Corporate Environmental, Social, and Governance (ESG) programs are unique from other business processes because they’re typically driven by reporting. The number of companies disclosing ESG data rose substantially in 2021, driven by demand from investors, employees, consumers, and other stakeholders. According to Deloitte’s Sustainability Action Report, the number and quality of ESG reports will increase even more in 2023 with virtually all executives (99%) planning to invest more in ESG reporting technology and tools in the coming year.

The most important component of ESG reports are industry-aligned disclosures — typically provided in a downloadable spreadsheet or at the back of your report. Aligning your report with guidance provided by the SASB, GRI and TCFD is crucial to ensure your data is credible, decision-useful, and comparable with that of your peer companies. Neglect your disclosures and your report will be little more than PR fluff. However, limit your ESG report to industry-aligned disclosures and you’ll miss out on a valuable opportunity to tell your unique sustainability story in a way that contextualizes your performance and forward-looking strategy.

Literature around ESG reporting focuses on adherence to standards and ensuring the quality of data. Without a doubt, this is the most important component of ESG reporting in terms of driving accountability and raising the bar on corporate performance. However, investors and other stakeholders will also be interested in how the company leverages sustainable practices to capture market value and foster innovation.

We conducted a review of ESG reports that was focused on the inaugural reports of mid-sized tech companies but also included those from Fortune 500. The process lead to the identification of 3 themes for high-quality ESG reports. For a more thorough review check out our sustainability reporting guide.

1. Context

Many companies begin ESG reports with pages and pages about their company activities, culture and values. While some reports do go overboard with this in my opinion — it’s not as irrelevant as it might seem. In fact, providing insight into the mission and business model of your company is crucial to help readers understand why your company is focused on the issues that it chose. For example, if Target, a vertically integrated company, doesn’t explain that it owns manufacturing plants as well as retail stores, its focus on circular design or greenhouse gas emissions might be confusing for readers. Information on mega or industry trends or political and environmental factors helps explain corporate decision-making and differences between actual vs. expected performance. The mega-trend COVID-19 impacted all companies in many unexpected ways. For example, many companies' GHG emissions went down in 2020 due to travel restrictions but spiked in 2022. Explaining the connection between business travel and COVID-19 primes information users for seeing this kind of changes in the data.

1a. Perspective

In addition to adding broader context, providing an authentic account of why your company is pursuing ESG at all creates clarity and focus in your report. Long before your company begins the ESG reporting process, you should have an earnest discussion with your board and leadership team to align on your company’s approach to and target audience for ESG reporting. For example, if you are investing in ESG because of investor demand and hope it will help you create long term shareholder value, your ESG report will look much different than if you engage in ESG because company leadership wants to reduce its impact on the environment. Summarizing the value that your company hopes to create through ESG, the stakeholders that your strategy is focused on, and where ESG is integrated into the business, illustrates diligence and intentionality that stakeholders will appreciate.

2. Strategy

Many stakeholders will be more interested in learning about your company's ESG strategy than your past achievements, because it offers greater insight into your future performance and contextualizes goals and objectives. For each component of your report (e.g. Environmental, Social, Governance — or however you choose to organize information) you should embed information on new processes, policies, initiatives, and investments that you’re planning to make in the coming year as well as their projected impact.

Even more important to address is whether your company is on track to meet its targets, why or why not, and how these challenges will be managed in the future. Atlassian’s 2022 sustainability report begins with a page titled “our progress” with two columns, “where we fell short” and “where we’re going”. It’s a wonderful example of acknowledging past shortfalls, although it could be even more informative with additional context on why shortfalls occurred and how exactly they will be addressed in the future.

2a. Integration

ESG initiatives have a wide array of financial implications. They often require significant capital expenditures, drive new revenue streams, reduce operating costs, and reduce volatility and the cost of capital. Highlight how your ESG activities are intended to create financial returns, as well as their actual financial impacts thus far. It will also be helpful to indicate here how ESG is embedded in existing processes — for example, risk management or supply chain management.

3. Methodology

Providing information on how your company identifies material issues, engages stakeholders, gathers and assures data, is crucial to illustrate the credibility of your information and the sophistication of your program and governance structure. This level of rigor will become increasingly important as concerns around greenwashing put companies under greater regulatory scrutiny. Three common ways that companies show their methodology include publishing materiality matrices, governance structure, and data assurance and control processes.

*3a Materiality Matrices*

A materiality matrix visualizes the final step in a materiality assessment, the formal process of identifying and prioritizing relevant sustainability issues. After companies have identified potential impact issues, sought and analyzed stakeholder feedback, and assigned each issue a weighted score, the issues are plotted on a grid, typically with 2 contrasting dimensions pertaining to corporate sustainability. I like this example from Best Buy’s 2022 report because the dimensions they use (impact on society / environment vs. impact on enterprise value) are clear and mutually exclusive.

3b. Governance

In addition to sharing your company’s general governance practices and structure, companies should report on the oversight and management of their ESG strategy, including the specific committees and teams involved. Since ESG is a burgeoning field, it's often necessary for companies to show how they are upskilling their leadership and board to manage this work, as well as investing in their corporate sustainability teams. Finally, linking executive compensation to ESG performance shows that sustainability is taken as seriously as other important matters.

3c. Assurance & Controls

ESG reporting processes are still nascent in their development, but they are quickly catching up to more rigorous procedures like financial accounting. Add to the credibility of your report by sharing information about the different levels of assurance ESG performance data is subject to and your reporting methodology. Seeking external assurance is ideal, though not required at this point.

Conclusion

Good ESG reports are thoughtful, authentic, and credible — a representation of the ESG team and strategy that guide them. If you’re interested in developing an ESG reporting roadmap which grounds and aligns your strategy with best practice, feel free to set up a free coaching call with me here.

ESG Reporting 101