Quantity and Quality of ESG Reporting: Challenges for growth, financial and societal value
Taking ESG issues seriously delivers greater value for investors and higher performance for firms over the longer term. A meta-review of over 2,000 case studies spanning different sectors and geographies confirms that the correlation between diligent ESG-related business practices and economic performance is empirically well-founded. As a result, more investors are integrating ESG considerations into their management and investment decisions—in fact, ESG is now top of mind for many investment executives.
More ESG data is available today than ever before. But quantity does not mean quality. Increasing concerns for both reporting and analysis are related to transparency, comparability, coherence and measurement methodologies. These concerns risk undermining the progress made by the sector and could deter future ESG investments and management decisions.
In recognition of these emerging challenges, the World Economic Forum undertook an extensive consultation process in 2018, interviewing various stakeholders across the ESG ecosystem including companies, standard setters, framework developers, investment banks, data providers and regulators. Their white paper, published in January 2019, presents findings on the common challenges across these different stakeholder groups and suggests ways to overcome these challenges to accelerate system-level process.
Three Common Challenges for ESG Reporting:
Complexity and burden of ESG reporting
Knowing which standards to choose and use, how to use them and how much detail to provide are just some of the issues that make ESG reporting problematic for many companies. Different concepts of materiality proposed by different standards increase complexity and reduce the eagerness of companies to engage.
The incomparability of company ESG data
Differences in materiality between sectors and countries means that companies prioritize different metrics. Even when companies report on the same metrics, the classifications and denominations they use are often different, as high-level guidelines leave much to interpretation. One example is gender diversity disclosure in the fast-moving consumer goods industry: companies can report the percentage of women "by position," "as share of all employees," "by geography," "by new hires" or "by contract type." Lack of consistency makes inter-company comparability difficult and prevents companies from benchmarking themselves against peers, reducing the ease with which investors can make decisions and hindering regulators and society from understanding companies’ contributions to national and local targets
Poor understanding of and interaction with ESG rating agencies
The proliferation of ESG rating agencies, which aggregate and process ESG information to provide perspective on companies’ non-financial performance, comes with a proliferation of methodologies employed to deliver this analysis. Not knowing what data is included in these reports and analysis reduces trust and use of this information.
Three Recommendations to Improve ESG Reporting
Improve transparency across the ecosystem
The wealth of activity in ESG reporting enables the development of the sector, but efforts and initiatives need to be better communicated and transparent to prevent duplication of work and to optimize outcomes.
Enable effective active cross-system dialogue
Data produced must help investors meet their own requirements, yet at the same time, reporting itself must not be too burdensome. Effective dialogue and communication between different groups will help build an understanding of different needs and requirements while enabling effective reporting in the future.
Tighten and align methods for metric measurement
Greater comparability of reported data will safeguard against the proliferation of multiple and competing methodologies and reporting criteria. In the first instance, tighter guidelines from standard setters on how to report on ESG criteria to reduce the application of company-specific classifications may improve comparability.
As a first step to address these recommendations the WEF has developed an interactive ecosystem map to highlight vital stakeholder groups and their current activities.
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