5 top ESG reporting challenges and how to overcome them
Organizations face various challenges in reporting on their environmental, social and governance initiatives. Here are five critical ones ESG teams should know about.
Reporting on environmental, social and governance initiatives is an essential but often misunderstood component of contemporary corporate strategy. As stakeholders such as investors, customers, regulators and employees increasingly prioritize sustainability and corporate social responsibility, companies must disclose their ESG performance in a transparent way.
Typically, this shift toward greater accountability isn't accomplished suddenly. Rather, there's slow progress by degrees as companies learn to balance meeting compliance requirements with building trust and demonstrating a commitment to sustainable, socially responsible and ethical business practices.
The importance of ESG reporting lies in its ability to provide a comprehensive view of an organization's impact on the environment and society and its internal governance policies. Effective reporting influences strategic and tactical decision-making and, from the point of view of customers and investors, helps foster long-term brand value.
Reporting covers a wide range of issues across the three main categories of ESG programs:
- Environmental factors, among them climate change, carbon emissions, energy efficiency, waste management and biodiversity protection.
- Social aspects, such as diversity, equity and inclusion; labor practices; employee health and safety; human rights in the supply chain; and community relations.
- Governance matters, including board structure and diversity, executive compensation, business ethics, transparency and risk management.
Despite a growing body of best practices, many organizations encounter substantial challenges in their ESG reporting efforts. This article identifies the most critical ESG reporting challenges and provides practical advice on addressing them. They're listed not in order of importance, but by the workflow of ESG reporting, from data collection and then analysis to communication of ESG progress and risks to stakeholders. This structure aims to ensure that readers gain a comprehensive understanding of the ESG reporting process and how to overcome its biggest challenges.
1. Data collection and data quality management
The first challenge in ESG reporting is collecting ample and accurate data from multiple sources. ESG data often comes from disparate systems in different departments and from external partners, resulting in a disorderly data aggregation process that can undermine the reliability of ESG reports. You might also find, especially when tracking things such as labor practices, ethics or diversity, that ESG data can be susceptible to bias or misinterpretation. Avoiding those issues requires special care in data collection processes and subsequent data analysis.
In addition, data quality and consistency are the foundation of good ESG reporting. Organizations should implement strong data management systems, tools and programs to address this challenge, just as they do for mission-critical business data. Given the diversity of source systems involved, platforms such as cloud data warehouses or data lakes might be needed to centralize ESG data.
Automated data collection tools and real-time data integration technologies can improve efficiency and accuracy, especially for sensor-generated environmental data. Increasingly, AI and natural language processing can assist in extracting information and data from documents, such as emails and internal reports that contain important information for reporting on social impact and corporate governance.
Maintaining data integrity through regular audits and validation processes is also a must. To help with that, organizations should establish clear data governance policies and assign virtual teams to oversee ESG data collection and management. Don't treat ESG data as second-class in your data management and governance efforts. It's critical business information in its own right.
2. Lack of standardization in ESG reporting frameworks
The lack of a standardized set of reporting frameworks also holds back ESG reporting in many organizations. There are various ESG frameworks and standards that have different priorities, guidelines and metrics. Some examples include the GRI Standards developed by the Global Reporting Initiative, the SASB Standards and the reporting platforms operated by the Workforce Disclosure Initiative and CDP, originally known as the Carbon Disclosure Project.
Some of these standards also might be overengineered for corporate needs, leading to confusion and inconsistencies as organizations struggle to align their internal reporting processes with the standards.
Efforts are underway to harmonize the ESG reporting landscape -- in particular, through the International Sustainability Standards Board (ISSB). In mid-2023, it issued a pair of disclosure standards that build on the SASB ones, which were initially developed by the now-defunct Sustainability Accounting Standards Board but have been overseen by the ISSB since 2022. The new standards also incorporate elements of other reporting frameworks and recommendations.
In addition, the ISSB is working with CDP, GRI and other groups to align different standards and platforms. For now, though, there isn't one generally accepted reporting framework, which also makes it difficult to benchmark ESG performance across industries, geographies and market segments.
To overcome this challenge, organizations should decide which reporting frameworks align best with their long-term goals. ESG priorities, such as alignment with best practices in your industry or with the values of your customer base, will influence such decisions. Adopt the most recognized ESG reporting standards for your strategy, and strive for consistency in your reporting processes.
It may be possible to streamline reporting efforts by choosing a combination of well-established frameworks. However, be cautious about clarity -- trust and transparency should always be critical values. Aim for comprehensive reporting, but accept the limitations of current frameworks. Be open about areas where your reporting might be incomplete or still evolving.
Training staff on these standards is essential to ensure everyone involved in the ESG reporting process understands the requirements and methodologies. You should also monitor the ongoing developments in ESG reporting standards and be prepared to adapt as new guidelines emerge.
3. Regulatory compliance policies and reporting for ESG programs
The ESG regulatory landscape is also complex and evolving. In a phased process starting in 2025, the EU's Corporate Sustainability Reporting Directive (CSRD) will require some 50,000 companies, based both in Europe and elsewhere, to file annual reports on financial risks and business opportunities related to environmental and social issues. CSRD reporting will also need to detail the impact that business operations have on people and the environment. In early 2024, the U.S. Securities and Exchange Commission also adopted new rules mandating climate risk disclosures by publicly traded companies, although it put them on hold because of pending legal challenges.
As a result, regulatory compliance can feel like a moving target. You might find that, with simple good business practices, you already comply with some ESG regulations. For example, perhaps your products are built to the latest environmental standards, or you already have a diverse workforce or an ethical supply chain. That's good, but compliance isn't just a checklist -- ongoing adherence requires the right policies and effective reporting. Failure can result in legal penalties, financial losses and reputational damage, so these policies must be a business priority.
What's needed is a proactive compliance strategy. Regular training for staff involved in ESG reporting should keep everyone informed about new regulations and compliance procedures. Many regulations require audits of your ESG processes -- you can prepare for this by ensuring your organization is always audit-ready rather than scrambling to make changes or explain exceptions at the last moment.
Some organizations turn to specialized software tools to support proactive regulatory compliance and reporting. Ethics and compliance management software, for example, can help maintain ethics programs, manage incident reporting and facilitate policy distribution. Similarly, dedicated ESG and sustainability management software platforms are becoming increasingly valuable. They can automate data collection, centralize data management, track ESG performance against key metrics and generate standardized reports, among other features.
Some companies also adapt existing quality management platforms for ESG purposes. Initially designed for QA, such systems implement frameworks for process management, document control and continuous improvement. Repurposing this existing software infrastructure to manage ESG-related processes, track performance and ensure compliance can be effective and help meet reporting requirements.
4. Integrating ESG initiatives and reporting with business strategy
ESG needs to be strategic. Integrating ESG efforts with business strategy ensures that sustainability initiatives aren't just peripheral activities, but core components of a company's operations. This integration transforms ESG from a compliance exercise into a driver of innovation, successful risk management and business value creation.
However, many organizations struggle to align their ESG goals with broader business objectives. It's rare to see perfect alignment between short-term financial goals and long-term ESG objectives, which can make progress difficult -- so can resistance to change or cultural opposition to some ESG commitments. Moreover, the lack of clear, quantifiable ESG metrics can lead to vague reporting that makes it challenging to prioritize initiatives and measure progress effectively.
Instead of forcing ESG considerations into existing operational structures, aim to naturally embed them into the organization's strategic planning process. This involves setting clear, measurable ESG goals that directly support the company's mission and business objectives. For example, a manufacturing company might set goals to reduce energy consumption, aligning with both environmental sustainability and straightforward cost reduction objectives.
You could also develop integrated performance metrics that combine ESG factors with traditional financial indicators. This could include creating a balanced scorecard that incorporates sustainability metrics alongside financial, customer and operational measures. The goals and integrated metrics then must be incorporated into the ESG reporting process for both internal and external stakeholders.
5. Communication and stakeholder engagement
Communicating ESG progress to diverse stakeholders is a significant challenge for many organizations. Investors, customers, employees, regulatory bodies and local communities have varying expectations and require different types of information. The complexity increases when dealing with qualitative aspects of ESG, which are often harder to measure and communicate. Yet, failing to meet these expectations as part of the reporting process can lead to a lack of trust, reduced support for the company's ESG initiatives and potential damage to its reputation.
Organizations should develop a comprehensive, multichannel communication strategy to address these challenges and effectively engage stakeholders. Prioritize transparency, authenticity and consistency in your ESG disclosures, avoiding half-truths that could damage trust and credibility in the long run. Tailor messages to stakeholders through various channels, including annual reports, websites, social media and stakeholder meetings. Be honest about achievements and areas that need improvement, providing context for ESG data and explaining methodologies clearly.
For larger organizations, especially public companies and government bodies, two-way dialogue helps to build trust. This can include surveys, focus groups and open forums that allow stakeholders to voice opinions and concerns. You can then demonstrate in reports how this feedback influences your organization's ESG strategies and decisions.
Effective communication goes beyond just sharing data. Storytelling and data visualization techniques make ESG information more accessible and impactful. Case studies and personal testimonials can help bring ESG initiatives to life. My earlier advice on aligning with recognized reporting frameworks and utilizing technology for enhanced reporting can improve the clarity and credibility of ESG disclosures.
Demonstrating commitment through ESG reporting
Effective ESG reporting demonstrates an evident commitment to sustainability, ethical practices and responsible governance. The challenges described here are both technical and cultural but not insurmountable. The key in all cases is to be proactive, transparent and authentic in your ESG strategy and how you report on it. ESG reporting is a long game. The benefits -- trust, improved brand reputation and long-term value -- are well worth the sustained effort that's required.
Donald Farmer is principal of TreeHive Strategy and advises software vendors, enterprises and investors on data and advanced analytics strategies. He has worked on some of the leading data technologies in the market and previously led design and innovation teams at Microsoft and Qlik.
