For the second year in a row, BlackRock CEO Larry Fink has rocked the corporate and investment world with a simple tool…a letter. With the pandemic as a backdrop, he makes a compelling case for corporate responsibility amidst the existential environmental and social threats we face, with a strong call to action for transformation to a net zero economy. His words, and those of other forward-thinking leaders, have echoed broadly – and have left organizations around the world scrambling to implement more ambitious Environmental, Social and Governance (ESG) goals, increased transparency, and effective reporting as the world learns to pivot to reach the goal of a net zero economy.
The investment world places high value on ESG responsibility and reporting. In fact, despite the COVID pandemic, ESG investments were set to grow by 40% in 2020. However, developing and communicating a compelling ESG strategy can be daunting, and the challenge of data collection and verification can seem insurmountable. In addition, navigating the myriad ESG reporting schemes remains complex, confusing, and time-consuming – for seasoned ESG managers and newcomers alike.
While every company’s ESG path is unique, one common thread is the need to determine which sustainability metrics to prioritize. There are many ways to assess this – through benchmarking, gap analyses, and evaluating risks and opportunities.
Over three decades, SCS has been working with corporations throughout the world to deepen their understanding of ESG best practices, ensure their reporting is verifiable and complete, and develop attainable ESG goals that will foster a net zero corporate footprint. We use a three-step process that takes into consideration materiality, choosing the best reporting frameworks for each individual company, and reporting assurance, a much-overlooked process designed to detect calculation errors and weaknesses in management systems so that they can be corrected prior to issuing a final annual sustainability report.
Step 1: Materiality Assessments – The Key to Getting ESG Right
Beyond standard business benchmarking and gap analysis lies the whole idea of materiality, which is to say, what is actually “material” or relevant to your business and operations with regard to ESG strategies, goals and reporting. Companies undertake the often lengthy and not inexpensive materiality assessment in order to better identify corporate ESG priorities, processes and practices and evaluate their potential future impact on the economy, environment and society at large, not just on the company’s current operations. Materiality assessment necessarily involves engagement with key stakeholders, both internal and external. Depending on which framework a company adheres to, financial materiality is involved as well – that is, issues vetted that are likely to have a financial impact on the company’s overall performance, which in turn, could impact the investor community.
Learning the methods for establishing ESG priorities through stakeholder engagement and materiality assessment, companies can obtain a clearer direction for their ESG reporting requirements so they can better visualize their priorities, communicate their ESG practices both internally and externally, and mitigate significant issues that can impact not only the company and its performance, but the larger global environmental, social and corporate landscape.
Step 2: Choosing the Right Sustainability Reporting Framework
Regardless of the way in which a company establishes its ESG priorities, once those priorities are determined, it’s time to focus on developing goals and implementing change. This leads to the next ESG hurdle: Sustainability Reports.
CDP, GRI, TCFD, SASB, SDGs – the alphabet soup of ESG reporting frameworks – can be confusing and overwhelming, even for the experts, not to mention the escalating demands from investors and customers that are making reporting an increasingly complicated and high-stakes endeavor. How do you choose which reporting frameworks are right for your organization, let alone figure out how to get started on responding to them?
The short answer is: There isn’t necessarily one framework that will fit your company perfectly. Each reporting structure has its plusses and minuses, and each can work well, either independently or coupled with another, depending on what industry or what type of company you have. There are both differences between and synergies among the various ESG reporting frameworks. SCS has worked with many multinational companies to find a hybrid approach that can truthfully identify the material topics that need to be reported in the most streamlined process possible, all while meeting stakeholder requests and being aware of how the company might be rated on its myriad environmental, social and governance issues.
Step 3: Report Assurance — Your ESG Secret Weapon
To help ensure that the reporting structure(s) you have chosen will deliver what you need to put your company at the forefront of ESG best practices, companies are increasingly turning to independent, third-party assurance of all or part of the ESG information contained in their Sustainability or Corporate Social Responsibility (CSR) Report. Designed to detect calculation errors and weaknesses in internal management systems, report assurance reinforces internal and external stakeholder confidence in your organization’s reporting, and enables your company to make corrections prior to issuing your final report.
Report assurance provides third-party validation that data are accurate, reliable and material to all stakeholders. It provides increased corporate confidence in your disclosures and added resiliency to ESG risks. By providing investors and other stakeholders with independently audited ESG information, companies can mitigate ESG risks associated with investor relations and increase their corporate score with ESG rating agencies.
Becoming an ESG Leader IS Possible
Working towards greater adoption of ESG best practices, while not easy, is not impossible, and has many rewards for your business, employees and customers. And each year Larry Fink and the rest of the investment world calls out to the global corporate community to step up its game and take all aspects of ESG seriously. The world is waiting for a bigger response. Now is the time when your organization can be a change agent to help achieve a net zero economy. Now is the time to learn how your organization can become an ESG leader by following the three simple steps of materiality assessments, proper reporting and report assurance.