Environmental, social, and governance (ESG) issues have long been considered secondary concerns to investors.
In the past decade however, institutional investors and pension funds have grown too large to focus on systemic risks alone; considering the environmental and social impact of their portfolios is increasingly becoming a priority.
Most business leaders acknowledge their role in contributing and responding to several social-environmental challenges, including climate crisis.
Yet, many of these leaders believe that pursuing a sustainability agenda is not aligned with their shareholders’ agenda.
Despite challenges, the value of embedding ESG concerns in decision-making is becoming more commonplace.
This process not only signifies a company's commitment to holistic values but also serves as a transparent interface with stakeholders.
However, like all complex procedures, it has potential pitfalls.
In this article, we’ll highlight the 5 mistakes you should avoid in ESG reporting, how you can respond these challenges and navigate ESG reporting with ease and efficiency.
1. Overlooking Materiality Assessment
Materiality in accounting refers to the relative size of an amount, and the impact it has on financial statements.
In ESG reporting, however, it takes on a broader role.
It involves discerning which environmental, social, or governance issues can substantially influence a firm's financial condition and which matters most to its stakeholders.
- Environmental factors might include carbon emissions, waste management, and resource conservation.
- Social factors include employee welfare, community engagement, and product safety.
- Governance factors cover board diversity, executive compensation, and shareholder rights.
The ESG landscape is vast and diverse. Not all ESG factors will have the same relevance across different sectors.
- Assuming consistent relevance for all ESG factors: a pharmaceutical company may prioritise health and safety measures, while a tech giant emphasises more on data security and privacy.
- Bypassing stakeholder insights: stakeholders offer a rich reservoir of insights that, if overlooked, can render ESG reports incomplete or out of touch.
ESG is not one-size-fits-all. Going through a materiality assessment, defining what ESG factors matter the most to your company, and your industry, is the foundation of powerful reporting.
2. Underestimating Data Verification
Data serves as the backbone of ESG reporting. It isn't merely about collating numbers; it's about ensuring that every datum upholds the truth of a company's ESG endeavours.
Inaccuracies in data representation can result from oversights, miscalculations, or misinterpretations. Such errors compromise the integrity of the entire report.
- Humans can bring context, understanding, and intuition to data. However, they can also introduce bias and inaccurate calculations.
- Machines, especially AI-driven systems, can process vast datasets efficiently, and easily spot anomalies or trends that might escape human scrutiny.
- Sole reliance on internal evaluations: while internal checks are crucial, they can sometimes lack an outsider's perspective, which can spot inconsistencies or biases.
- No third-party verification: external audits, although potentially costly, offer credibility to the data presented.
Incorporating technology, like AI-driven ESG data management tools, can facilitate all processes while reducing errors.
Leveraging automated tools for initial data handling and verification, followed by human oversight for contextual understanding, offers a balanced approach.
It's not about replacing humans in the work place; rather, it emphasises on supplementing human expertise and experience with technology for optimum accuracy.
3. Underplaying Stakeholder Engagement
Stakeholder engagement is a cornerstone of any effective ESG strategy.
It is a two-way conversation between an organization and its different stakeholders with varied insights, concerns, and expectations.
Stakeholders can be broadly classified into two categories:
- Internal stakeholders include employees, managers, and shareholders.
- External stakeholders include suppliers, consumers, local communities, NGOs, and regulatory bodies.
- Inadequate establishment of communication channels: significant reliance on annual general meetings or periodic newsletters is often insufficient and ineffective.
- Failing to act upon feedback: listening is half the task; integrating stakeholder feedback into actionable strategies is equally vital.
A dynamic engagement with stakeholders enriches the ESG strategy and reinforces stakeholder trust.
Effective stakeholder engagement hinges on a company's ability to foster open channels of communication, demonstrate genuine receptivity to feedback, and translate that feedback into actionable strategies.
Regular town halls, stakeholder surveys, community outreach programs, and collaborative workshops are a few avenues to solidify these relationships.
4. Bypassing the Continual Improvement Paradigm
While the publication of an ESG report is a significant achievement, it is merely a chapter in a company's sustainability journey.
As new objectives and challenges arise, it's inevitable that the yardsticks and objectives for ESG reporting will adapt in tandem.
- Episodic approach to ESG: once-a-year ESG report might tick a box, but authentic sustainability requires an ingrained, day-to-day commitment.
- Resisting adaptability: stagnating on past achievements instead of striving for continuous improvement. Yesterday's best practices might be today's minimum requirements.
ESG isn't a destination; it's a continuous journey.
Embracing this dynamic nature, staying informed about global shifts, and nurturing an ethos of perpetual betterment are the hallmarks of genuine and impactful ESG engagement.
Consistently assess current ESG practices in comparison to internal goals and international benchmarks.
Based on the insights from these assessments, refine and enhance strategies.
Then, using the gathered feedback, adjust these strategies in anticipation of the subsequent evaluation.
5. The Trap of Overcommitment and Underdelivery
Venturing into the ESG landscape, corporations are often faced with a dilemma:
How high should they set their ESG bars?
Ambition can propel companies to new heights, but it must be tethered to reality to ensure those heights are sustainable.
This may stem from a company's ethos, driven by internal leaders who genuinely want to make a positive impact.
Or from external forces, such as regulatory requirements, consumer demands, or competitive landscapes, with the latter occasionally leading them to set overly ambitious ESG goals.
- Setting unrealistic ESG goals: while envisioning a 100% carbon-neutral operation in a year sounds commendable, is it practically achievable based on current technologies and infrastructures?
- A mismatch between what's pledged and the strategy in place: announcing a plan to transition completely to renewable energy without a tangible roadmap or sufficient resources in place can lead to inevitable shortfalls.
Commitments grounded in reality, accompanied by a well-thought-out execution strategy, not only bolster credibility but also solidify trust with stakeholders.
Define SMART Goals, i.e Specific, Measurable, Achievable, Relevant, and Time-Bound goals, to ensure their implementation and efficiency.
Furthermore, engage with multiple departments — from operations to finance — to craft an actionable and achievable ESG strategy that complements your business strategy.
In a global economy exploring or committing to improve its responsibilities to people and the planet, a company's dedication to Environmental, Social, and Governance (ESG) not only marks its standing as a responsible entity but also communicates its values transparently to all stakeholders involved.
Addressing ESG requires diligence, awareness, and a commitment to ongoing refinement, as each facet is riddled with challenges.
Yet, with a balanced approach that synergises human intuition with technological precision and a commitment to genuine and transparent dialogue, these challenges can be deftly navigated.
And this is where we can help: at Apiday, we provide you with a one-stop solution!
Our Materiality Assessment feature helps you identify and prioritise the most important sustainability issues and opportunities.
Apiday's AI helps identify the most relevant actions aligned with global sustainability frameworks. This Sustainability Roadmap will fit your specific needs, making it easy for you to follow and implement.
Then, our tool will automatically gather data from any file format and generate beautiful reports to share with all your stakeholders. You’ll simply approve the suggestions, and you're ready to go!
Try Apiday for free and simplify your ESG reporting like never before!