There is a global paradigm shift from a one-dimensional view that targets just financial performance towards a more holistic approach that also incorporates non-financial performance. This shift is mainly driven by stakeholders, such as investors and customers, who are demanding more responsible operations through the revelation of companies' environmental, social, and governance (ESG) impacts.
Although it has been mainly voluntary, we must say that it is getting to the next level where it will be mandatory for all. Indeed, it is already happening. In Hong Kong, as an example, all listed companies are required to provide ESG reports that capture the current impacts and further anticipate future challenges. According to Hong Kong Stock Exchange (HKEX) the listed firms also have to provide clear strategies for addressing the challenges.
Thousands of kilometers from Hong Kong, the EU is also singing the same tune, and its approach is more radical. The EU is working on a new regulation referred to as Taxonomy that will help to define whether a business is sustainable or not.
It will overhaul the other laws and is expected to require all companies under the EU plus others that want to trade within the EU to comply. As you can see, the net is widening, and you better get ready for ESG sustainability reporting. So, are you ready? Here is a step-by-step ESG procedure that you can use.
ESG Procedure: A Brief about Sustainability Reporting Principles
Before looking at the different steps of ESG reporting, it is important to appreciate the underlying principles that inform the process.
- Accuracy: This is aimed at ensuring the information provided in the ESG report is correct and detailed for stakeholders.
- Balance: The focus of ESG reporting is not to simply highlight the positive end of a company’s operations. Instead, it should capture even the negative impacts. Do you know how to calculate carbon emissions?
- Clarity and comparability: One of the main reasons for preparing ESG reports is to help investors easily make the right decision about the company. Therefore, the information should be clear and comparable. The stakeholder, whether client or investor, should be able to compare the report with those of other firms to make the decision on whether to work with your firm or others (click here to know more about ESG report)..
- Timeliness and continuity: This means that your organization should generate the report on a regular basis to make it easy for stakeholders to read and see the sustainability progress. Furthermore, the report should form the basis for the next one in the next reporting session.
A Step-By-Step Guide to ESG Sustainability Procedure
When reporting on ESG sustainability, it is important to appreciate that although the process is similar to what others do, the content will be different. So, it is prudent to put more focus on details and data accuracy. So, let's dig into the main steps:
Step 1: The Highest Level of Company Governance Sanctions ESG Reporting
To put emphasis on ESG reporting, the entire responsibility is given to the board of the company under consideration. This is the trend all over the globe. For example, Hong Kong Stock Exchange (HKEX) requires the boards of listed companies to prepare ESG reports and publish them (check our article about ESG reporting in Hong-Kong).
This is because the board draws its mandate from shareholders and is responsible for the organization's key decisions. When delegating the duty to lower staff, such as the CEO, production manager, and product development teams, the board ensures sustainability is given enough focus. Enough resources are also allocated to the procedure.
Step 2: Situational Analysis and Stakeholder Engagement
ESG reporting is not simply about the final report that will be tabled for stakeholders to read. Rather, it is the process, but what will yield the final report? In the second step, you need to carry a comprehensive analysis of the company to identify key opportunities and risks for sustainability. Note that this cuts through all areas from production to consumption.
Another crucial thing at this stage is that you need to involve the stakeholders. This is important because they are the target for the final report. So, who is the target of the report you are making? Is it the investor, regulatory bodies, shareholders, customers, or employees? Even if you had thought of focusing on something different, shareholders' targets should come first.
Step 3: Materiality Analysis
Once you have carried a situational analysis and listened to stakeholders, you need to make another assessment referred to as materiality analysis.
The focus of this test is to determine the topics that are more important for the company. Although you might have picked several topics, they do not have equal importance.
Here is an example. Suppose you are a manager of a company that deals with fishing. In such a case, you might target running a program that will promote spawning of fish. This action will have a number of effects, such as restoration of natural habitat, increasing fish availability and supporting the entire food chain in and out of the sea.
Step 4: Develop a Strategy and Add Value
Once the topics of focus are developed, you need to go into the implementation phase. If you targeted cutting down emissions, reducing waste at source, or promoting habitat restoration, the selected strategy is what will make that happen. So, you need to have an ample budget for it and create structures for implementation.
A company that targets promoting the restoration of rainforest might want to identify groups in the target region and work with them. Others might be partnering with schools, development groups, and organizations committed to social justice.
Remember that no matter the preferred topic, you need to develop key performance indicators (KPIs) to be able to measure progress.
Step 5: Collect Data and Prepare the Report
Armed with the right strategy, you need to gather data that will be used to prepare the ESG report. Again, you need to determine whether it will be a standalone report or part of other company reports. Remember to make the report as accurate as possible so that stakeholders can easily get the details and say, “yes, this is the company I want to be associated with.”
As you can see, the process of ESG reporting is never easy. It can be pretty complex from the start to the end because it involves multiple parameters and stakeholders. So, is there a way to simplify the process? There are two things that you can do; work with a consultant and appropriate sustainability reporting software.
The software allows you to automate the process and collect the right data. Why struggle to prepare this so crucial report when you can use software to simplify the process?
Call Diginex for the best sustainability management software.