ESG Reporting - Why it Matters & is it Failing?

Why does ESG reporting matter for government and industry so much right now?

Jeff Hamilton

4

August 11, 2021

If the topic of ESG reporting hasn't yet entered your ecosystem, you're in for a fascinating ride. ESG stands for Environmental, Social and Governance, and is the practice of creating transparency in an organization by publicizing data about their sustainability and social practices.

Nowhere is transparency more important than in government spaces - governments are shifting to working in the open, from open-source code to overall digital transformation. As a result, having a broader ESG reporting strategy is being increasingly expected by citizens, and rightfully so. However, many governments are just now in the process of trying to understand what this should look like strategically and how they can get there in partnership with these many businesses or organizations within their political backyards.

Let's zoom out. The world of ESG reporting goes beyond just the public sector. Businesses in the private sector are now accountable to not only stakeholders such as their investors, customers, and employees, but also to all levels of government and its citizens.

Whether it be in forestry, energy, transportation, manufacturing or anything else, strong and sustainable business practices may not meet social or legislative standards and the data behind this clearly exposes short falls and the need for accurate data and actionable ESG reporting.

Investors are watching

ESG reporting is clearly top-of-mind within industries, resulting in the CEO and investor relations & communication leaders being forced to change their reporting and management processes, quickly. Luckily, this means that more and more money is now pouring into ESG funds, enabling teams to tackle this ever-important problem. Meanwhile, regulators and industry organizations are playing catch-up as they set disclosure rules and develop tools to inform investors about what they’re buying. Investors are increasingly digging deeper and expanding their due diligence beyond traditional investigation and inquiry. Today there are non-financial factors that have become part of their analysis process, to identify material risks and growth opportunities:

  • meeting the requirements of current and future legislation.
  • matching industry standards and good practice.
  • improving staff morale, making it easier to recruit and retain employees.
  • improving relationships with suppliers and customers.

ESG reporting now falls squarely into the "must do" category when it comes to how industry is operating.

Governments are shifting how they approach ESG reporting

Governments across Canada and around the world are focused on expanding their understanding and capabilities around ESG reporting. ESG standards have either been set up or are in the process of being established in most countries, and this will help the process to create consistency and make it easier for companies to report.

A blossoming and growing demand for ESG reports has resulted in a flood of vendors supplying varied reporting tools and standards. Make no mistake, this broad range of evolving reporting typically does not meet the needs of government, industry or answer the questions citizens are asking. This range of reporting tools popping up requires standardization for consistency. It is no surprise, the calls by businesses and government to harmonize reporting have been getting louder.

The European Union (EU) became the first international organization to introduce a green taxonomy for the financial sector recently. The Sustainable Finance Disclosure Regulation (SFDR) makes ESG reporting mandatory for asset managers and requires disclosures to be available on businesses’ websites and in quarterly and annual reports.

Where ESG is failing

The Institutional Investor details some excellent points around why ESG is currently failing. The authors note; “we must revisit the relationship between economic and social performance” and “a currently popular idea holds that companies that score higher on rankings aggregating a myriad of ESG metrics, with little consideration of their financial materiality and its relation to the competitive strategy of a company, will deliver better shareholder returns. This is simply incorrect.

Can industry, investors and government align on the same page? When it comes to standardization and data consolidation, many organizations and governments are still stuck simply trying to decipher an abundance of data in outdated technology and accumulated in mountains of detail within Excel spread sheets.

ESG reporting solutions in a government setting must take an ecosystem approach, to deliver an interoperable, scalable system across industry as well, that could be handed off at the end of a project. Open source is terrific and gratifying in that respect – the goal is to work in the open, harness enterprise approaches, and create a transparent product that can be handed off after development. This is what all government and industry should strive for.