Although there is ongoing debate regarding many aspects of sustainability (including what should be prioritised, measured and achieved, and by whom), ESG is set to stay as the key framework for the orientation of business towards sustainability goals. Recently there have been as strong arguments made for splitting the E, S and G of ESG as there have been to highlight that they are inextricably linked.

In the author’s view, the challenge lies not in the concept of ESG, but rather the attempt to somehow distil an organisation’s performance on ESG to an overly simplified single number or rating. An idealist might say this is to drive behaviours – of people, organisations and governments; while a cynic would say that it’s just to extend the social ‘licence to operate’ and clear the path to sell more stuff (investments, products and services). 

The modern history of sustainability arguably began with the 1987 Brundtland Report and, similarly, ESG isn’t a new concept. The term first appeared in the sustainable investing space – specifically, the 2006 United Nations Principles for Responsible Investing Report. It was conceived as a mechanism to be used alongside traditional financial assessment of companies, which goes far beyond conventional Corporate Social Responsibility (CSR) programmes. Subsequent developments, including the adoption of the 17 SDGs (Sustainable Development Goals) by world leaders in September 2015, the publication of the FSB’s TCFD recommendations in 2017, and ongoing work around the TNFD framework have strengthened and provided a degree of structure to ESG measurement. ESG metrics are intended to reflect the aspects of an organisation’s operations that go beyond short-term financial returns. 

Now mainstream, ESG factors are reflected in various ways – governments enacting regulations to drive organisational (and consumer) behaviours; consumers strongly indicating a preference to engage with sustainable organisations; and financial institutions in their investment strategies. Adopting ESG measurement is not only becoming a requirement but - done well - is also a way for organisations to redefine their engagement with stakeholders and address issues that go beyond short-term financial gains – moving from shareholder returns to stakeholder returns.

But engaging with ESG can be confusing. Rating agencies use hundreds of data points and analytics to create ESG scores; the UN has 17 SDGs – measured through 169 targets using 232 indicators; the Standards Map App tracks over 300 different VSS (Voluntary Sustainability Standards); and of course, there are organisational certification and reporting standards like ISO, EcoVadis, BCorp and the UN Global Compact. While we’re at it, let’s throw in a few more terms like the Green Taxonomy; CSRD; Scopes 1, 2 and 3; NetZero; Carbon Neutral; TCFD; TNFD; Linear Economy; Circular Economy; Systemic Thinking; Planetary Boundaries…the list really does go on. 

It is so very easy to get lost. Overwhelmed. Frozen into inaction.

So, let’s take a step back and think about this in practical terms.

The challenge, distilled

Fundamentally, all the measures, metrics, certifications and standards are trying to achieve two things:

• provide a framework to help organisations align their ‘sustainability’ agendas with broadly accepted and defined standards; and
• provide a basis for the organisations and others to compare, contrast, assess and rate organisations, both against each other and over time, in a fair and consistent manner.

At a very high level, measuring and reporting fall into two categories:

• mandatory; and
• voluntary.

Mandatory standards

Mandatory reporting requirements are simply those driven by law (whether primary legislation or regulations with legal force). Whether they apply or not will depend on a variety of factors including (but by no means limited to) the line of business, the geographies in which the organisation operates, the size of the organisation and indeed the entire value-chain (raw material through to final consumption and disposal). Three of the biggest challenges we see in organisations grappling with the challenges of mandatory reporting are:

• keeping up with the rapidly evolving reporting and compliance environment;
• sourcing the data to comply effectively; and
• identifying who within the business should take responsibility for the compliance and equipping them to do that job.

Voluntary standards

Voluntary reporting standards pose different challenges, not least of which is determining which of them an organisation chooses to apply. It’s only after that the challenges of data sourcing and who will take ownership for the reporting emerge (or at least should emerge).

So how do you decide what VSS you should pick and report on? How do you even decide if you should at all?

While it’s all too easy to get lost in the plethora of available metrics on which to report, it would make sense to take a step back and ask oneself the question – “why?”. 

Such an easy question, but one that we don’t ask ourselves often enough.

Why do it?

In our experience, the reasons that organisations choose certain reporting standards usually include some combination of:

• Getting ahead of the curve
  It’s easier to see mandatory standards emerging (the legislative process is long and relatively public in most countries). Taking this further, voluntary standards sometimes evolve into mandatory standards (e.g. TCFD disclosures in the UK and beyond). There are advantages to engaging with standards while they are still being defined and/or gaining traction (and you have time to work out what’s needed for them), instead of waiting and having less time in which to demonstrate compliance. The latter option may work out costing more and leading to poorer business outcomes (eg failure to identify opportunities to cut material waste and therefore save costs).
• Managing risk
  Similar to the point above, we see organisations choosing to adopt expected standards sooner than necessary as this gives them an opportunity to review the information and adapt their operations as needed so they are fully compliant by the time the standard comes into force.
• Investor requirements
  A common driver for choosing certain reporting or disclosure standards is because investors – direct and indirect – require these. The investors are, in turn, expected to make sense of and report on this information to their investors and stakeholders.
• External validation of responsible management
  Some organisations already operate very responsibly and have some great sustainability programmes – but in a world awash with both green and purpose washing, it is easy for organisational messages to be dismissed or glossed over as just so much marketing hype. An independent review and certification using published information can provide comfort – both internally and for other stakeholders.
• Organisational commitments
  Again, similar to the point above– adopting a recognised reporting standard can help the organisation track how it’s fulfilling its commitments and also deliver this message in an unbiased manner to the market. This is particularly relevant in an environment in which businesses and their leaders are increasingly expected to be on-message in relation to environmental and social considerations.
• Adopting best practice(s)
  It’s no secret that for the most part regulations lag societal sentiment and market expectations. Voluntary standards and related organisations can be a great way for organisations to identify and adopt best practices. Indeed, in some instances, adopting the standards would be part of the requirement to access and share knowledge with other likeminded organisations.

So what do you do now?

Far too often, we see organisations focussing on VSS reporting before they have a good grip on mandatory reporting. Therefore, a simple three-step suggestion:

• Get to grips with current and emerging mandatory reporting
  Start with understanding and complying with mandatory reporting – both as it currently exists and as we can foresee it evolving. This is no small task for a large organisation, but helps mitigate risks, avoid fines and also often helps identify potential areas of improvement in an organisation’s operations when the information is analysed from the perspective of doing more than just ‘complying’.
• Find the ‘right’ voluntary standard(s)
  Investigate the “why”, and the “what” will follow.  
  There may be more than one suitable standard and equally there may be a need for more than one standard to be adopted to fulfil your objectives. Planning this carefully can help create opportunities to minimise the incremental effort involved in implementing adoption.
• Establish processes and keep improving
  ESG reporting should be a route map – not a destination. Once you’ve established the reporting standards in line with your strategic intent, set up the processes to collect and analyse the data so you can continuously improve.

Sustainability is a team sport – no one person in an organisation can make it happen. The legal team has a critical role in the journey, particularly as new standards and obligations are established. The involvement covers myriad perspectives in the journey to achieving and exceeding compliance requirements – whether this be achieving and demonstrating compliance; supporting and building synergies between organisational teams in their programmes; responding to stakeholder demands; or indeed protecting the organisation from inevitable criticisms whether these are justified or not. We will talk about the role of the legal team and the journey to ‘beyond compliance’, in greater detail in future articles in this series.

To close – ESG reporting is just a tool, but a tool that used well can help align, track, measure and help organisations become more sustainable. The space can feel overwhelming at times but doing nothing isn’t an option. If you don’t already have a plan – make one, if you have one – that’s a great start, but not the end of the journey.

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