Module 5 of the HSBC Sustainable Business Accelerator delved into the critical aspects of “ESG Data Validation, Assurance, and Communication.” The session underscored the significance of companies reporting on Environmental, Social, and Governance (ESG) factors, emphasizing the pivotal role of data validation, assurance, and communication in this process. Specifically, the module focused on elucidating the methods (validation and assurance) and platforms (communication) companies should employ when reporting and publishing their ESG data and information.
In today’s corporate landscape, where Environmental, Social, and Governance (ESG) considerations are integral to strategy, the validation, assurance, and communication of ESG data are pivotal. ESG reporting goes beyond compliance and risk; it’s a dynamic communication effort. Navigating this landscape involves more than data collection; it’s about resonant messaging. Regarding ESG and/or sustainability reporting, it’s essential to understand who the company is trying to communicate with, what they want to know, and how best to deliver that message. Understanding diverse stakeholders is critical, whether investors or consumers, requiring precision in conveying intentions, actions, and impacts. Sustainability commitments, achievements, and ambitions must be relayed with precision. Selecting the proper channels, tailoring the message, and ensuring transparency are as paramount as the data itself.
ESG Data Validation: Key Steps, Actions, and Internal Controls
Before communicating on ESG reporting, companies must validate the data and information to be shared. Good governance and internal controls are critical to a company’s ability to produce high-quality, accurate, and reliable information. The same level of rigor applied to measurement and reporting of financial information, should be used in ESG reporting. This precision will increase user confidence in the data and help drive decisions that create value for the business and stakeholders.
Companies looking to implement effective governance over reported ESG information need to roll up their sleeves: conduct materiality assessments to pinpoint crucial ESG topics, enlist board oversight for these material matters, seamlessly integrate ESG into the enterprise risk management (ERM) process, and let ESG weave into the overall company strategy. And the real game-changer? Implementing internal controls over ESG data collection, processing, and reporting processes that match the same rigor as their financial reporting counterparts. Indeed, a company’s ability to provide accurate and reliable ESG information to investors and other stakeholders, depends in large part, on the design and effectiveness of the company’s internal controls, which refers to the processes, policies, and procedures in place regarding measurement and reporting.
What is ESG Data Assurance and Why Is It Important?
ESG assurance is crucial to reporting and communicating data, ensuring disclosed information’s reliability, completeness, and accuracy. Assurance involves an independent third party evaluating an organization’s ESG disclosures and related information to instill stakeholder confidence, and guaranteeing data reliability through an expert, independent lens. Companies seek ESG assurance to meet legal mandates, improve internal processes, and meet stakeholder demands for reliable data. Legal and regulatory compliance, meeting stakeholder expectations, and internal management needs are driving forces behind the increasing demand for ESG assurance. For instance, the new EU Corporate Sustainability Reporting Directive mandates limited assurance for all relevant companies in their first year of reporting. Similarly, the proposed United States Securities and Exchange Commission (SEC) rule would require independent assurance of the company’s emissions disclosure, particularly Scope 1 and 2. Investors and other stakeholder groups, such as customers and suppliers, rely on high-quality non-financial information, influencing decisions like purchasing products. Internally, assurance aids management in making informed decisions based on reliable data. Beyond compliance, ESG assurance yields significant business benefits, improving market share, profitability, decision-making, innovation, and reputation.
Global demand for credible ESG information is rising, driven by regulatory pressures. While reporting frequency is high, assurance rates are still catching up. American and European companies lead in ESG assurance adoption, while Middle Eastern and Asian companies are lagging. According to a KPMG report, 41% of American companies include a formal assurance statement in their sustainability report. Challenges in ESG assurance preparation include high initial costs, lack of internal expertise, and insufficient digital tools. To overcome these challenges, companies should focus on enhancing data collection, reporting, and validation systems. Embarking on the ESG assurance journey involves improving internal processes and aligning with global standards such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). Successful companies align everyone with the mission, fostering a holistic approach to ESG assurance readiness, considering stakeholder expectations, data maturity, and corporate strategy alignment.
Powerful ESG Communication Strategy: Formats, Channels, Recommendations?
When developing an ESG communication strategy, companies should clarify the objective (why are you reporting), identify the audience (who are you reporting to), determine the content (what and how are you reporting), select appropriate channels (where are you reporting), and define the timeline, validation process, and responsibilities. The reporting format and channel choice should align with the audience’s preferences, whether they be data-driven investors or stakeholders seeking narratives and visuals. Whether through annual reports, stand-alone sustainability reports, corporate websites, or ESG data portals, the format and channel should align with the intended audience, ensuring a tailored and impactful approach. For companies beginning their ESG journey, targeted stand-alone sustainability reports suffice. Yet, the future trend leans toward integrated reports that combine financial and non-financial information. As ESG becomes intertwined with business processes, companies recognize the need for a more holistic reporting approach.
Companies should reduce the time between financial and ESG report publication, increasing the frequency of ESG reporting, even if only for internal purposes. A company’s ESG reporting cycle and frequency will significantly depend on its reporting objectives, maturity, data availability, and general resources. It often takes six months to a year to complete reporting cycles, from conducting the materiality assessment to publishing final reports. Companies tend to publish their sustainability reports between four and six months following the end of their fiscal year. However, shortening reporting timelines facilitates timely decision-making by stakeholders. While annual reporting is standard, adapting the frequency based on stakeholder demands enhances engagement and transparency.
In conclusion, effective ESG reporting and communication, is imperative in today’s business landscape. As stakeholders increasingly scrutinize non-financial information, companies prioritizing transparency, strategic communication, and reliable assurance will be better positioned to meet requirements and gain a competitive edge in a socially conscious world.
