Environmental, Social, and Governance (ESG) compliance is how companies align their operations with ethical and sustainability ideals. It includes actions a company might take to reduce its carbon footprint, ensure decent working conditions in its supply chain, and maintain a transparent governance structure.
But it is not just about companies taking action on ESG topics; it is important that companies report on these actions. The emergence in recent years of voluntary frameworks and standards, such as the International Financial Reporting Standards (IFRS) and the Global Reporting Initiative (GRI), aims in part to make it easy for organizations to communicate on ESG performance, as well as provide guidance.
Fast forward to 2024, and the ESG landscape has become ever more complex with the introduction of a new framework: the Corporate Sustainability Reporting Directive (CSRD). The CSRD is a new European regulation that requires a much broader range of European companies to report on ESG. As a result, lots of companies are being introduced to ESG reporting for the first time and probably wondering, "What's in it for me?"
An ever-changing landscape of new standards and regulations makes it difficult for even sustainability professionals to stay up to date, with companies having to dedicate an increasing amount of human resources to ESG compliance.
Then there is the reporting aspect, which is often perceived as burdensome and time-consuming. Standards and frameworks use sustainability jargon that might not be easily understood by everyone in an organization, and information requests might seem daunting and overly detailed.
A recent Edie survey found that spending on reporting alone exceeds spending on sustainability innovation by 43% (link).
Reporting is made even more difficult when not everyone in the organization is on board with it to begin with. Indeed, ESG is frequently seen as a ‘sustainability team issue’, and senior management involvement is rare. This is problematic because ESG is inherently cross-functional and of strategic importance.
Maybe the conversation below rings a few bells if you work in sustainability, or have been involved with ESG:
Sustainability person: Hi, we're doing our annual ESG reporting. I’m sending you this Excel sheet with 100 lines, which I need you to fill in by tomorrow at the latest.
Head of department (after taking a deep breath and looking at the file): Okay, some of this information we already report on, so I can get that to you. But there’s a lot here that’s new to us and I’m not sure if all of it is relevant.
Sustainability person: This information is required as per our reporting framework, which we have committed to publicly. We shared a CEO statement on LinkedIn last month. I’ve included the link to the article.
Head of department opens the article and mouths, "We are happy to announce that we are fully aligned with UNGC, GRI, and IFRS."
Head of department: These are just letters to me. And it still doesn’t answer my question.
Sustainability person: I don’t understand the question.
Head of department: You’re asking me to report on all these different areas, across all kinds of indicators. Some of these things we do. But the rest... I don’t see how it’s relevant. And frankly, the language is quite confusing.
Sustainability person: These are UNGC, IFRS, and GRI guidelines. Everyone else is reporting on it so we must report too.
Head of department: Look, it’s not that I don’t care about these topics but I have a lot going on at the moment. What are you going to do with this information anyway?
Sustainability person: We’ll include it in the appendix of our annual sustainability report in a table that no one will read.
Head of department: Right. Why don’t I put you in contact with our intern? He’s just started, and it seems like the kind of thing that might be good for him to do, you know, to get acquainted with the company. I’ll get him to contact you.
It is likely that conversations like this are happening in offices everywhere when the topic of ESG is brought up. It shows us how easy it is for those outside the ‘sustainability bubble’ to deprioritize ESG reporting when the case for it is not clear. In other words, when ESG is not clearly linked to an organization’s strategy.
Being able to explain how ESG is strategically relevant to an organization is key for any sustainability person in an organization looking to drive meaningful action.
Creating a sustainability narrative is the first step in making ESG data meaningful and strategic. A sustainability narrative should answer critical questions about the organization’s vision and mission regarding sustainability, the pathways through which the organization works towards its mission and vision, and the programs it needs to put in place.
For example, take company A. Company A makes chocolate bars and has the vision to to sell the first slave-free chocolate bar in the world. To achieve this, a company will want to ensure that its supply chain is entirely free of forced labor. To achieve this strategic objective, the company will need to implement specific programs, such as conducting regular supplier audits and investing in training programs for suppliers.
A sustainability narrative should answer the following questions:
What is the organization’s sustainability vision and mission?
What are the pathways (strategic objectives) through which the organization can achieve its vision?
What inputs (programs) are to be put into place to achieve the strategic objectives?
A sustainability narrative is a condensed, more engaging way to communicate to your employees, and potentially to an external audience, the sustainability impact your organization wants to achieve.
The second step of the process is to define underlying key performance indicators (KPIs) that track and report progress against strategic objectives. This is where existing standards and frameworks come in. The KPIs selected should be aligned with both regulatory requirements, such as CSRD, and internationally recognized frameworks, such as IFRS and GRI, amongst others. It is also likely that a company will have to come up with company-specific indicators and complement its narrative with industry-specific frameworks and standards, if applicable.
By implementing these steps, and clearly linking ESG to strategy, it is much more likely that people throughout the organization will understand and relate to the whole reporting process.
By hosting and moderating a sustainability narrative workshop. This workshop would bring together various teams within your organization, including the operational team, sustainability team, and senior management, to brainstorm and collaborate on the key questions outlined above. It’s a tried-and-tested approach that allows all parties to feel heard.
The outcome of this workshop is a tailored sustainability narrative that tells the story of your company’s sustainability efforts and the impact it strives to achieve. This narrative is then supported by underlying KPIs that can substantiate and measure success, which are aligned with reporting regulatory requirements and international frameworks. Ensuring that ESG reporting efforts are directly linked to strategy.
Transforming compliance into a strategic exercise is often an overlooked step, but it is an important one. In order to make ESG compliance a strategic exercise, reporting frameworks and standard requirements need to be clearly linked to your organization’s sustainability narrative and strategy.
Ultimately, an ESG compliance exercise should also be an exercise in answering the question: How are you working towards your sustainability vision and mission?
Beatriz has 6+ years of experience in consulting, with a focus on sustainability strategy development, ESG/impact monitoring and reporting, and corporate communications.
With such experience, she has a comprehensive understanding of what it takes for an organization to successfully integrate sustainability into its strategy and operations. She also has a keen eye for corporate communication that works for an internal/ external audience.