Challenges of ESG Reporting: Key Issues & How to Overcome Them

In the contemporary business landscape, environmental, social, and governance (ESG) initiatives are an essential component. However, they are often a misunderstood element in business strategy, given how much stakeholders, employees, and regulators prioritise it.

As this feature is taking centre stage in all marketplaces, ESG reporting challenges are on the rise if not zeroed on. Let us go through the various challenges in ESG reporting, how your business can overcome them, and what benefits an effective ESG reporting strategy entails.

ESG reporting is the entire process in which an organisation reports on its initiatives and performance in the environmental, social, and governance sectors. These disclosures come in the form of comprehensive reports like CSR reports. They carry the primary objective of providing transparent insights about the business to the stakeholders.

ESG reporting carries significant importance due to its ability to assess a business’s impact in the ESG domains. It can even influence the stakeholders’ strategic and tactical decisions for engaging with the business. To drive this point, a recent Global Institutional Investor Survey highlights that over 88% of investors prioritise ESG disclosures by businesses to assess long-term opportunities and risks for collaboration.

Now that you know what ESG reporting entails, let us dive into the most prevalent ESG challenges faced by organisations.

• Lack of Standardisation in ESG Frameworks

  There are currently no universal ESG frameworks in place. This results in inconsistent reporting across multiple standards. For instance, there are quite a few ESG standards like SASB, CDP, and GRI. But they all vary in their priorities and scope of assessment.

  Businesses need to proactively choose which frameworks to adopt based on their business strategy and goals, aligning with industry standards and expectations at the same time. This becomes a major challenge in global operations. That’s because different ESG frameworks can be the chosen standard in different areas of operations.

• Inconsistent or Unavailable ESG Data

  There are many inconsistencies created by disparate systems, subjective metrics, and external output due to a globally standardised ESG framework. For example, when analysing data for labour practices, diversity standards, and ethical codes of conduct in certain areas around the world, available ESG data can fall victim to biases and misinterpretations.

• Challenges in ESG Materiality Assessment

  Defining materiality isn’t so straightforward when it comes to ESG practices. Different stakeholders prioritise different issues when it comes to associating with a business. On top of that, shifting regulations and constantly evolving public expectations can make materiality assessments outdated within a matter of days!

  Balancing your business’s internal priorities with external demands and expectations can be a fine line to walk. If you miss the required context to determine the external demands, it can be difficult to align the ESG assessment with core business strategies.

• Complex Regulatory Landscape

  Keeping up with the constantly evolving ESG regulatory landscape is a prickly thorn for many businesses. The goalposts are always shifting, as seen by the evolving EU’s CSRD mandate and SEC’s climate disclosure rules. With varying jurisdictional requirements, there are bound to be legal uncertainties. This further complicates the process of tracking overlapping regulations. There’s also the need to future-proof ESG efforts with current expectations in mind. Hence, businesses must focus on staying ahead of regulatory changes and not reacting to them.

• Difficulty in Measuring Qualitative Metrics

  How can a business measure corporate culture, ethical behaviour, employee well-being, or stakeholder trust with so many ESG standards and regulations without a centralised framework? Especially when these qualitative factors are central to ESG performance but notoriously difficult to define and benchmark.

  The absence of clear metrics proves to be a risk in ESG reporting for businesses. Relying solely on anecdotal evidence would not be sufficient to keep pace with evolving regulations. To battle this challenge, businesses must learn to turn subjective insights into structured and reportable information. At the same time, the nuances of the ESG components must be undisturbed.

• Limited ESG Reporting Expertise

  Another challenge for businesses is the lack of in-house expertise to navigate the complex ESG reporting. Underprepared teams risk inaccuracies and missed obligations. Without sufficient expertise in ESG reporting, businesses are highly susceptible to compliance pitfalls.

• Risk of Greenwashing

  Vague or unmet claims, selective disclosures, and lack of evidence can lead to greenwashing. This can damage an organisation’s credibility and trust. They can invite a lot of scrutiny from regulators and stakeholders, and affect their perception of your business.

While the ESG reporting challenges are plenty, developing a corporate strategy that incorporates subjective considerations can be quite accessible, though this may make standardisation difficult. Here are some of the best ESG reporting practices you can employ to overcome these challenges:

• Choose the Right Framework for Your Industry

  Pick the ESG standards that best align with your area of operations and the industry’s unique risks and expectations. For example, a car manufacturing company picking an ESG framework like GRI in the APAC region is usually the go-to for ensuring relevance, comparability, and credibility.

• Automate ESG Data Collection and Validation

  Manual ESG tracking and data validation are very prone to errors. It is unsustainable in the long run. Hence, using automation tools for collecting, validating, and integrating data from various verified sources is much more efficient. This improves your data accuracy and keeps your business ready for real-time responsive decisions.

• Train Teams on ESG Metrics and Requirements

  ESG reporting is also a cross-functional responsibility. This is why you must equip your teams with training on key ESG standards, data protocols, and tools for operations & reporting. A well-trained workforce is less prone to errors. It also fosters a culture of accountability and enhances transparency.

• Engage Stakeholders in Materiality Assessments

  Manage your ESG priorities by reflecting on what truly matters to all stakeholders. These would include employees, investors, customers, and communities. Regular engagement with stakeholders will help your business in conducting holistic materiality assessments.

• Continuously Monitor and Refine ESG Goal

  As mentioned before, the ESG landscape is dynamic and constantly evolving. Therefore, you must set and track measurable goals while adapting to new data and stakeholder input in real-time.

• Adidas’s Data Headaches

  Adidas recently revealed that its suppliers were being overwhelmed by brand-specific data requests. This led to the brand struggling with fragmented reporting. It eventually led to inconsistent labour and emissions data.

• Wells Fargo's Diversity Data Controversy

  Wells Fargo faced a big shareholder lawsuit in 2023. They were alleged to have staged sham job interviews, claiming that half of their candidates were from diverse backgrounds. This led to overstated DEI disclosures, misleading their investors and shattering their trust.

• Manufacturing’s Regulatory Alignment Crisis

  Many US and EU-based manufacturers have collectively reported difficulties in aligning with ESG disclosures across CSRD (EU) and SEC (US). They have called it “the biggest ESG challenge today” due to the conflicting requirements of these standards.

With businesses and conglomerations coming together to make a stand on standardising ESG reporting, there are bound to be further evolutions within this domain. Some of the potential near-future trends that will influence ESG reporting challenges are:

1. Greater Regulatory Harmonisation - Further simplification of ESG disclosures, with greater regulatory harmony, to lower the confusion around global benchmarks.

2. Rise of AI and Automation in ESG Analytics - Implementation of AI automation tools to solidify data analysis for better risk mitigation, tailored reports on each component of ESG, and intelligent decision-making.

3. Increased Focus on Third-Party Assurance and Auditability - Independent assessments and auditing for ESG report assurance are becoming mainstream and are boosting improvements in ESG reporting as a whole. This trend will only continue to grow larger in the future.

As ESG reporting continues to evolve, your business must be prepared for the challenges and new trends. Maintaining data accuracy, simplified reporting, data-based risk mitigation and building stakeholder confidence - Dun & Bradstreet can help you with all these activities and more. Here’s an opportunity to grow the efficiency of your ESG reporting endeavours. Make it a strategic advantage for your business today.