What is ESG?
Before we zoom in on the key challenges organizations face regarding ESG reporting, it may be useful to provide context to ESG. ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate the sustainability and ethical impact of a company or organization.
- Environmental: The environmental aspect of ESG focuses on the company’s impact on the natural environment. It includes factors such as resource consumption, greenhouse gas emissions, waste management, pollution, climate change, biodiversity, and environmental risks and opportunities.
- Social: The social aspect of ESG encompasses the social and human impact of a company’s operations. It includes factors such as labor rights, human rights, employee well-being, diversity and inclusion, community engagement, product safety, customer satisfaction, and social risks and opportunities.
- Governance: The governance aspect of ESG focuses on the systems and processes that guide a company’s decision-making and accountability. It includes factors such as board composition and structure, executive compensation, transparency, ethics, risk management, shareholder rights, and regulatory compliance. Companies are evaluated based on their adherence to good corporate governance practices and their commitment to transparency and accountability.
Why is ESG reporting relevant for organizations?
ESG has gained significant attention and importance in recent years as stakeholders recognize the value of sustainable and socially responsible business practices. ESG factors are used to assess the long-term sustainability and resilience of companies, guide investment decisions, manage risks, and enhance stakeholder trust. This helps investors, civil society organizations, consumers and other stakeholders to evaluate the sustainability performance of companies, as part of the European green deal.
So, companies are evaluated and assessed based on their efforts to minimize negative environmental impacts and promote sustainability practices (=Environment). On their treatment of employees, relationships with local communities, and contributions to social welfare (=Social). And on their adherence to good corporate governance practices and their commitment to transparency and accountability (=Governance).
For what kind of organizations is ESG reporting required?
In Europe, mandatory ESG reporting requirements generally apply to certain types of organizations, specifically large public-interest entities (PIEs), which typically include large listed companies, financial institutions, and certain state-owned enterprises. However, the specific regulations and thresholds can vary by country.
For medium and small businesses, ESG reporting is not typically mandatory. The reporting obligations primarily target larger organizations due to their significant impact on the economy and society. Nevertheless, this affects medium and small businesses as well due to the fact that those larger organizations need to report on the scores and emissions of the upstream and downstream activities within their value chain (= scope 3 reporting).
7 key challenges organizations face with ESG reporting
Reporting on ESG can present several challenges for organizations. Here are some factors that can make ESG reporting difficult:
- Data availability and quality: Gathering relevant and reliable data on ESG metrics can be challenging. Organizations may need to collect data from various internal and external sources, which can be time-consuming and resource intensive. Ensuring data accuracy, consistency, and comparability across different reporting periods can also be complex.
- Lack of standardization: There is currently no universally accepted standard for ESG reporting, resulting in a lack of consistency and comparability across organizations. Different frameworks and reporting guidelines may have varying requirements and metrics, making it challenging to align reporting practices. This can lead to confusion for stakeholders and hinder meaningful benchmarking and analysis.
- Materiality assessment: Determining which ESG issues are material and relevant to an organization can be subjective. Conducting a materiality assessment involves considering the impact of ESG factors on the organization’s stakeholders and business strategy. The process requires careful analysis and stakeholder engagement to identify the most significant ESG risks and opportunities.
- Complexity and scope: ESG reporting covers a broad range of topics, including environmental impact, social issues, and governance practices. Each of these areas may encompass multiple sub-categories and metrics, making it challenging to report comprehensively and manage the scope effectively. Organizations need to prioritize the most relevant ESG issues and ensure their reporting is meaningful and focused.
- Data Integration and reporting systems: Many organizations have multiple systems and databases that store ESG-related data, which may not be interconnected or easily accessible. Integrating and consolidating data from various sources can be a technical and logistical challenge. Implementing efficient reporting systems and processes is crucial to streamline data collection, analysis, and reporting.
- Evolving regulatory landscape: ESG reporting requirements and regulations are constantly evolving. Organizations need to stay informed about changes in regulations, emerging frameworks, and best practices to ensure their reporting remains up to date and compliant. Adapting reporting practices to meet evolving standards can be demanding for organizations.
- Assurance and verification: To enhance the credibility of ESG reporting, organizations may seek external assurance or verification of their reported data. Engaging third-party assurance providers can be a complex process, involving additional costs and coordination to ensure the accuracy and reliability of reported information.
Addressing these challenges requires a proactive approach, commitment from senior management, dedicated resources, and continuous improvement in data collection, reporting frameworks, and internal processes.
Sparkle empowers organizations in their data challenges and is your go-to partner for data services like data integration, data platform modernization & optimization and data visualization, all parts of a solid ESG reporting structure.
Sparkle also helps organizations with the setup and integration of data using Microsoft Sustainability Manager, which will help kick-start your ESG reporting.
Do contact us to discuss how we can help your organization to overcome its ESG reporting challenges.