Identifying Material ESG Issues
Before you start reading, ask yourself: 'Given what I know about this company and industry, what are likely to be the biggest environmental impacts this company causes and biggest risks they face? Social impacts they cause and risks they face?' Write down a short list. These are the company's material ESG issues, as judged by you. For example:
- If you're getting ready to read the sustainability report of a major consumer packaged goods company whose flagship product line is carbonated sugar water, water use is going to be a major sustainability issue for that company and health impacts (including obesity and diabetes) will be major social impacts and risks.
- If you're reading the sustainability report of an oil and gas company, Scope 1, 2, and 3 emissions (those caused by the company directly, indirectly, and by the company's suppliers and customers) is going to be a major sustainability issue for the company.
As you read, pay very close attention to how the company reports their material ESG issues. But also, pay attention to material issues that you didn't think about at first—but which the company's leaders clearly think are important.
- For example, you might not think that having a board oversight committee for climate resilience is really important. But some companies think it is—and will report on it.
How is this company using sustainability information?
- Are they using a deluge of largely irrelevant information to distract the reader from the core sustainability challenges the company faces?
- Or are they using relevant information, clearly presented within a rational ordering that reflects relative priority, to clearly inform the reader about their current and future strategy and tactics for addressing their core sustainability challenges?
Who is the audience?
- The primary audience for most sustainability reporting is financial analysts and benchmarkers, who use the information to formulate recommended investment preferences.
- However, sustainability reporting is also intended to inform a wide range of other stakeholder communities, including public policy makers, academics, the leaders of other companies, customers, retail investors, and concerned members of the public.
- As you judge the quality of the report, keep in mind the audiences it needs to address.
How transparent is the reporting?
Ask yourself how easy is it to find information
- Some reports use hyperlinking to point you to yet other reports, which can make tracking down information difficult.
- Other reports use hyperlinking within documents to clearly organize information (e.g., showing how each of their sustainability initiatives supports one of the Sustainable Development Goals).
Ask yourself whether the medium matches the message
- Sustainability reporting evolved out of an era in which all corporate reporting was done on paper. Currently, much sustainability reporting reflects this legacy medium: reports are prepared and delivered as PDFs.
- However, some reporting ecosystems are starting to be delivered in a 'digitally native' format, which allows for more organic, networked, less linear representation of information.
- How the information is displayed really matters for the effectiveness of the reporting.
Don't automatically identify complexity of reporting with intentional greenwashing or socialwashing.
- Today's large corporations represent one of the most complex social forms of organizing that humans have ever invented. Their sustainability risks and impacts are, generally, mind-bogglingly complex.
- These companies need to be able to present their sustainability efforts in a way that allows you, as a reader, to see both the forest (the overall picture) and the trees (the individual elements that are complexly interconnected).
Ask yourself whether there is evidence of "greenmuting." As companies come under intense scrutiny from both regulators and consumers for their sustainability claims, many companies are responding by talking much less about their sustainability initiatives (because they are worried about legal or reputational liability)--even though many of these companies are quietly pursuing meaningful sustainability initiatives behind the scenes.