The 5 biggest hurdles to effective ESG reporting (2024)

Environment, social and governance (ESG) reporting: It’s new, it’s evolving and it’s all over the place. As it stands, comparability between ESG reports is low and the investors’ demand for consistency is high. While most current frameworks are voluntary, they won’t be for long. Reform, global standardization and mandatory disclosure is only a matter of time.

The time has come to get prepared for ESG reporting. Let’s explore the biggest obstacles to producing ESG reports so you can start addressing these challenges before they bottleneck your reporting efforts.

The Global Reporting Initiative, the EU Taxonomy, the Sustainability Accounting Standards Board, the Task Force on Climate-related Disclosures — oh my! While no single, global standard for ESG reporting exists, there sure are a lot of regional or industry-specific standards to choose from.

We give a brief overview of some of the most notable ESG standards in our recent post, The ABCs of ESGs.The long and short of it is, to meet investor demand, adequately showcase your organization’s sustainability in a comparable way, and meet the criteria for ESG credit scoring, your organization will have to choose one or more frameworks to adhere too.

According to a recent study byFinancial Executives International, the mix bag of competing standards and frameworks is a big challenge for organizations because 85% of companies are using, not one, but multipleESG reporting frameworks.

ESG reporting might pander to investors instead of regulators now, but these regulations won’t be loosie goosy forever. In fact, the tide is already turning.

The EU has instituted more stringent regulations in recent years — and the changes keep a comin’.

As of March 2021, the new Sustainable Finance Disclosure Regulation (SFDR) came into effect, requiring Financial Market Participants to disclose 18 mandatory indicators and another two of 46 optional indicators.

The Non-Financial Reporting Directive (NFRD) (a standard that lays down the disclosure rules for non-financial and diversity information by large companies) is also scheduled for an overhaul. An updated, strengthened version of the NFDR’s basic disclosure requirement, known as theNew Corporate Sustainability Reporting Directive(CSRD) is set to launch in 2022

With these EU regulations leading the charge, standards setters are beginning to succumb to the pressures from investors, regulators, and organizations eager to harmonize competing frameworks. In the last year, we’ve seen two big moves occur.

First, in June of 2021, the Sustainability Accounting Standards Board and International Integrated Reporting Council joined forces to form theValue Reporting Foundation. Their plan is to work with other standards groups like Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), and the Climate Disclosure Standards Board (CDSB) to get everyone on the same page.

Then, in November 2021, the International Financial Reporting Standards Foundation announced its plans to set up anInternational Sustainability StandardsBoard, which would deliver comprehensive global sustainability-related disclosure standards. The goal would be to provide investors and market stakeholders with information about sustainability-related risks to inform their decision making.

If this is any indication of the coming future of ESG reporting, two things are certain: standards are quickly changing and organizations will have to have their work cut out for them when it comes to data management and transforming that data into meaningful disclosures. Speaking of data …

Data management is going to be one of the biggest, if not the biggest, challenges companies will face when creatingESG disclosures. For example,the SFDR requirespublic EU companies to disclose nine mandatory environment-related indicators and six mandatory social indicators (covering employee, human rights, anti-corruption and anti-bribery topics.) These organizations must also report on at least one of 22 optional environmental indicators and one of 24 optional social indicators.

This is just the infancy ofESG regulationand it’s already mired in complexity.

To meet regulatory requirements or even just to adhere to voluntary frameworks, many organizations are starting to get their data ducks in a row. A study by global business consulting firm,Privotifound that 68% of financial executives surveyed said that measuring and reportingESG risksand issues has become part of their finance team’s role within the last year. Another 75% said senior leaders and boards are developingESG metricsfor progress tracking.

And yet, ESG reporting is already posing challenges to companies because sustainability is inherently hard to quantify. SinceESG datais often divided in siloes across the business or manually logged in spreadsheets, a global, integrated picture of ESG gains and impacts is hard to paint. In addition, the connection between ESG results and financial performance isn’t often well understood because businesses have no clear way to see how sustainable activities impacted the bottom line. Without a centralized source of financial and sustainability data, it’s impossible to draw a through line between ESG action and financial outcome.

Sustainability is so broad and covers so many facets — sustainable production, supply chain equity, responsible HR, data governance, governance, to name a few. But you don’t know what you don’t know.

Barbara Porco, director for the Center of Professional Accounting Practices at Fordham Business School,said it best: “All elements of ESG reporting are really based on proper risk management. You cannot manage your risk if you don't know what your risk is. It's the risks that you don't know about that will be the problem, and you cannot do that without a data-driven and tech-enabled risk management approach.”

ESG risks are especially challenging to monitor because many aren’t quantifiable. They can’t be defined in terms of dollars and cents. And in fact, the most impactful sustainability initiatives might in themselves pose a risk to an enterprise because they may negatively impact the bottom line in the short term. Sustainability can be expensive.

Deloitte reminds usthat, “ESG impact can be wide-ranging, for example: