Christopher Allen

Director, Product Marketing

ESG reporting explained: Definition, examples, & software solutions

Meaningful environmental, social and corporate governance (ESG) reporting is critical for developing an attractive profile that drives investment. ESG reporting can also help companies define and refine a sustainable culture and a public-facing value proposition focused on good corporate stewardship.

Yet, as essential as ESG reporting is, it’s also an intricate process through which the board of directors must guide the rest of the organization. To do that well, directors must master the modern ESG landscape. While this subject can become quite complicated, the good news is that recent standardization efforts have helped to streamline and centralize the reporting process.

Here we'll cover:

• What ESG reporting really is and what it's important
• ESG reporting requirements
• Common reporting standards and frameworks
• ESG report examples
• How to prepare your own ESG report

What is ESG reporting?

ESG reporting measures performance across three key areas: environmental sustainability, social responsibility and corporate governance.

While ESG reporting typically includes key performance indicators (KPIs) and metrics, this report is not accounting-driven. Instead, it aims to give investors and regulators the information they need to evaluate the company’s ESG performance and compare it to other businesses.

Examples of ESG reporting across the three categories include:

Environmental sustainability reporting topics:

• Climate change
• Water conservation
• Sustainable land use
• Recycling efforts

Social responsibility topics

• Labor standards
• Domestic and global human rights issues
• Employee relations
• Conflict zone management

Governance topics:

• Cybersecurity measures
• Data privacy regulatory compliance
• Tax avoidance
• Executive pay
• Corruption

Is ESG reporting mandatory?

Yes, ESG reporting is mandatory. While the Securities and Exchange Commission’s (SEC) updated climate disclosure rules aren’t expected until the end of 2023, other government agencies have already made ESG reporting a requirement.

For example, the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) requires disclosures from 50,000 EU-based companies and roughly 14,000 non-EU-based companies, many of which are headquartered in the U.S.

Why is ESG reporting important?

ESG reporting is important because it encourages mindful investing and environmentally and socially conscious operations. The overarching theory encourages responsible investment in companies actively working to improve ESG concerns during their day-to-day business activities.

At the highest level, the United Nations (UN) has advocated for ESG reporting as a self-reported oversight of various environmental, social and governance concerns. The UN also issued the Principles of Responsible Investing in 2006 to guide what corporations report on.

ESG reporting is also important because of its ripple effect beyond investors. Organizations with effective practices:

1. Put their pledges in action: Many organizations say they’ll improve ESG metrics, but not all do. ESG reporting separates organizations taking meaningful action from those that are greenwashing to attract investors and consumer goodwill.
2. Commit to ESG performance: Organizations with ESG reporting show they take ESG seriously. Investors want to see improved performance over time, and companies with reporting commit to making those improvements.
3. Consider the impact of operations: Not all businesses are concerned with the environmental and social impact of their activities. ESG reporting is a meaningful differentiator for those that do.
4. Proactively identify ESG risks: ESG-related risks are on the rise. Effective reporting is an opportunity to detect those risks before they develop, keeping organizations ahead of the risk landscape.

ESG reporting requirements

Public companies will find overlap between ESG metrics and many of the disclosures they must regularly produce per SEC regulations.

1. Item 101(c)(1)(xii) of Regulation S-K, Description of the Business: A portion of this reporting requirement touches on environmental sustainability issues, including "the discharge of materials into the environment, or otherwise relating to the protection of the environment." A public company must also disclose "any material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year and its succeeding fiscal year."
2. Item 103 of Regulation S-K, Legal Proceedings:Companies must disclose administrative or judicial proceedings related to "regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment."
3. Item 303 of Regulation S-K, Management's Discussion and Analysis of Financial Condition and Results of Operations:This SEC reporting requirement advises a company to provide information about "material trends and events that may affect its financial condition, changes in financial condition and results of operations," including those related to ESG reporting topics. Public company boards of directors will also find similarities between ESG reporting and disclosure requirements laid out in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Examples include conflict minerals provisions (Section 1502), resource extraction payments (Section 1504), mine safety and health (Section 1503), and employee and CEO compensation (Section 953[b]).
4. Corporate Sustainability Reporting Directive:The European Commission announced this directive in 2021. It went into effect at the end of 2022, introducing sustainability reporting requirements for publicly listed companies that operate in the EU.

ESG reporting standards and frameworks

There are over 600 ESG standards and frameworks organizations can choose from to guide their reporting. In response to the frustration with the multitude of frameworks, several external third-party organizations, institutional investors, and ESG proponents have proposed standardization initiatives that allow companies to follow uniform guidelines. These include:

• Global Reporting Initiative (GRI): This initiative creates a standard for non-financial reporting, particularly sustainability reports. It helps organizations identify key principles for their sector and reporting priorities.
• International Integrated Reporting Committee (IIRC): This framework seeks to streamline corporate reporting by offering a concise, strategic take on current reporting requirements.
• Sustainability Accounting Standards Board (SASB): This standard was recently updated based on feedback from companies and investors. It aims to offer a more transparent reporting approach.
• United Nations Sustainability Goals (SDG): These goals cover 17 different ESG areas and can help companies clarify their ESG focus if they’re unsure what to report on.
• Carbon Disclosure Project (CDP): This a global disclosure program that includes a step-by-step reporting guide and timeline.
• Task Force on Climate-Related Financial Disclosures (TCFD): This reporting focuses specifically on climate-related financial risk and includes four risk pillars.

These standards provide a reasonably straightforward framework for reporting on metrics for sustainability and corporate sustainability.

ESG report examples

Because ESG reports are prepared for investors, they’re often publicly available. Many ESG reports are available through the SEC, or you can check a company’s website. Some ESG report examples from large companies include:

• Apple: The Apple ESG report contains key disclosures on ESG issues and also maps the company’s performance against reporting standards like GRI and TCFD.
• Nike: The Nike ESG report is folded into their annual impact report, which focuses on people-related targets for the social “s” in ESG.
• Amazon: Amazon’s ESG report is unique in that it’s a sustainability-focused report and includes updates on their own climate goals — achieving net zero by 2040.
• Microsoft: The Microsoft ESG report is considered a sustainability report and sheds light on the company’s progress related to waste, water usage and carbon emissions.

How to prepare an ESG report

ESG reporting is an ongoing effort, one that collects and centralizes data for organization-wide visibility. The ESG report is the culmination of this process and puts all performance data into a single document that investors can access.

To create an effective sustainability report:

1. Revisit ESG goals and metrics: To create a report, you have to identify what you’re reporting on. Refer back to your ESG strategy to determine the areas that are most meaningful to your business, then verify which metrics will prove your performance in each. In the example above, Amazon focuses primarily on its environmental impact, while Nike focuses on people.
2. Choose a standard or framework: Standardization is a focus area for all ESG reporting. Choose the framework that your reporting will adhere to. You might choose TCFD if you will focus on climate, whereas GRI can encompass any non-financial impact areas.
3. Create a reporting document: Use your framework of choice to create an outline. The outline should refer back to the targets you identified, your ESG policies and any timely ESG data that would validate your reporting.
4. Curate ESG data: Many organizations will have a repository of ESG data. Organize that data to align with your ESG goals. Ideally, this should be a cross-functional process, so financial officers, sustainability officers and auditors can ensure all data is relevant and accurate.
5. Design the report: Most companies don’t stop at Microsoft Word or Google Docs. Because these are public-facing, enlist a graphic designer to develop a beautiful report that’s easy to read and reflects your branding. It doesn’t have to be visual-forward, but it should be engaging.
6. Publish and distribute the report: Publish the report to your website, then promote it via high-value channels like social media or your email list. You may also work with your PR team to garner more coverage about your ESG impact. The idea is to ensure that investors will see and understand your ESG priorities.
7. Improve your ESG reporting process: Like ESG itself, your reporting process should always be improving. Conduct a post-mortem with relevant stakeholders and identify ways to make the process more efficient, cost-effective, and integrated across departments.

Transform ESG with the right reporting software

The UN released some of the first ESG reporting guidelines in 2006. In the nearly two decades since then, investors’ ESG focus has only intensified — yet ESG reporting has scarcely changed. That stagnation will likely come to an end with the SEC’s reporting disclosure, a requirement that should come to light later this year.

Don’t be caught unawares once it does. The right ESG software isn’t just a reporting tool but also a growth driver. Diligent ESG scales with your organization, calculating your emissions, evaluating first-person ESG data, and applying consistent ESG messaging to all reports.

Learn more about Diligent ESG and request a demo.