Trends in ESG reporting: are you prepared?

Author: John Sayer, Director, CCA

Trends in ESG reporting: are you prepared?

It is clear that ESG reporting – sometimes called sustainability reporting – is set to become as familiar a part of company life as financial reporting. The requirement for non-financial reports is spreading to jurisdictions around the world. The Singapore Exchange will begin requiring sustainability reports from members at the end of this year, and ESG reporting requirements are already in place in Shanghai, Shenzhen and Taiwan, with movement in a similar direction in Malaysia and Korea. Such reporting often begins as a voluntary exercise, then moves on to ‘comply or explain’. It is likely this evolution will continue with a clearer scope for what is to be reported and more rigorous standards on the format of that information.

Advocates of ESG reporting have always argued the business case that ‘doing good is good for business’. This gained impetus this year when the Financial Stability Board’s Task Force on Climate Related Financial Disclosure released its final report listing a range of environmental risks and opportunities which they suggest are important from a financial perspective.

Investors, lenders and insurers are warned that they may face problems related to due diligence if they don’t seek information from a client company regarding the vulnerability or resilience of the company’s assets, the security of its supply chain in the face of extreme weather, readiness for transition to more efficient energy technologies, or compliance with new regulations on emissions as a consequence of the climate change Paris Agreement targets.

So from the point of view of corporate development, comprehensive environmental reporting is much more than a compliance exercise; it becomes an indicator of business prospects and future resilience. In this era of internet vigilance, the same applies to reporting on social conduct in the face of cases of reputational damage resulting from poor records on equal opportunities, child labour or corrupt practices.

So where is ESG reporting likely to go in the near future? Some interesting trends can be seen.

More accurate and comparable information

First, more accurate and comparable standards will make the reporting more valuable. Although there are a variety of organisations offering reporting guidelines, there does not seem to be a dangerous divergence of standards. Different leaders in the field, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the International Integrated Reporting Council (IIRC) are all talking to each other about common ground and differentiated roles.

The move towards online reporting may improve the spread of common standards and shared terminology. Organisations such as XBRL (extensible business reporting language) are working on standard language which can be authoritatively defined to enable financial statements and other kinds of compliance, performance and business reports to be moved between organisations, aggregated and analysed rapidly, accurately and digitally. Although those developing the taxonomy currently focus on financial reporting, there is discussion about how ESG information can be covered within this initiative.

Also on the near horizon is the extension of blockchain technology to new areas beyond its initial role in mediating cryptocurrencies. There is work going on to apply blockchain technology to energy supply, consumer products as well as legal and compliance documents. Reports created with blockchain contain transparent, unalterable and traceable data. This traceability could be valuable for ESG reporting where the component data is assembled from multiple sources, such as workforce or emissions statistics from different subsidiaries or worksites of a corporation.

The need for small data – reporting in the ‘post-truth’ era

In addition to the need for greater amounts of accurate, comparable data, there is also a converse need for simpler, more approachable information. It is true that regulators, investors, lenders and insurers require more detailed and verifiable information. But ESG reports are also of interest to a larger circle of stakeholders including consumers, the public, popular media and critics of our entire economic system.

We live in a time rife with claims of ‘false news’. The Oxford English Dictionary 2016 Word of the Year was ‘post-truth’. Studies have shown that when those sceptical of the facts about climate change are presented with more evidence, rather than change their minds, they harden their original, sceptical position. Most worrying, the group least willing to change their views are those with more, not less, education.

A recent article in the Financial Times (FT) suggested ‘the beginnings of a backlash against data obsessionalism’. Another FT piece from an economist argued: ‘we don’t need to explain ourselves better. We need to ignite in people this curiosity, this sense of wonder, the sense that the economy is a thing that is a mystery to be unraveled’.

Those involved in corporate reporting, whose job includes the clear presentation of economic, social and environmental information, the challenge is how to overcome a lack of trust in information and ignite this sense of curiosity in people. Three approaches can help.

1. 1. The message. We need to frame reports in ways that resonate with people’s values, beliefs and identities.

1. 1. The medium. We need to use more graphics, social media, more personal stories and more interactive reports that mirror the information styles and sources the great majority of people prefer today.

1. Online disclosure. Online reports can be more attractive and approachable and reduce fact bombardment. Smart design can help those who want to dive deeper to click through to find what they are looking for without wading through too many pages. Online reports also encourage more current data in the form of dashboards rather than backward-facing reports of past years.

Materiality across all of society – do our efforts count?

One of the greatest challenges for any business reporting on environmental and social impacts concerns putting information about performance in proper context. The context debate challenges all of those setting reporting standards without any targets, including the Hong Kong Stock Exchange. The Exchange asks for figures on energy use, on emissions of greenhouse gasses and waste products, but they offer no guidance on what norms, standards or thresholds are good, indifferent, or suicidal in the context of Hong Kong’s sustainability.

Contextual reporting on the environment asks: ‘Does our carbon emission target meet, or exceed, a fair contribution to Hong Kong greenhouse gas reduction targets, the nationally determined contribution of China under the Paris Agreement, or ultimately an appropriate contribution to global efforts to hold warming below catastrophic levels?’ In other words, environmental impacts should eventually be reported relative to the very real planetary boundaries beyond which our society is not sustainable.

Contextual reporting on social issues should include the question: ‘Does our supply chain screening ensure workers in our suppliers earn a living wage and can maintain a decent life for their families and children? How can we link measures to poverty lines, minimum wage levels, or national wages averages?’

Social impacts should be reported relative to the accepted needs of all people to live a decent life, including food, water, shelter, health, education, equal opportunities and also a voice in society.

Reporting environmental and social performance without context is like reporting financial information without including expenses.

Linking company ESG actions to the UN sustainable development goals

One answer to the question of context is afforded by the increasing number of companies linking their sustainability reports to the global agenda for change. All around the world we are seeing sustainability, CSR or ESG reports referencing the UN sustainable development goals (SDGs), a set of 17 goals agreed by 193 governments in 2015 which set global targets on poverty reduction, environmental action and human rights standards in what is known as the 2030 Agenda for Sustainable Development.

Analysis of 100 blue-chip company reports for 2016 by the United Nations Global Sustainability Index Institute Foundation found that over 80% of such companies were already either mentioning the SDGs (58%) or actually referencing them in their own sustainability plans (24%). Some companies demonstrate links between their ESG reporting KPIs and the SDGs. Others select certain SDGs, such as health, education or gender, and focus on how they make a concerted contribution to progress in these areas of the global goals.

While it is true that few companies can be expected to actively contribute to all 17 SDGs, no business can fail to address those goals which are directly impacted by their core business activities. For example, a company requiring large amounts of water or producing waste water in its manufacturing operations cannot reasonably ignore SDG 6 (promoting clean water and sanitation for all). Power companies need to explain their relationship to SDG 7 (promoting affordable and clean energy), while many manufacturing and retail businesses will have to take a look at SDG 12 (promoting responsible production and consumption).

Conclusion: preparing for the future

The growing demand for all companies to be active corporate citizens on issues beyond their core business – to play a positive role in environmental and social agendas – can take a business outside areas that it feels has the know-how and the confidence. To prepare for this future, I would advise business to look at the following areas.

1. 1. Keep abreast of trends on reporting standards. Stay in touch with developments and debates in order to ensure you end up using VHS and not Betamax. Enable your reporting system to deliver first-mover benefits and not face the catch-up penalties of a laggard.

1. 1. As demand for non-financial disclosure grows, prepare to respond to differing needs:• more accurate and comparable information is needed by lenders, investors, insurers and regulators, and

      • more accessible information is needed for other stakeholders – a challenge of message, medium and framing.

1. 1. Understand the context of your reporting. Set your disclosure in the context of social and environmental agreements, targets and debates which are likely to lead to changes in regulations and consumer expectations on environmental and social issues.

1. Link your report to the SDGs to demonstrate that your business is well-positioned within the global agenda for change. These are environmental and social targets against which all countries will be measured over the next 12 years.

John Sayer is Director of Carbon Care Asia Ltd. and is also a Stakeholder Council Member of the Global Reporting Initiative.

Published by The journal of The Hong Kong Institute of Chartered Secretaries, December 2017