#3 What are the challenges in ESG reporting?

Broadly speaking, the objectives of ESG reporting are to demonstrate performance and build your reputation as an ‘ESG company’. What do we mean by ESG company? We alluded to this in our first article where we talked about how companies are now expected to be good stewards of natural and social capital in addition to being good stewards of financial capital.

Demonstrating performance is done by establishing a robust data collection process. Building your reputation is best done by taking the data you collect and presenting it through success stories. In this article we will first look at the challenges in data collection and in the next article we will look at the challenges in incorporating data into success stories.

The 4 main areas of concern that will have to be addressed are:

1. Knowing what needs to be collected
2. Knowing who needs to be involved in the process
3. Knowing where the data is in the business
4. Developing a robust, future-proof data collection process

Knowing what needs to be collected

The framework you chose for your report and the materiality matrix will tell you what data to collect however this isn’t always clear cut in practice because different metrics have different reporting boundaries. Reporting boundaries are the description of where an impact occurs which may result from your organization’s own activities or from your relationships with other entities. It is important that you take the time to understand the reporting boundary of a given issue. Let’s take the example of greenhouse gas emissions as that can be tricky in terms of reporting boundary. For example, office building energy use,
specifically energy consumption for heating and electricity can be Scope 1¹ or Scope 2² GHG emissions depending on whether the energy used is provided by your company or purchased from an external source. In the case of heating, you may have on-site combustion at your offices or other facilities, in which case the emissions from fuel use for heating would belong under Scope 1 emissions. If, however heating is provided by an external provider such as a district heating company then the emissions from the purchased heat would be reported under Scope 2.

Another important consideration to be aware of is that not all the data collected is directly what you will be reporting on. The above GHG emission example is one of the most common cases of this. Regardless of whether GHG emissions end up being Scope 1 or 2 in the previous example, in both cases you will collect activity data (fuel consumed or heat purchased) which you will then have to multiply with the appropriate emission factor.

Knowing who needs to be involved in the process

You may find that a lot of the data you have to collect for ESG reporting is actually available in your organization however, since a lot of these data are not yet part of any formal data collection process you will have to first identify the data managers within your organization. Start by interviewing those data managers who you know will have some of the data required for your ESG report. When discussing what data you will need for ESG reporting, always make sure to give an overview of your data needs as administrative staff might be aware of other relevant data owners and can help you discover other data managers. This interviewing step is especially important if your organization has many facilities, buildings, manufacturing processes. The more complex your organization, the more data managers you will have to involve in your reporting process.

Knowing where the data is in the business

Once you know who all the data managers are in your organization, it is important to map the business processes from which they collect the data. For some data points, like Social data from HR, the location of the data will be obvious, however it is worth noting the location of all data sources to ensure continuity. Some examples of data sources in terms of business processes:

• Flight and taxi data from tour operator and taxi service provider
• Material data from suppliers (if your company manufactures goods)
• Electricity bills from all business units, facilities
• Emissions from on-site combustion (used for heating or from heat generated for manufacturing processes)

It is important to note all these sources because you want to ensure that personnel changes don’t affect the continuity of your reporting. In our experience, problems with continuity due to personnel changes in ESG reporting are a recurring problem for companies because this step was not done when the first report was compiled and once the data manager who knows all the relevant data sources for a given ESG issue leaves, reporting for that issue comes to a halt.

How do you develop a robust, lasting process?

Although time consuming, it is worth documenting the following for each indicator you report on:

• Is the data source internal or from some relationship with an entity?
• Is the data in a single location or do you need to aggregate it from multiple business units?
  • If so what are these business units?
• Is this data activity data that needs to be used in estimation?
  • If so, what other data such as emission factors are you using in the estimate?
• Who is the current data owner?

By maintaining a living document of how each indicator is reported on, you can ensure the continuity of your reporting process. This is a seemingly obvious step that is often ignored by beginning reporters because its value will only be apparent in a year’s time when you have to do your reporting exercise again. When preparing your first report, always try to keep in my mind that this will be an annually recurring process from now on.

Want to know more? Read the rest of our article series:

• #1 What is ESG?
• #2 Where do you start with ESG reporting?
• #3 What are the challenges in ESG reporting?
• #4 Integrating ESG into your company’s value creation narrative
• #5 Materiality Matters