Practical Tips for ESG Reports

At a Glance

• Companies are increasingly choosing to disclose environmental, social and governance (ESG) information in voluntary reports.
• With increased scrutiny towards ESG efforts and reporting, a rigorous process for accuracy is important.

More and more companies are voluntarily publishing reports to provide information about their operations and performance that goes beyond what is traditionally provided or required in financial statements and annual reports, namely environmental, social and governance (ESG) matters. There is no one-size-fits all to these reports; they vary from company to company in length, range of disclosures, and level of detail. They go by different names — ESG Report, Sustainability Report, Corporate Social Responsibility Report, Impact Report, to name a few — but the trend is clear: companies are responding to demand from investors and other stakeholders to supply meaningful information regarding ESG initiatives and performance. This trend is not without its complications, however, as ESG has become a hot button topic of discussion across the political spectrum, as well as an area of heightened scrutiny from regulators. With this spotlight on ESG, it is important for companies to adopt a thoughtful approach to navigating this area and related disclosures. Regardless of whether your company is considering publishing its first ESG report or has been doing this for years, here is a list of considerations when preparing your report:

1. Specify the period covered. Be clear about the period covered by the report, which might, for example, be the most recently completed fiscal year. Further, particularly to communicate the date as of which the information is accurate, it is helpful to indicate the date the report is published. Additionally, over time, develop a regular cadence for the timing of publishing the report. Although there is no “deadline” for voluntary reports, developing a reporting timeline can improve the preparation process and would also be responsive to investors. For example, BlackRock has publicly indicated that it prefers robust disclosure in advance of a company’s annual meeting.
2. Include appropriate cautionary language. Reports are likely to include forward-looking statements and other information that is not standard and could change. Provide appropriate explanatory context for the information included in the report and consider enhancing disclaimers regarding forward-looking statements and potential limitations to data quality.
3. Identify your third-party reporting frameworks. If reporting against one or more third-party disclosure frameworks — such as SASB, GRI, TCFD, UN SDGs — be clear about what reporting framework(s) you use and adhere to the terms of use requirements for the chosen framework (for example, GRI requires companies to provide it with notice). Also indicate which version of the framework or standards was used. Use of a framework is voluntary, but many investors and other stakeholders have grown accustomed to and expressed preferences for frameworks.
4. Provide informative quantitative data. To the extent you have established goals, provide context and sufficient details for clarity about those goals, and consider describing plans for achieving those goals and progress to date. Carefully address challenges and expectations, while avoiding overly broad statements or pithy catchphrases without context. Aspirational goals should be clearly identified as such, but also grounded in a realistic intention to take steps (and to describe the steps to be taken) to reach those goals. For comparability, provide multiple years of data if possible.
5. Formalize and systematize report preparation, review and publication process. These reports have advanced well beyond being just a “nice to have” marketing tool. Particularly as reports become a regular expectation and attract scrutiny, a rigorous process to ensure that the reported information and data is accurate and reliable becomes key. Develop a calendar and process checklist, document and follow internal controls and systems, and prepare and retain supporting work papers to ensure that data is verified and can be substantiated.
6. Highlight board oversight of ESG. Discuss the governance systems and processes in place regarding ESG, including the board’s role in oversight of material risks and opportunities and related strategy, as well as any specific committees or initiatives established in this regard. In light of investor interest, consider disclosing the type and frequency of information reviewed by the board and/or relevant committee. Corporate governance structures and board oversight of risk are required disclosure items in public companies’ proxy statements, so this will be an area to ensure consistency.
7. Refresh and re-think “materiality.” Continue to refresh the company’s materiality analysis in light of ESG developments, including materiality of risks and how ESG-related risks are incorporated into the company’s overall risk management process. It’s useful to have a clear internal approach for determining and disclosing ESG priorities. Even though many third-party frameworks refer to ESG disclosure items as “material” and encourage “materiality assessments” and “materiality mapping,” if you plan to disclose information in your ESG report that you deem not to be material under the securities laws, consider using different terminology (both internally and in public facing materials) to describe the importance of ESG information and why it’s disclosed in the report.
8. Ensure consistency. Make sure that statements in the report align with, and don’t contradict, confuse, or create ambiguity when read together with, other public disclosures, such as those in annual reports, proxy statements, corporate websites and submissions to third parties (including regulators). In particular, investors will look to see whether the company’s lobbying activities and policy positions are consistent with the information in these reports.
9. Involve legal counsel. Consistent with a rigorous disclosure process, involve your legal counsel in the preparation and review of the report. They can assist with items such as benchmarking peer companies’ disclosure, identifying potentially ambiguous or inconsistent statements, and addressing overlaps with Securities and Exchange Commission (SEC) reporting considerations.

In addition to the considerations provided above, be prepared for recent and upcoming changes from various regulatory entities. The SEC is in the process of preparing new climate-related disclosure rules that would require companies to report on, among other things, greenhouse gas emissions and environmental impact, and is also planning to release proposed rules requiring enhanced human capital management disclosure, all before the end of this year. Additionally, the Federal Trade Commission is currently reviewing its Green Guides, which are anticipated to be revised to include more robust content regarding misleading consumers (and therefore more potential pitfalls for non-compliance). And for companies that operate in Europe, the Corporate Sustainability Reporting Directive will soon impact ESG reporting requirements, with the Corporate Sustainability Due Diligence Directive, which will impose new diligence obligations in relation to a company’s own operations and those of its supply chain, following close behind. As such, the time, consideration and resources invested into your ESG report now may serve you well as new rules are implemented.