Reporting Metrics? A tale of chaos and – maybe? finally? – convergence

Biz StrategyGovernance
··4 min read
ESG Sustainability KPIs
Photo by Stephen Dawson on Unsplash

Reporting on ESG / sustainability dimensions is an issue.
One for the executives in a company across all levels of responsibility.
And one for the board.

For the board indeed even on two accounts, namely:

  • The metric they require to be reported to; and
  • The metric that eventually find their way into investor relations information, into non-financial reporting papers, and into CSR reports.

It is rather widely agreed that there it remains a challenge to hone into what a board sees as necessary to be reported to them. Tools intended for boards are few and far between (read: nonexistent). At best, those tools are a dashboard view of a company’s in-house reporting, and are a trial-and-error approach to figure out what is needed, what is useful and what nonetheless is missing.

Boards: Drivers of ESG capability building

This said, before even getting to the point of being able to report to its a board, a company needs to be able to a) collect, b) report and c) take action upon sustainability dimensions. In some cases this is relatively straight forward (e.g. Scope 1 carbon emissions), in other cases – and depending on jurisdiction – it can be as good as impossible (e.g. diversity data in France …).

In other words: the board’s role is initially to ensure that such capability is being built up in first place … which is an interesting task knowing that very, very few boards have the required expertise among their ranks, and equally few take the leap to work with an outside expert to plug that hole.

How well or badly the boards do when supervising the capability building exercise, is the interesting collateral insight from a report just launched by the Chicago Booth University.

The principle focus of the report is at its origin though somewhat different:

The research was intended to look at the ESG/sustainability indicators where reported by companies in the S&P Global Index, and if any conclusions could be drawn on a) the ‘usefulness’ of such indicators and b) the maturity of different industries.

ESG Reporting Maturity: Reflects board ESG readiness

Sustainability, CO2, Pollution, Campaign
Photo by ev on Unsplash

Between the lines hence, the report is also an insight on how ESG-savvy and mature boards across different industries have been up to this point in ensuring that their companies build capabilities and get up to speed.

There are some additional key insights:

  • Even better performing companies – and hence boards – are seemingly chiefly concerned with public reputation: how else could it that industries that over the past decades repeatedly were the focus of public outcries and scrutiny are at the top of the list (right hand side of illustration)?
  • The lack of board’s (and executives?) expertise in the ESG area becomes blatantly apparent in a) the lack of commitment to have the CSR report audited by a 3rd party – as would evidently be habitual for other public disclosures, notably of financial nature; and
    b) the even smaller fraction of companies that disclose qualitative information instead of quantitative KPIs.
    Keep in mind that not only such an approach would be unacceptable in the financial – and other – spheres of company performance

In short: it is very clear that boards are challenged to not only make sense of what relevant reporting criteria for companies should and must be, but they also see it more as an art than a science given the ‘wishy-washy’ soft approach they take to quantification (or the lack thereof).

ESG Reporting: Financial reportings’ younger sibling

Of course, many will now say: ‘it’s complicated and cannot be done that easily’.
Which is true – to an extent.

Yet: thinking again of financial reporting, and the necessary processes and procedures, definitions, red lines and consolidations that are needed to report accurately: even those supposedly stringent approaches to not prevent some ‘creative accounting’ to take place in just about any company.

The fundamental difference lies in expertise and track record:

  • 50+ years of more or less consolidated and aligned accounting approaches. And a long tradition of book keeping and financial management, which allowed all board directors of the present to be extremely fluent in the ‘language’ and procedure of financial reporting.
  • The exact opposite the case for ESG reporting: not only have most board members barely a clue on the subject, and hence lack expertise; but also as a result of lack of expertise whishy washy approach keeps prevailing.

It is ‘high noon’ for this to change.
How else can we make businesses future fit in the age of climate crisis …

CSR Metric report by industry
Li, Lu and Nassarl, 2021, pp. 7 to 9.

Learn More: Reference