Can your organization address mounting investor scrutiny over ESG disclosures?

This blog is part of our ongoing SOC Insight series. Each piece focuses on a different area of trust and transparency and aims to answer the questions that are important to your business. Read more to learn how controls reporting best practices can improve ESG disclosures. 

Companies across sectors are facing pressure to provide robust environmental, social and governance (ESG) disclosures. This sea change is due in large part to increased investor demand. In fact, investors find that ESG information is closely correlated with a company’s risk profile, which strongly influences investment process decisions. For example, investors might want transparency into a company’s environmental policies as they could influence customers’ purchasing decisions, or they might request metrics and data around an organization’s health and safety processes, which could also indicate potential risks.  

However, most companies struggle to provide the right information to investors and other stakeholders because—while disclosure standards exist—market practice is not consistent and is constantly evolving. 

So how should ESG reporting be handled? As companies look ahead, they can draw from best practices in other critical reporting areas, such as controls reporting. Indeed, these reporting standards can serve as a blueprint for how organizations can provide assurance over ESG disclosures and strengthen relationships with current and prospective investors by providing transparency into intangible assets. 

Providing stakeholder assurance with ESG reporting 

To adapt to the increased demand for ESG disclosures, organizations should evolve their reporting and underlying controls and processes to include metrics, insights and policies that directly address investor concerns.  There are five steps companies can take to strengthen their ability to meet stakeholder expectations.

1. Construct a strategic framework: Create a narrative around the ESG topics that are most critical to the organization. Doing so will help identify the key metrics by which to measure progress. For example, if improved diversity is an objective, an organization might use benchmarking or expanded employee surveys to measure improvement or increased retention rates. 
2. Optimize processes: Companies are developing the capability to manage ESG performance regularly and to quickly respond to a wide range of stakeholder requests such as the UN Principles for Responsible Investment (UNPRI) signatory details, policies that incorporate ESG issues and investor surveys. To create a data collection, consolidation and disclosure process that aligns with those needs, organizations are proactively assessing investor and customer requests to develop standardized responses supported by augmented processes. For example, is there a way to accelerate how the company collects and validates data that it shares with stakeholders? 
3. Identify risk and controls: ESG disclosures are frequently supported by immature processes and involve a high degree of judgment, increasing the risk of error. To combat this, companies are establishing formal information governance for ESG, routing disclosures through a disclosure committee and increasingly seeking third party assurance to build trust with stakeholders. For example, an asset management company might work with a third party to design a new attestation report focused on ESG process narratives for their institutional clients. 
4. Build a digital platform: Many ESG disclosures are presented in long, static PDFs along with a collection of supporting documents, such as emails and spreadsheets. To reduce inefficient paper recordkeeping, leaders are investing in microsites for a more streamlined experience and to shorten the length of annual reports. Companies can work with their IT departments to outline technology requirements, helping guide the construction of a digital platform where all data and reporting can reside. The result is a system with a robust foundation (centralized data and governance) that can accelerate performance (dashboards, analytic tools and integration of technology platforms) and use advanced analytics capabilities to provide insight into key sustainability metrics such as climate risk or board diversity. 
5. Get the right governance in place: A robust governance framework can help organizations clearly and accurately describe their reporting and control environment to investors. Does the company have the right governance model in place to support these efforts? Does it have organizational policies, internal and external reporting, and KPIs to run the business and processes for engaging key stakeholders? Companies can also align ESG disclosure processes with existing financial reporting processes to leverage investment and set the right tone. For example, many companies now have their disclosure committee and board review reports before publication.

As companies become more attuned to investor needs and interests around ESG reporting, they will become more efficient at providing the right metrics and data around their intangible assets, providing trust and transparency to stakeholders.