There is growing interest among companies to start, or improve, ESG reporting...and we believe this is an excellent development.
Good ESG programs, policies, and reporting are quite idiosyncratic to each company...this is how strategic advantage is developed.
But two recommendations can be shared as being applicable to all companies: i. Be cautious in all unit conversions: ESG is a practice in measurement and unit conversions are one of the most common sources of error in reporting. ii. When in doubt, disclose: No company is penalized for disclosing more, but many are penalized for disclosing too little.
With the explosion of consumer and investor interest throughout 2021, it would seem many companies have resolved to make 2022 the year they start ESG reporting. We certainly are advocates for ESG reporting and warmly welcome this development. From our experience in this field, we would like to share two key recommendations.
Now, there is a lot more to good ESG reporting than simply following two key recommendations, but the fact is that ESG is truly idiosyncratic. What works for one company may not work for another, even if they are both in the same industry sector and geography. Blanket recommendations across all issues and applicable to all companies would be so void of detail and context as to be meaningless (perhaps helpful if we wanted to write a ‘listicle’, but certainly not helpful if you want to derive strategic advantage from your ESG program and reporting)
That being said, there are two recommendations that can be applied to just about every company:
Be cautious with unit conversions.
When in doubt, disclose.
(We have previously discussed who is actually reading ESG reports as well as the reasons why you should not shape your ESG programs and reporting to the interests of rating agencies. If you are new to ESG reporting, these may be helpful…but we wouldn’t call them recommendations!)
This one is quite straightforward. ESG reporting is an exercise in measurement, and all measurements require units. One of the most common sources of error in ESG reporting (and ESG ratings and scores) is unit conversions.
From water, emissions, paper, and waste to people, diversity, inclusion, and engagement, and on to safety, community, supply chains, and board composition, ESG is focused on measuring inputs, outputs, processes, and outcomes. Each of these latter can be reported in a variety of measurement units relating to each of these former.
Do you report the number of people injured while working or do you report the number of people-hours lost to injury? These are different units for the same underlying issue.
What about diversity--do you report cultural, racial, and gender diversity respectively, or is it all one ‘diversity’?
Lastly, are you measuring actual greenhouse gas emissions or are you modelling them based on energy inputs? If based on inputs, are you adding electrical consumption in kilowatt-hours to natural gas consumption measured in therms, MMBtu, cubic feet, cubic meters, or metric tonnes if liquified (even the U.S. EIA has had to put out clarification on some of these metrics), to vehicle fuels measured in US gallons, imperial gallons, or liters, and lastly to any other fuel sources such as pounds or gallons of propane?
That’s just considering a few issues that you could report on. As you can imagine, ESG reporting will invariably entail identifying, tracking, combining, converting, and communicating countless different units of measure.
Even once reported, the risk of unit conversions isn’t over. Investors, ESG rating agencies, and stakeholders typically want to synthesize the information you have reported with the information other companies have reported and all of this brings about even more unit conversions--and, particularly noteworthy, conversions you have no control over.
Every single unit conversion is an opportunity for error to be introduced to your reporting…and there are a lot of unit conversions to be done in ESG.
The tricks to minimizing conversion errors are, firstly, to double check every conversion you make, and secondly and most importantly, minimize the number of conversions that must be made. To accomplish this, determine what you want to report and who you want to report it for before you start collecting any metrics.
Determine who you are reporting for. Is it for a particular stakeholder? Perhaps a leading ESG rating agency? Or maybe an industry group? Whichever your key audience, determine which units they engage in and prepare to report directly in those same units. Doing so can eliminate an entire series of unit conversions.
Determine what you are reporting. Knowing what you want to report allows you to carefully identify what you need to measure. This allows you to create a unit-tree which distinctly maps the various input units to the final output units and every conversion factor along the way. Knowing which conversions must be performed helps reduce the risk of error, and knowing which conversions were supposed to be performed helps identify the source if an error occurs.
Countless hours are spent preparing ESG reports, countless more spent synthesizing, analyzing, and repackaging the information in these reports, and countless trillions of dollars are flowing based on resulting insights. It’s a bit disconcerting to know that a large share of errors in this field could be prevented with a simple calculator and a little more thought to unit conversions.
When just starting out in ESG reporting, there may be a fair bit of confusion over what you should disclose. Even if you are following a framework such as Value Reporting (formerly SASB), GRI, CDP, or some other, there are still plenty of opportunities to wonder if you should report on certain issues.
Perhaps you are of the mind that the issue is not material to your situation. Maybe you are wondering if you should wait until a particular campaign or program is complete before you report anything. Perhaps you are concerned the metrics you have to report are too inconsequential to warrant reporting. Or maybe you feel you haven’t done enough within this particular issue to justify reporting.
Whatever the case, more disclosure is better than less disclosure.
People seek ESG information and data because they want a better understanding of your company. The doubts you may have about materiality, timeliness, or applicability of any metric are not likely the same as those of your audience members.
In fact, we have seen ESG rating agencies downgrade a company because data was not available on an issue they considered to be material even though the company had the data but did not disclose it because they did not consider it to be material (this actually happens quite a bit).
We’ve also seen companies with amazing disclosures on a small selection of topics and no disclosures on other topics be viewed with skepticism by investors and stakeholders not because of what was disclosed but because of what wasn’t disclosed. Surely, the only reason a company with such great outcomes in these few issues would not disclose on these other issues is because they are hiding terrible outcomes…or so the thinking goes.
No company is penalized for disclosing more, but many are penalized for disclosing less. Transparency and disclosure is the bedrock of ESG reporting.
So, when in doubt, disclose. It may not all seem important or relevant to you, but you are not your intended audience. Over time, you can engage with your audience and the ESG data markets and refine what and how you disclose, but for now, the important thing is to disclose.
ESG reporting is a critical element of transparency, communication, and engagement. Your ESG profile can confer a strategic advantage, and in this, it is specific to you. By extension, how you report ESG information and data from which your profile arises can also be specific to you.
To all those companies starting out on their reporting journeys, and to all those seeking to make improvements to theirs already under-way, we urge you to consider the two key recommendations of caution in unit conversions and of increased disclosures we presented in this blog. These are such simple things that can make such a big difference.
Of course, we have plenty of other recommendations but these apply to specific industry sectors, market objectives, engagement strategies, or distinct companies. Caution in unit conversations and a direction toward increased disclosures are two recommendations that remain applicable across all companies and industry sectors.