ESG Reporting - the challenges

ESG reporting: A summary of challenges The current practices and the challenges control teams face in ESG reporting and governance is enormous.

The current state Organizations are in distinct phases of their ESG reporting. Some companies have included sustainability metrics in their annual reports or in separate reports for many years, but others are in the initial stages. For those reporting, it is an iterative process requiring continuous improvement.

As companies provide more ESG information to meet needs of investors and analysts, many are finding they have a lot of information reported in a lot of different forums - the starting point for confusion.

“We have a number of sustainability reports, but we are stepping back, rethinking, and taking a more holistic approach to what we report and where,” said Amie Thuener, vice president, chief accounting officer at Alphabet, Google’s parent company.

What reporting frameworks apply?

A significant challenge for companies in all industries is assessing the multiple reporting frameworks available. These include guidance from the Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), Climate Disclosure Standards Board (CDSB), Task Force on Climate-Related Financial Disclosures (TCFD), and numerous smaller frameworks.

“There are two completely different definitions of materiality for SEC (Securities and Exchange Commission) filing purposes and for sustainability reporting, which makes it extremely difficult and confusing,” said Marc Siegel, partner at EY’s Financial Accounting Advisory Services.

“There are also different materiality definitions in the different frameworks, and preparers need to look at this closely.” Siegel noted the SASB and TCFD guidance are narrower and more focused on investors, while the GRI considers a broader audience and includes companies’ sustainability impacts on society.

Where is the information?

For most companies, there is no centralized system that holds all needed ESG data. When companies inventory their ESG metrics and sources of data, it is likely to require manual effort.

Some of the challenges include: -Data (e.g., headcount, costs, emissions) can reside in systems outside of finance or in third-party systems outside of the company, which raises process and control issues.

-Timing issues The availability of ESG data and what needs to be done to it and lack of automation create timing challenges. Many companies issue their sustainability reporting much later than their financial reports.

-Resources Because companies are in various stages of sustainability reporting and the requirements are changing, they must consider the need to train employees on ESG matters and reporting requirements.

Recent development in standards In response to feedback from investors, regulators, and preparers that global financial markets need consistent and comparable sustainability reporting, the International Financial Reporting Standards (IFRS) Foundation on Nov. 3 announced significant developments for providing highquality disclosures on climate and other sustainability matters.

Oversight Primary responsibility for ESG governance and reporting can reside in various parts of the organization. Many companies are creating separate sustainability groups to oversee the data gathering because the information and subject matter expertise is typically embedded across the organization.

Instead of leading sustainability reporting efforts, finance and controllers at many companies focus on the sources of needed information and any gaps; the controls and systems used to gather the data and make sure it is accurate and complete; and the process and repeatability of the reporting.

Engaging ESG stakeholders As demands for ESG information continue to evolve and companies work through the many reporting challenges, it can be helpful for them to engage users of their ESG information.

Collaboration, communication, and cohesiveness are key.