Three years ago, the senior managers of a company in an extractive industry decided to commission an audit of the environmental, social, and governance (ESG) metrics included in its annual report. They understood that disclosure of greenhouse-gas emissions in particular was soon likely to be required, and they wanted to give investors and other stakeholders confidence in the quality of their reporting.
Then they did a preaudit review of their data and processes—and realized they had some prep work to do. Not only could they not reliably follow the balance of all their emissions, but they also didn’t have complete records and couldn’t even tie their data back to actual utility invoices. When pressed, one manager quipped, “Oh, we don’t keep any of that stuff; no one has ever asked us for it.” Moreover, they weren’t using the right emissions factors or the right sources to support conversions to CO2 equivalents. An audit would have to wait, they realized, until they could conduct a thorough inventory of their emissions.
Their experience was not an uncommon one.
Investors and the public alike are keenly interested in companies’ performance on sustainability, by which we mean a company’s ability to maintain a certain level of economic resources over time without negatively affecting the environment or society. Yet many companies are still getting a handle on how to track and report, and eventually assure, their related data. They have questions about how to measure some nonfinancial data on a consistent basis, not just from year to year but from business to business, so that performance and impact can be compared. They often face limited or obsolete data—whether actual or modeled—and inconsistency across sources. And despite recent moves by some regulators to start providing broader reporting guidelines, the area is quickly evolving with varying initiatives, reflecting diverging opinions on what and how to report.
To build investor and stakeholder trust in sustainability-related measures of performance, companies eventually face the question of whether their reporting can be externally validated. For most, assurance in this area is a novel exercise even if they’ve been reporting some metrics for years. The data is qualitatively different, is rife with subjectivity, and has often been compiled through unstructured processes. With new reporting requirements on the horizon, there are some practical steps companies can take to prepare.