What to Measure for ESG Reporting: 5 Tips
You might have heard that the SEC is finalizing its climate risk disclosure rules, but thought that, because you’re a middle-market, privately held company, that you don’t need think about them. Think again.
If you have clients, vendors or suppliers that are publicly-traded companies -- or if you want to do business with any, or with any government agency -- you’ll need to report your ESG footprint and risk analysis.
If you have not started yet, start now. Literally, now, because setting up, measuring, tracking, and verifying this data is going to take several months. The SEC and other regulators require that ESG disclosures be audited or otherwise verified by an independent third party. That’s what the ESG and Sustainability Solutions team at EisnerAmper – with decades of experience in this work – suggests. ESG issues are environment, social and governance issues.
It's the Wild West out there in ESG-related reporting with an alphabet soup of standards and frameworks, and easy to get confused and overwhelmed.
“When it comes to ESG, not only do we not need to measure everything, we also shouldn't measure everything,” Director of EisnerAmper’s ESG and Sustainability Services, said on a recent episode of the ESG In Focus podcast. “For example, the price of gasoline is going to be more relevant to a transportation and logistics company than to a professional services company. Same goes for carbon emissions. And because ESG can be overwhelming if you're just starting out, it's important to prioritize.”
What do you need to measure?
Reporting frameworks are designed to provide investors, lenders, regulators and others the comparable, reliable, and consistent data they need on these issues to make their financial decisions. If they require it and you don’t report it, or don’t report it properly, they will likely not invest in your company or do business with you, so these are very important.
Here are five key points to help you identify what you need to measure for your ESG, sustainability- and climate-related reporting requirements:
- Identify your target audience: The frameworks you need to use depend upon what you need them for, and will determine what specifically you need to report. Are your reporting to the SEC? Or to lenders? Or to general stakeholders? Or to current or potential clients who have to report to the SEC, for example? Are you seeking government contracts? The answers to these questions will drive your measurement, verification, and reporting process. For example, your reporting needs will vary if you only need to focus on the financial impact to your business, versus if you also need to disclose the impact of your business on the environment.
- Choose your ESG or sustainability-related reporting framework: If you’re a publicly traded company, or preparing to go public, or if you work with any publicly traded companies, you’ll want to use the framework from the Task Force for Climate-Related Disclosure, or TCFD, which is the basis for the SEC’s climate risk disclosure rules, Lourenco Miranda, managing director of EisnerAmper’s ESG and Sustainability Services, said. If you are responding to proposal requests that ask for this data, then note what specifically they are asking you to report, and if they suggest a specific framework. If you’re focused on comparisons within your own industry, you may want to use the Sustainable Accounting Standards Board, or SASB, framework, which breaks down approximately 77 industries. You might also need to use the GRI or CDP or another framework too. It also depends if you do business internationally, such as exporting.
- Define “materiality” for your business: Each framework will have its own definition of “materiality,” based on traditional accounting standards. Some frameworks, such as the TCFD and the SEC’s proposed rules, focus on financial materiality, which is the impact on the business’s cashflow and bottom line. Others focus on what’s called “double materiality,” which is the impact your business is having on the environment and climate change, such as the carbon emissions (these can have a financial impact as well).
- Prioritize based on your stakeholders and risks: “What's important to your company and stakeholders? Who is your audience? What are the ESG-related risks and opportunities that come with this changing global landscape?” These are all questions to ask. SASB, for example, has the Sustainable Industry Classification System (SICS), which breaks the factors to measure down by sector. “So, the question that you'd have there is, which SASB industry does my company fall under?,” she added. Are they physical risks, such as those associated with extreme weather events? Or, are they transition risks, which might result from your company’s transition to be net zero by a certain date, or from regulatory changes that require reporting about the entire supply chain?
- Set up tracking that’s verifiable and repeatable: The SEC and other reporting entities require these numbers be verified by an independent third party, which is usually an auditor. Charles Waring, an audit partner in EisnerAmper’s ESG and Sustainability Services, emphasized that, “The data that is being collected, and ultimately reported upon, is flowing through a process that is structured, is formalized, is repeatable, and from an auditor's sake, we call that re-performable. So, from a standpoint of, has the organization, has management developed that process so that then an auditor can come in and assess, evaluate that information, that data and the process that's in place?”
What a company tracks and reports goes back to its strategic goals, its stakeholders’ demands, and how to verify it. “But it should also align with your company's values,” EisnerAmper suggested.
ESG and related reporting is time-consuming and complicated, so start right away to be prepared for this year.
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