A complex, evolving ESG reporting landscape
ESG reporting is becoming increasingly important to companies, not just to comply with regulations, but to respond to the demands of stakeholders. The EU's new Corporate Sustainability Reporting Directive (CSRD) affects approx. 60,000 EU and non-EU companies who will have to meet the European Sustainability Reporting Standards (ESRS) for financial year 2024. On a global level, the inaugural IFRS Sustainability Disclosure Standards (ISSB) will require companies to communicate the sustainability risks and opportunities they face over the short, medium, and long term.
Given the changing state of ESG reporting, it's little surprise that companies differ greatly in how they organize ESG reporting responsibilities for gathering, processing and disclosing their ESG performance data. Depending upon the company, the organization of ESG reporting may vary in terms of organizational structure, company statement, and the distribution of tasks – as well as varying sizes of teams responsible for disclosure.
The ESG reporting challenge for companies
The arising challenge is twofold. On the one hand, companies are obliged to report on ESG at ever-increasing levels of detail across a widening range of areas. As a result, metrics and targets are likely to stretch to the hundreds. On the other hand, similar to financial reporting, the CSRD expects companies to offer independent assurance over their ESG reporting. This places considerable pressure on companies to come up with a fluid process for setting targets and measuring performance, to meet appropriate standards and adapt to the new requirements coming down the line.
Meeting these extensive and growing requirements is a major, complex challenge that makes it imperative to transform ESG reporting. This involves rethinking resources, reporting lines and organizational structures for non-financial reporting.
Partner, Corporate Accounting Advisory Services
KPMG professionals have worked with many companies on these new ESG reporting challenges, and this article presents some of the learnings and insights on how to build an effective ESG reporting organization.
Building an ESG-ready reporting structure
Consider these four key actions to help the transition to smooth, accurate and timely ESG reporting:
1. Start preparing now
Start now. As the reporting obligation becomes more demanding and more complex, companies need to get ready now to position themselves for ESG compliance.
2. Define your ESG reporting strategy
Define a ESG reporting ambition level. Some companies may choose to merely comply by providing the minimum disclosure whole others may view ESG reporting as a source of competitive advantage, which not only satisfies regulators but also improves access to capital, customers and talent.
3. Determine roles and responsibilities
Determine roles and responsibility for ESG reporting in terms of functions and key personnel, to establish a structure and a team that can meet current and future disclosure requirements with accurate, timely and credible information.
4. Re-think your ESG reporting structure
Design your reporting structure within your organization for non-financial reporting that aligns with the ESG reporting ambition and builds on existing (reporting) structures within the company. Balance centralized control and consistency with decentralized speed and flexibility.
Key questions when re-designing your ESG reporting organization
Besides the goal of compliance and providing transparency to stakeholders, the ESG reporting organization should complement the existing reporting structures to avoid unnecessary duplication of effort. It needs effective processes and clear defined leadership and responsibilities. Above all, it must achieve consistency, reliability, and accuracy.
- When designing the structure, companies should ask the following questions:
- Who should have Board-level accountability for the ESG statement?
- Which individual should have overall responsibility for ESG reporting? Should this be the CEO?
- In which function should ESG reporting be anchored: e.g., Finance, Sustainability, Investor Relations or another?
- How can subsidiary companies be incorporated into the global ESG reporting structure?
- What are the key responsibilities of the ESG reporting team?
- How many people are needed to generate effective ESG reporting? What capabilities should these individuals have and what are their training needs?
The answer will be dependent on the organizational size, geographical reach, structure, existing capabilities, and ESG reporting strategy.
Two predominant approaches emerge
Having worked with many multinational companies, KPMG professionals have observed a continuum of reporting infrastructure ranging between two generic approaches:
The centralized structure enables interdepartmental collaboration through specialist central departments, committees and/or steering groups, which could include the Sustainability department, Group Sustainability Board, Chief Sustainability Officer (CSO), and Sustainability Committee. Either the Management Board or CFO/CEO are responsible for monitoring. Their responsibilities include defining sustainability strategy, material topics, and coordination of accountabilities. In this kind of set-up, directives tend to be top-down, although there is some flexibility with decentralized responsibility for collecting and processing data.
The other main structure is more of a hybrid, consisting of a group sustainability board that integrates the organization through working with relatively autonomous countries, regions, corporate functions and division functions. These companies tend to have some, but not all, ESG reporting responsibility within the executive board, with some decentralizing tasks to the individual departments, business units or entities, and others managing duties.
Get the ball rolling: Your ESG reporting
There is no single 'right way' to organize for ESG reporting. To lead or to follow, to do the minimum required or seek sustainable advantage: these are the questions companies are confronted with in the context of evolving ESG reporting standards.
KPMG professionals have gained insights into different ESG reporting organizations and has supported several multinational companies with designing their reporting organization to get ready for future ESG reporting. Stemming from this experience, this article has brought to you some of the first steps on how to kick-off your ESG reporting structure. At last, to reiterate the key message to you: start now with shaping your organization for the ESG reporting of today and tomorrow.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.