The demand for more substantial and transparent ESG reporting is growing as investors, consumers, financial institutions, and government regulators demand high-quality disclosures that assess corporate stewardship and decision-making concerning ESG issues. -Robin Byrd

At one time, investors made decisions based primarily on financial viability, and consumers on issues like product quality and customer service. Today investors, customers, financial institutions, and the general market want to know the company’s policies and operations viewed through the environmental, social, and corporate governance (ESG) lens. The difficulty is that there is no standard ESG reporting framework. The complexity is that business stakeholders demand more transparent and substantial reporting that gives a clearer picture of the current decision-making and future expectations and goals. A massive amount of data is available, making the integration of transparent ESG reporting into corporate reporting challenging. This has stymied many corporations from implementing ESG reporting. What should be disclosed? What is investor-grade ESG reporting? What reporting format works best for transparency and decision-making? As stakeholders increasingly demand higher-quality ESG reporting, those businesses that report in a way that supports internal and external decision-makers and make themselves accountable are more likely to see long-term success.

Growing Demand for Better ESG Reporting

It has been a free-for-all landscape for ESG reporting. Business leaders that voluntarily implemented ESG reporting could be called visionaries, because they recognize the importance of informing stakeholders. The issue is that much of the original ESG reporting mechanisms delivered surface information, so transparency became an issue. Since the first ESG reporting began, the landscape for ESG reporting has significantly changed. Due to global warming and social justice issues, investors, financial institutions, customers, government regulators, job candidates, and employees demand more transparency. They want to know the impact of business leaders’ decision-making on the environment and how the company supports social justice and communities. Despite the growing market demand for ESG reporting, a Deloitte survey of 300 senior finance, legal and sustainability leaders found that 57% of respondents have a cross-functional ESG working group, and 42% are still working to establish one. Numerous ESG reporting frameworks have emerged over the past 10 years in response to the growing demand by various interest groups. Still, a new challenge has developed: accessing quality data that can be used to deliver a more transparent picture. Increased demand for ESG reporting is leading to the need for more structured and unstructured reliable data that can deliver meaningful analytics. The Deloitte survey found that 35% of executives listed quality as the top data challenge, because they were concerned about data completeness and accuracy. This challenge must be overcome, because ESG reporting is rapidly becoming essential for more than just attracting investors or complying with regulatory requirements. Reporting is vital to protecting the corporate reputation, remaining attractive in the marketplace and labor market, and identifying the environmental and social factors that will influence the ability to remain a successful operation. Business leaders must have in-depth knowledge of business risks due to environmental threats such as climate change, and/or social changes such as stronger demands for protecting human rights and racial and gender equality. In turn, these risks influence investors with growing expectations for ESG reporting that builds trust.

Tackling the Challenge of Accessing Quality Data

Some strategies are emerging for making more in-depth ESG reporting less complex. For example, the IBM ESG reporting software Envizi is a SaaS that captures ESG data from multiple sources and integrates the data into a single system of collection and reporting. It allows organizations to “report in alignment with external frameworks such as GRI, SASB, GRESB, the UN SDGs and others by consolidating questions from these frameworks into one platform in an easily exportable format.” Dharmarajan Sankara Subrahmanian, a Council Member of the Forbes Technology Council, says there is increasing investor demand for ESG data analytics, and that artificial intelligence-machine learning (AI-ML) offers simplified solutions for developing critical and meaningful analytics. One of the issues with ESG reporting is that it currently does not have globally accepted reporting standards like financial reporting does. This has led to companies creating their own language and reporting. This makes it difficult for analysts and other stakeholders to compare companies. Too many documents also need interpretation to discover the ESG information. If investors have difficulty identifying the ESG factors, other people will have even more difficulty.

So another demand for ESG reporting is emerging: simplify and develop comparable reporting systems. Subrahmanian believes high-end AI-based document analytics solutions are possible because they can access global structured, unstructured, and metadata. SaaS solutions offer the data companies need to address needs and plan for the future. The collection and analysis of the data to meet the increased demand for more sophisticated ESG data could be much easier by utilizing artificial intelligence-machine learning (AI-ML) solutions. The AI-based ESG data analytics solution should be simple to use, SAAS-based, scalable, and able to extract information no matter the format used.

Changing Perspectives

The demand for ESG reporting usually begins with investors. Companies and investors need alignment, and there are several disconnects, which is another reason ESG reporting has become so important. EY asked investors and companies to identify the challenges of producing useful and effective sustainability reporting. Among other findings, there is a disconnect between ESG reporting and traditional financial reporting, a need for more information on how a company can create long-term value, a lack of forward-looking disclosures, and a lack of focus on material issues that truly matter.

Four major objections to ESG reporting are slowing the adoption of more transparent reporting. One is that ESG is irrelevant to the company’s strategy to earn as much profit as possible. The perspective is that ESG supports the brand but is only a sideline, or ESG is merely a greenwashing effort. An Edelman survey found that 3-out-of-4 institutional investors do not trust companies to achieve their ESG or DEI commitments. The second objection is that ESG implementation is too difficult, and it is impossible to meet multiple stakeholder expectations. Third, some say ESG is not reliably measurable, and scores across the six major ESG rating frameworks are not comparable. The fourth objection says there is no meaningful relationship between ESG and financial performance, and financial success can be attributed to other factors. The solution to overcoming the objections is to develop an ESG strategy that advances the business model and aligns with the business purpose.

ESG Reporting No Longer Optional

Many issues concerning ESG reporting still need resolution, even as the demand for more in-depth, accurate, and transparent reporting grows. One emerging truth is that incorporating sustainability and social responsibility into business decision-making is no longer an option, if a company wants to grow and protect its reputation. The ESG reporting models still need refinement, but companies should still move forward with incorporating a reporting system. The trend is towards using SaaS, like IBM’s software, that consolidates ESG data from multiple sources and is scalable as data and data analytics needs expand.