Getting ready for ESG
Imelda Kwong, Senior Manager, Risk Assurance, PricewaterhouseCoopers, highlights the challenges involved in environmental, social and governance (ESG) reporting and provides a practical way forward for companies to get ready for the raised compliance expectations regarding ESG disclosure.
Proper and structured disclosure of ESG performance is becoming increasingly important for organisations in Asia. In recent years, Asian stock exchanges have introduced protocols for mandatory or voluntary reporting for listed companies. In Hong Kong, locally registered companies are required to include environmental disclosures in their Business Review report under the new Companies Ordinance, which was implemented in March 2014. Furthermore, as proposed in the recent consultation paper issued by Hong Kong Exchanges and Clearing in July 2015, listed companies are likely to be required to disclose ESG matters on a ‘comply or explain’ basis by 2016/2017.
The ESG journey is unique for each organisation. One of the main challenges for companies is execution – how to develop an approach that can deliver on your ESG strategies and goals. But, with a clear understanding of the value in ESG, companies can actually turn these challenges into new business opportunities. Companies may need to draw on the help of external experts to support the conversion of a traditional business operation into one that also benefits society and protects the environment. To fully articulate ESG performance and demonstrate sustainable growth, a relevant and material sustainability report is key.
Understanding the business case for ESG reporting
In addition to mandatory disclosure compliance, investors are looking increasingly for socially responsible behaviour in listed companies. In this regard, they will critically examine the information disclosed, especially in areas such as sustainable and responsible investing. As a result, ESG reporting is now mainstream.
To ensure long-term success in ESG, the commitment should be based on value-creation for the company and society. Smart ESG strategies focus on key impact areas for the business and society, with the aim of developing solutions which address major challenges from both areas and bring mutual benefits to each other. The following table highlights the direct and indirect values brought about by ESG reporting.
ESG reporting frameworks and guidelines
As ESG reporting has become more common, various reporting frameworks have been developed. The Hong Kong Stock Exchange has issued its own ESG Reporting Guide for listed companies to follow. Additionally, the Global Reporting Initiative and the International Integrated Reporting Council provide sustainability reporting frameworks that are adopted globally. No matter which reporting framework an organisation chooses to follow, ESG reporting can be outlined in five stages and broken down into a number of practical steps.
- Build your ESG governance structure
- Assess materiality
- Collect data
- Develop a reporting framework
- Write the report
There are no specific guidelines to implement reporting. The following steps act as a guide that can be tailored to individual organisations. Each of the five stages is designed to structure and stimulate the thinking process with a continuous approach towards improving business and social benefits. Each organisation should adapt those guidelines relevant to their particular situation and remain focused on their own value creation process.
The challenges ahead
1. Build your ESG governance structure
Corporate responsibility and sustainability/ESG programmes are often separated from the core strategy and operations of an organisation. A successful ESG strategy not only creates social value, but also governs and engages with the organisation at all levels, vertically and horizontally.
When starting, organisations tend to have issues in deciding who should lead the ESG reporting and what the team composition should look like. It is very important to build the right team with a good structure, and a responsibility matrix that together form the basis of the organisation’s ESG driving force. There is no set standard for team structure. However, a responsible group should govern ESG initiatives with top management’s support. Top management should have the ultimate responsibility for approving and setting the organisation’s ESG vision. Having a responsible group for driving sustainable practices across core functions of an organisation with support from senior management allows goals and policies to be established, missions and directions to be set, and strategies to be executed. An ESG governance structure also reinforces communication within the organisation to ensure adequate support is provided to implement ESG initiatives.
Tip: establish a multidisciplinary steering group. In your governance framework around the reporting process, make sure there is one steering group that provides mission and milestones for the reporting project team. The steering group should also assess whether these milestones are being achieved during the writing and reporting process. Its membership should be multidisciplinary, for example including representatives from strategy, HR, internal audit, external communications, investor relations and reporting.
2. Assess materiality
The principle of materiality assessment is to define, in order of priority and impact, the ESG issues that are most important to an organisation’s business and stakeholders. Materiality assessment is therefore a key step in developing a holistic understanding of the strategic risks and in identifying opportunities arising from global, as well as local, trends. As all organisations have to come up with their own relevant material issues and engage their stakeholders, the challenge is how best to define those material issues. Relevant questions include: which stakeholder(s) should we engage? How many stakeholders should we engage and how should we engage them? How should we incorporate material issues that are relevant to operations in various locations?
To have a valuable materiality assessment, the following steps are fundamental:
- Establish a programme of systematic engagement with investors and other stakeholders (internal and external), which should be embedded in your governance structure/process. Tip: it is best to integrate your annual stakeholder dialogue and materiality analysis in your reporting manual, so that it becomes part of the formal reporting process and instructions. In your first year of reporting, it is more achievable to engage internal stakeholders and then incorporate external stakeholders as your reporting matures.
- Identify a list of relevant issues to your organisation and stakeholders based on desktop research. Tip: maintain an outside-in perspective to get an all-encompassing view of the operational context, competitor analysis and megatrends.
- Reduce the list of relevant issues and prioritise key concerns with stakeholders. Tip: it is crucial to identify key stakeholders for this process and establish the method of engagement with each stakeholder. Will it be a survey, a meeting or an interview? Depending on the size and type of stakeholder group, different methods can be used. For example, if a company is looking to engage all its employees, a practical way is to conduct a survey. On the other hand, if a company is looking to engage senior board members, a meeting may be more appropriate. An organisation can engage as many or as few stakeholders as they see fit – as long as the views of each stakeholder group truly reflect the key material issues of the business. It is best to engage different stakeholder groups to get a holistic view of the organisation’s issues and to avoid narrowing down on one aspect only.
- Consolidate the results from stakeholder engagement and present to the board for discussion and approval. Tip: the impact of each issue can be scored and shown in a matrix form to classify the top material issues. Review the issues regularly to keep track of the latest trends. Consider benchmarking your material issues with your competitors and referencing industry issues to ensure the material issues are reasonable and relevant.
3. Collect data
The data collection process is a demanding task that is frequently problematic. Common problems arise from identifying the right data to collect, how/where to collect data and ensuring its accuracy. To provide a perspective on the trends and allow a comparison of data throughout a time-span, it is important to collect relevant, complete and accurate data as soon as possible. If an organisation is just beginning to publish an ESG report, communication with data owners is essential. Also, a well-defined system/process to capture reliable and accurate data helps support key decisions and business strategies. The main points for data collection include:
- clearly define data boundaries and specifications prior to data collection
- establish data collection procedures
- to serve as a protocol to what information is collected and how the information is gathered, compiled and calculated based on industrial/ local/ international practices, and
- verify the completeness, accuracy and assumptions made during data collection.
Although third-party assurance is not mandatory, organisations often undergo
the assurance process to achieve the highest level of integrity and value for the obtained data. Assurance adds transparency and credibility to the
report. However, note that it does not serve to affirm that the ESG issues disclosed are being well addressed by the organisation.
Tip: identifying and developing the right key performance indicators helps reveal the impact and value an organisation brings to the environment and communities around it.
In order to achieve this, an organisation needs to develop robust, standardised methodologies for measuring outputs and impacts. Primary data may not be adequate, and different methodologies as well as creativity may need to be used to produce a meaningful output. However, management should understand that investors would rather have data with some inherent limitations than none at all.
4. Develop a reporting framework
ESG reporting needs to be embedded within the strategic objectives of an organisation in order to realise tangible and sustainable benefits for the organisation. It should not become a compliance exercise – it should be used as a practical tool for improving transparency to stakeholders and performance. Hence, the steering group must continue to revisit the three fundamentals that underpin the framework for report development each year:
- identify the requirements for reporting (organisations should have decided which reporting framework to use at this stage), analyse gaps and develop a reporting action plan
- develop a reporting concept and structure, and
- discuss the ESG content index and discuss the presentation of indicators (options: storyboard the report, develop the report text and review after the artwork has been completed).
5. Write the report
Effective accountability and transparent reporting are key to addressing ESG issues and performance. In report writing, one main challenge is to find the balance between depth and readability. To have an effective report, organisations should consider the points below.
- Designate a chief editor to provide consistency of content, style and language throughout the report.
- Provide a narrative description and supporting graphics that explain each reporting aspect, such as the company’s sustainability governance system and how it fits into the overall governance structure.
- Describe sustainability policies that have been implemented and explain how management ensures that the policies are working.
- Develop a system or procedure to sign off on the final report by various departments and top management. Consider the authority to sign off on less satisfactory news and restatements.
A good ESG report is written in simple language that is easy to comprehend. The report should cover material issues that concern key stakeholders. It should also provide insight into management’s approach to addressing and mitigating ESG related risks and demonstrate ways in which an organisation is a good steward of financial, human and natural capital.
Tip: periodically check whether the information is comparable with that issued by your peers. The true value of information lies in comparability.
The matters covered above are only pointers that help to formulate a good ESG report. As ESG requirements become more encompassing, new regulations and requirements will inevitably be stipulated. Therefore, it is imperative that organisations keep abreast of these provisions so they will not fall behind and find themselves handicapped in complying due to scarcity or lack of expertise and available resources.
Senior Manager, Risk Assurance PricewaterhouseCoopers
SIDEBAR: How ESG adds value