s exactly what your stakeholders want to see: accountability and commitment. Only by setting goals and targets and communicating them publicly can companies prove that they really care about ESG topics and are not just doing ESG because some law told them to or because everybody does it.
And it doesn’t end here. Stating what you want to achieve is one thing, but you should also describe how you want to go about making this all come true. Plus (and here’s looking to your second, third, and fourth report) the goals and targets you set in the past have to be tracked and reflected upon. Which targets did you reach, which are still a work-in-progress and which did you fail to achieve? And yes, you have to be brave to admit possible mistakes: but doing it in an easy-to-understand and transparent fashion can avoid backlash and even bring you additional bonus points.
5. Forgetting the audience
Every second, thousands and thousands of invisible machines are crawling the internet, devouring vast amounts of public data on websites in the blink of an eye, always looking for the ESG information their master sent them out to find…
You don’t want them to leave your website hungry. Those so-called ESG-algorithms are used by investors, banks, rating agencies and many other financial market players to form a judgement of your company: is your ESG data more convincing than your competitors’ or not?
So, let’s feed those hungry little beasts by making your data accessible: use frameworks the algorithms are trained on, display large tables on your website with all your ESG information, even the one you deemed superfluous for your formatted ESG report, and always use data formats that can be easily processed.
Alas, algorithms are not your only readers. At least not yet. There are still some crazy humans who are looking for your ESG information and though they might not be many, they will be all the more critical for it.
Because after getting feedback from their algorithms, some investors, analysts and your future IT employees will want to look deeper into what you have to say about ESG – and especially how you say it. So, your data is great, but now go ahead and sway them! Make your ESG reporting “sexy” by including strong pictures, illuminating diagrams, a reader-friendly navigation. Form follows function – so don’t leave it behind!
In summary, ESG reporting matters for listed and non-listed companies. ESG should be a fundamental part of every business strategy. ESG reporting builds trust with stakeholders.
Preparing an ESG or sustainability report for the first time is not always easy. It requires time, investment, capacity building and resources to build the foundation for ongoing reporting.
However, by avoiding common mistakes made by first-time reporters, a company will remove pain points that limit the standard of their first ESG report – and of all the others that follow.