ESG Reporting Beginner's Guide: A Practical Path from Zero

John Truzzolino is Director of Governance Services at Donnelley Financial Solutions. The views expressed in this article are solely those of the author.

Emerging growth companies and mature enterprises are competing for investor attention and have learned a key lesson—the standards for attracting the investment community have changed. Today, the criteria are no longer just financial numbers, but also include a company's performance in environmental, social, and governance (ESG) areas.

If you have doubts about the extent to which the investment community values ESG, consider data from the U.S. Forum for Sustainable & Responsible Investment: "At the start of 2020, $16.6 trillion in professionally managed assets in the U.S. employed some form of ESG screening." This figure represents an increase of more than 40% over 2019.

This growth momentum slowed somewhat in the early stages of the COVID-19 pandemic, as the business world generally shifted into survival mode. But as the economy gradually returns to normal, it is clear that the pandemic has prompted investors to demand that invested companies expand and deepen their ESG disclosures.

For the industry, focusing on ESG is an important direction, but while calling for more reporting, investors have failed to provide specific guidance, including where to start, what content is most critical, and what information should be disclosed through channels such as the corporate website, proxy statement, and 10-K.

In this void, many companies face a variety of ratings, rankings, and frameworks, yet have little clarity on where to begin. The good news is that help is on the way.

Several organizations are already working to develop voluntary reporting standards, including CDP (formerly the Carbon Disclosure Project), CDSB (Climate Disclosure Standards Board), IIRC (International Integrated Reporting Council), GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board), and TCFD (Task Force on Climate-related Financial Disclosures).

Once these standards take shape, they will provide companies with much-needed guidance. However, this takes time, and the investment community demands immediate action—companies do not have much time to wait. To get ahead in the ESG process, you can follow these widely recognized steps:

• Focus on material metrics.Multiple frameworks currently exist, and while they differ, there is overlap. Our company (which helps businesses navigate financial compliance challenges) recommends primarily referencing SASB, GRI, and TCFD, and looking for commonalities among them. Then, identify 5 to 7 material metrics relevant to your industry and ensure you have information to disclose, such as climate, labor, human capital, social inequality, sustainability issues, and more.
• Research peer disclosures.Review disclosure documents from companies in your industry, especially proxy statements, 10-K/annual reports, and websites. These are excellent resources for identifying important industry topics, which may cover themes not identified in the first step. Based on this, assess what actions your company needs to take to match or exceed the achievements of peers.
• Develop thematic principles.Combining material metrics and peer research, your team should be able to identify 7 to 10 themes. These themes will ultimately form the foundation of your disclosures. First, have your communications team translate these themes into 3 to 5 thematic principles. For many companies, these principles can be summarized as the "three Ps"—people, purpose, and planet.
• Develop ESG content.Build content around these principles that aligns with the aforementioned standards. You may hire ESG consultants, analysts, and writers to assist, and have them collaborate to produce this content.
• Focus on visual presentation.As a final step, it is recommended to transform ESG content into infographics that are consistent with or complementary to your company's brand style.

After completing the above steps, you can move into the disclosure phase. Below are recommendations on what to disclose and through which channels.

Corporate website

For many companies, the corporate website is the most logical and easiest starting point. You can publish all of your company's policies on the website, covering data privacy, workplace health and safety, equal opportunity, anti-harassment/anti-discrimination, and more, with depth at your discretion. You can also place this information under the investor relations section.

Key disclosures in the proxy statement

Some companies may begin their disclosures with the proxy statement, sharing key highlights that could influence important ratings and rankings. Areas worth highlighting include:

• Board oversight.If your company has a committee responsible for overseeing ESG, list its members, capabilities, and qualifications in the proxy statement. Additionally, you can report on the board's own diversity. It is worth noting that investors typically want to see multi-dimensional information, such as racial and ethnic diversity breakdowns, as well as gender diversity data.
• Overview of ESG and human capital programs.The proxy statement should include the same programs and policies as the website, but present only the most core highlights, including potential risks, opportunities, priorities, and performance in these areas.
• Executive compensation.Any ESG-related compensation metrics should be highlighted, such as health and safety, employee development, and diversity initiatives.
• COVID impact statement.Focus on the company's efforts during the pandemic, such as employee health and safety, remote work arrangements, and measures to maintain productivity and morale.

Annual report/10-K

In the United States, integrated reporting that combines financial reporting with company operations and non-financial data is not as common as in other countries, but this should not prevent you from voluntarily including these details. This information always attracts investors who seek additional factors in their decision-making.

Regardless of how you proceed, you should pay attention to the U.S. Securities and Exchange Commission's (SEC) call for principles-based human capital disclosures. As part of the modernization of SEC Rule S-K, these disclosures may ultimately require companies to include human capital resources, as well as any human capital measures or objectives (if they are material to the management of the business), in their 10-K or other filings. For example, the number and type of employees, broken down by categories such as full-time, part-time, seasonal, and temporary workers.

Corporate Social Responsibility (CSR) report

The CSR report is the best opportunity to present your company's complete social responsibility story. Be sure to include program details and their impact on the environment and communities. These reports are not "one-size-fits-all"; companies can choose the format that best suits them. For example, some companies may use a brief six-page SASB snapshot, while others may produce a sustainability summary report exceeding 20 pages.

There is reason to be optimistic about the development of unified ESG reporting standards. These standards are likely to include the guidance companies need. But companies should not wait for the standards to be formally issued before taking action. With the insights provided in this article, you can begin your ESG journey immediately.