How well would your environmental, social and governance (ESG) report hold up under the critical analysis of an ESG professional? Dr Glenn Frommer and Theodora Thunder, Principals, The Sustainability Partnership, share some insights into what they look for in a good ESG report.
Expectations from ESG reporting and reports have moved on from decorative ‘green walls’ and fun days shared with the community. The environment, social inclusion, regulatory compliance, supply chains and stakeholder voices now dominate the ESG reporting landscape. While non-financial reporting is increasingly mainstream, many companies have yet to deliver the substantive and relevant information that adds value to a company’s sustainability development.
A good non-financial report explores management thinking beyond the balance sheet exercise. Regardless of the standards or platforms used – such as the UN Sustainable Development Goals (SDGs), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC), and the Task Force on Climate-related Financial Disclosures (TCFD) – the report essentially complements an organisation’s annual financial reporting. It expands on the social and environmental dynamics in context of the business strategy, management’s decision-making and the operating environment. And, increasingly, it explores the impact created by the company’s business and culture, as impact speaks to the value of the outcomes from business strategy and decisions.
Non-financial reports today increasingly adopt the material risks management approach, directed mainly to the financial community, investors, shareholders, internal management and main stakeholders. This approach necessarily aligns with the strategy and programmes that advance the company’s specific business model. Reports can also be structured for industry or peer group purposes, or as a reputation management exercise. While these supplement the annual financial reporting and tick the right boxes, the messaging and value to performance can be overtaken by their intent.
A reader’s critical assessment
As readers of non-financial reports from the governance and financial perspectives, our professional interest is to be able to assess a report for its ESG content and value regardless of platform, standards or intent. The following points prove helpful in critically assessing the value of a non-financial report.
1. Report structure
The priority and order of reading an ESG report should be the same as an annual financial report: Chairman’s statement, CEO statement and the ESG metrics. These are then followed by the substantiating information (for example management discussions and analysis) on programmes, events, initiatives and outcomes that support and explain the first three sections.
2. The Chairman’s statement
The Chairman’s statement should be about company vision, strategy and direction. It covers the ‘big picture’ issues that affect the reader’s perception of the company in terms of achieving (for example, progress/regression) the stated vision and business purpose. Importantly, the Chairman’s statement should inspire trust. A critical reader, for example, would look for evidence of good governance and ask why one should trust the management team to steward the organisation in a sustainable direction. The report should answer this beginning with the Chairman’s statement.
3. The CEO statement
The CEO statement should clearly set out the business strategy and how well or not, it is being implemented. It should give a clear indication of management’s understanding of the material risks and opportunities attached to the strategy, the context in which the company operates in the market and the actions taken by the management team to enact effectively the strategy. The CEO statement includes the broader/more significant social, economic and environmental impacts of strategy implementation. This can include the longer-term impacts that potentially affect business and stakeholder decisions that sit outside of the immediate reporting time period. Importantly, the CEO statement is a strategic statement, not a laundry list of activities.
4. The metrics
The ESG metrics that measure performance against regulatory guidelines and voluntary industry standards such as GRI, the Sustainability Accounting Standards Board and, more recently, the TCFD. These are important as the metrics reflect the effectiveness of governance and other systems, and give measureable insight into internal, peer group and industry performance. While aligning with the financial reporting exercise, it is preferable to see sustainability performance measured in terms of trends (three years or more) due to the nature of the programmes that manage environmental and social issues. Climate change risk mitigation, for example, could well need a 5-10 year horizon to effectively assess the decisions currently taken and the justification of the resources allocated. The rationale for such decisions therefore needs solid evidence-based management discussions to support them.
5. The management discussion and analysis section
The management discussion section, or series of sections, is about the systems, policies and actions undertaken that support and explain the business strategy and demonstrate performance within that context. A good report focuses principally on the company’s material ESG issues and their management that affect operations and future business development (for example environmental and social risks, supply chain management, regulatory compliance, stakeholder issues, workforce, etc). Discussions explain performance, policies, operations and any changes that create significant impact from previous years, or possibly, in future years. Discussions should also elaborate on the ‘comply or explain’ of mandatory regulations and give insightful explanation of performance in regards to the standards and guidelines (GRI, IIRC, TCFD, SDGs, etc) the reporter chooses to use to position the sustainability journey. While being elective and providing guidance, discussions of these standards serve to elaborate on the context in which business operates and the measured impact that the company has on stakeholders. For example, reporting on SDG Goal 12: Ensure Sustainable Consumption and Production Patterns, points to the commitment to address supply chain management in terms of manufacturing practices and materials, recycling and resources use. This indicates to the reader the future strategy, business plans, programmes and targets to address exposures or risk within the supply chain.
The importance of coherence and clarity
Readers of ESG reports seek to understand the underlying corporate journey, the commitment and strategy to manage risks and opportunities, as well as the decisions that define a company’s sustainable development pathway. In addition to the points above, a skilled reader would also keep the questions below in mind when reading a report.
- Is the document consistent in its message and story? This starts from the Chairman’s statement and moves through to the more detailed explanation of performance results.
- Does the story and subject matter connect all sections so that the information is integrated and easily identified in relation to other sections?
- Do the metrics convey timely information concisely, and are they clearly explained and easy to understand?
- Is the report well presented, concise, balanced and void of green wash and irrelevant stories?
Because it is a voluntary exercise, a non-financial report can be structured to fit the individual corporate purpose (investment, peer review, industry ranking, internal management capabilities, etc) and therefore can be confusing to read. The above points however, serve as a baseline approach to any report in how to understand and review a report and assess its value as a corporate document.
Dr Glenn Frommer and Theodora Thunder, Principals
The Sustainability Partnership