Overcoming ESG reporting challenges: How the finance sector can help

ESG reporting has become an essential tool for companies looking to showcase their commitment to responsible business and sustainability strategies. It’s clear businesses are recognising this too, as research finds 90 percent of S&P 500 companies published ESG reports in 2020 (an all-time high), compared to just 20 percent in 2011. 

The path to effective ESG reporting is not without its challenges, but finance professionals can support companies in managing risk, achieving compliance, and increasing investor trust. This article explores the nuances of ESG reporting, the importance the finance sector will play in ESG reporting, and the specific obstacles organisations will face when integrating ESG data into their operations. 

What is ESG reporting? 

ESG reporting refers to the process where an organisation discloses data on its initiatives across environmental, social, and governance (ESG) aspects. This allows the company’s progress in these areas to be evaluated against various targets and benchmarks.

After gathering and assessing the data, a company produces an ESG report with the goal of providing complete transparency to stakeholders. The ESG framework was developed to make sustainability efforts more measurable and specific for businesses and investors, moving away from vague claims. It is becoming mandatory for all companies to produce an ESG report. 

The role of finance teams in delivering ESG reports

Historically, organisations primarily focused on financial reporting disclosures to update stakeholders on a company’s financial health, future prospects, and performance. More recently, there has been immense growth in demand for disclosure of ESG factors. 

Finance teams have expertise in compiling and reporting on metrics to stakeholders and shareholders. Therefore, they are well-positioned to rack the information required for ESG reporting to see metrics on supply chain, sales, customers, and other kinds of information that help measure ESG performance. 

ESG reporting requires the same level of governance, accuracy, auditability, and control needed for financial reporting. Moreover, they work across functions and business units. Ultimately, they are in a position to leverage their existing skills and framework to drive their organisation’s ESG agenda. 

Why ESG reporting is important for organisations

ESG reporting is essential for organisations for a number of reasons. 

• Risk management: This kind of reporting enables organisations to identify and manage risks associated with environmental, social, and governance factors. Regulatory changes, climate risks, and social issues are all factors that can significantly impact investments and loan portfolios. By successfully integrating ESG data, firms can better anticipate and navigate these risks, leading to more resilient long-term investments. 
• Regulatory compliance: Most countries are introducing stricter regulations around corporate responsibility and sustainability. Organisations must provide ESG reports to comply with these regulations, avoid penalties, and ensure they meet both national and global standards. 
• Investor demand: Investors are looking for transparency around a company’s sustainability and ethical practices. They are prioritising businesses with strong ESG performance, as they often offer more stable returns and reduced risks. With this in mind, ESG reporting enables organisations to meet these demands and attract eco-conscious and responsible investors. 
• Improved reputation: Companies with strong ESG reporting showcase accountability and transparency, which can enhance their reputation. ESG reporting, therefore, shows a commitment to ethical and sustainable practices, which can help attract investors, clients, and partners. 

ESG reporting challenges organisations face and how finance teams can help overcome them 

Organisations face several challenges when it comes to ESG reporting, given the complexities of navigating risks and opportunities across global markets. The financial sector and internal financial teams are going to play a pivotal role in overcoming these challenges by leveraging their expertise in financial management, data analysis and reporting. However, financial professionals will need to undergo tailored training to ensure they gain the required knowledge to meet the growing ESG reporting demands.

Data quality and availability

ESG data is often fragmented, difficult to quantify, or inconsistent. Many companies, particularly those with global supply chains, struggle to obtain accurate data across all ESG dimensions. This is especially the case for things like Scope 3 emissions. In addition, many business partners and suppliers may not have robust ESG reporting systems in place.

To overcome this, finance teams will play a role in standardising data collection by implementing uniform data collection frameworks. For example, the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). They should also consider the use of digital tools and automation to track and gather real-time ESG data and work closely with suppliers and business partners to encourage improved transparency and data collection. 

Complexity in measuring climate risk

Measuring and integrating long-term climate risks, like extreme weather events, into financial models is difficult. ESG risks typically unfold over extended periods, making it hard to align them with short-term financial reporting practices. To tackle this, finance teams will need to employ scenario analysis techniques to assess the potential impacts of climate risks on their business and consider the financial implications of environmental and social factors. 

Scenario analysis will be a vital tool to model different climate outcomes and their financial implications supporting organisations’ sustainability strategy and meeting reporting requirements. Financial teams can explore partnerships with climate risk specialists or external consultants who can offer expertise in modelling climate risks and translating them into financial insights in parallel to internal training on the topic. 

Scope and boundaries of ESG reporting

Scope 3 emissions pose a significant challenge in ESG reporting for companies due to their complexity, difficulty in measurement, and the extensive value chain they cover. Moreover, with the arrival of the Corporate Sustainability Reporting Directive (CSRD), managing Scope 3 emissions cannot be ignored. 

Finance teams can help here by establishing clear guidelines for ESG reporting that outline which metrics are included and which assets or operations should be covered. They should then align these with stakeholder expectations and industry standards. Materiality assessments should also be leveraged to determine which ESG factors are most relevant to the business and its stakeholders. 

Embedding ESG into traditional financial reporting

ESG elements are often qualitative or difficult to quantify and do not easily align with traditional financial metrics. Embedding them into financial reports and decision-making processes is a challenge, particularly when trying to showcase the financial materiality of ESG initiatives. 

To overcome this hurdle, finance teams should embed ESG data into the company’s broader risk management and financial forecasting processes, linking it to financial performance. For instance, quantify how reductions in energy use can translate into reduced risks and cost savings. 

Additionally, moving toward integrating reporting, where financial and non-financial (ESG) data are combined into one report, helps. This approach highlights how ESG performance drives long-term financial value. Ultimately, ESG goals should be tied to financial outcomes. 

Regulatory complexity and compliance

Varying countries and regions have different ESG reporting regulations, meaning financial institutions must navigate multiple frameworks to ensure compliance. As the regulatory environment around ESG reporting continues to evolve, organisations are also likely to struggle with keeping up with new or changing requirements. This increases the complexity of compliance. 

To tackle this, members of the finance team should be tasked with tracking and interpreting evolving ESG regulations to ensure compliance. Alternatively, companies should invest in compliance software that automatically updates to reflect new ESG regulations. This helps finance teams stay up to date and maintain their organisation’s compliance without significant manual effort. Regularly engaging with external experts is also a good way for finance professionals to stay informed about new regulatory developments. 

Skills and expertise gap

ESG reporting remains relatively new for many organisations, and there could be a skills gap in terms of understanding and managing ESG risks and integrating them into financial reporting processes. Finance teams can play a pivotal role in bridging this knowledge gap and improving the quality of ESG reporting. As custodians of financial data, they already have expertise in data management, analytics, and reporting, which are all skills that can be directly applied to sustainability metrics. 

They can help ensure that ESG data is collected and analysed with the same rigour as financial data and successfully integrate ESG metrics into financial reporting frameworks. This would help businesses better understand the financial implications of sustainability efforts. In saying that, finance professionals may still lack some knowledge of sustainability so it is critical that organisations allow them to upskill by investing in training and development programmes for them. 

Conclusion

The role of finance teams in ESG reporting is set to become even more critical as the demand for transparency, accountability, and sustainability continues to grow. Despite the challenges, effective ESG reporting offers a wealth of benefits, from enhanced risk management to improved reputation and competitive advantage. 

By embedding ESG elements into their strategies, finance teams can align themselves with global sustainability goals while fostering long-term value for stakeholders. To overcome the hurdles of ESG reporting, businesses must invest in the right tools, training, and expertise for their finance teams. The Institute of Sustainability Studies CPD-certified Certificate in ESG Reporting and Auditing offers clear insights into ESG reporting frameworks and best practices, enabling professionals to lead meaningful change within their organisations.