A practical guide to
CSR and ESG
reporting
Introduction
Compiled for HR, Compensation, Total Rewards, and DEI Professionals
The era of Corporate Social Responsibility and Environmental Social, Governance reporting is here.
Is your organization ready?
Corporate Social Responsibility (CSR) and Environmental, Social, Governance (ESG) initiatives have become essential to nearly every organization's financial performance and brand reputation. They're also indispensable for attracting and retaining top talent and building progressive workplace cultures.
As an HR, compensation, total rewards, or DEI professional, you play a critical role in championing your company's CSR and ESG programs and spreading the word about them to employees and other important stakeholders. This guide is intended to help you maximize your success. However, CSR and ESG are complex and evolving issues. Seeking ongoing guidance from a trusted expert such as Trusaic will ensure that you remain informed and capable of making decisions that serve all of your valued stakeholders.
The Rise of CSR & ESG
Organizations around the world are feeling pressure from virtually all of their stakeholders to become more transparent. Lawmakers, investors, business partners, suppliers, customers, and workers all want deeper insights into the operations and business practices of the companies they invest in, partner with, buy from, and work for.
They want to know, for example, whether organizations are behaving in ways that are ethical, sustainable, and worthy of trust. Are they as committed to positively impacting society as they are to growing their profitability? Are they creating equitable and respectful work environments? And are they actually holding themselves accountable for monitoring and making progress on these issues?
While some companies resist this level of transparency, progressive companies embrace it. They recognize it as a golden opportunity to tell their stories and showcase how they're future-proofing their organizations through more enlightened business practices. They share this information through Corporate Social Responsibility (CSR) and Environmental, Social, Governance (ESG) reports.
Like financial reports, CSR and ESG reports provide a company's stakeholders with the information they need to assess its overall standing and make critical decisions including whether to invest in, partner with, or purchase from that company. Instead of focusing on a company's financial status, however, CSR and ESG reports highlight other vital aspects of its performance such as its efforts to reduce its carbon footprint, progress on diversity and equity, actions taken to protect stakeholders' data and privacy, the composition of its management ranks and Board, etc.
CSR/ESG Facts & Figures
Among the top 10 trends that have the greatest impact on how CEOs lead their organizations in 2023 are ESG-related issues including … the increased importance of climate change and net-zero transition … a higher expectation for companies to have social purpose … and the persistence of gender and racial gaps in the economy. - McKinsey CEO Excellence Survey, 2023
69% of executives surveyed noted higher levels of stakeholder pressure to improve ESG reporting transparency-an 11% increase in only a year. - KPMG's 2022 CEO Survey
78% of investors think companies should make investments that address ESG issues relevant to their business, even if it reduces profits in the short term. - EY Global Corporate Reporting and Institutional Investor Survey, 2022
100% of asset managers in the UK include ESG factors in their investing decisions. 97% in Continental Europe and 82% in the U.S. do likewise. - Russell Investments, ESG Manager Survey, 2021
96% of employees expect their companies to pursue a sustainability agenda. But with only 28% of HR leaders putting sustainability/ESG at the heart of their agenda this year, picking up the pace will be essential. - Mercer, Global Talent Trends Study 2022-2023
Companies most attractive to students and young professionals have ESG scores 25% higher than the global average. ESG performance will function increasingly as a competitive advantage for companies, serving to engage today's employees and attract tomorrow's talent. - Marsh & McLennan, "ESG as a Workforce Strategy," 2020
Class actions and government enforcement litigation spiked to over $63 billion in settlement totals in 2022. ESG-related issues are prime areas of risk in 2023 and beyond. - Duane Morris, "ESG and the Growing Interplay with Class Action Lawsuits," April 3, 2023
ESG performance will function increasingly as a competitive advantage for companies, serving to engage today's employees and attract tomorrow's talent.
CSR Reporting
CSR refers to an organization's actions to address social and environmental issues as part of its business operations. CSR is voluntary and self-regulated, and it helps to promote the organization's sustainable development.
CSR reporting (also known as impact reporting and sustainability reporting) typically highlights the organization's activities, plans, goals, and progress along four basic paths: 1) ethical business practices, 2) environmental initiatives, 3) philanthropy, and 4) economic considerations.
These aren't hard and fast categories and CSR reports often vary in content and style, reflecting the cultures and interests of the organizations that publish them. Many businesses seeking practical guidance on CSR have turned to the ISO 26000 voluntary standard, which shares global best practices and helps organizations translate intentions and principles into tangible actions.
ESG Reporting
ESG overlaps CSR but is more data centric, focusing on the non-financial performance of organizations across three key areas:
Environmental stewardship — How an organization performs as a steward of nature. This includes its actions around climate change and carbon emissions, air and water quality, biodiversity, deforestation, energy efficiency, and waste management, etc.
- Social responsibility — How an organization manages relationships with employees, suppliers, customers and the communities where it operates. This includes customer satisfaction, data protection and privacy, gender and diversity, employee engagement, community relations, human rights, and labor standards, etc.
Governance — How an organization’s leadership governs it, and the rules, processes, and laws they use to do so. This includes audits and audit committee structure, composition of the Board and leadership ranks, executive compensation, lobbying, political contributions, whistleblower programs, bribery and corruption policies, etc.
Unlike CSR reports, ESG reports are often audited and must adhere to a set of standards (the European Sustainability Reporting Standards, for example) that direct how information and data are gathered, what is to be reported, and how reports are to be produced.
In the U.S., where there is no official template for ESG reporting, many organizations utilize standards from the Sustainability Accounting Standards Board (SASB) as a framework for disclosing sustainability information. SASB standards address disclosure topics, accounting metrics, technical protocols, and activity metrics. Use of SASB standards is voluntary, and organizations determine which standards are relevant, which disclosure topics are financially material, and which associated metrics to report, taking relevant legal requirements into account.
The Shift to ESG
Organizations have been shifting their focus from CSR to ESG, as it provides a more holistic approach to sustainability and responsible business practices. While ESG isn't limited to publicly traded companies, it's more commonly associated with them because they're subject to greater scrutiny from investors and regulators. However, ESG reporting has become increasingly important to all types of organizations, including private companies, non-profits, and government entities.
ESG reporting is compulsory in Europe and a number of other countries, although not in the U.S., and the number of organizations required to issue ESG reports is growing in the wake of directives such as the recently approved Corporate Sustainability Reporting Directive (CSRD), which nearly quadrupled the number of EU-based entities required to issue ESG reports. However, even organizations that aren't required to report on ESG are being drawn in, as they're part of the supplier or partner chains of organizations that are mandated to report. As a result, many are finding it necessary to become adept at gathering and supplying crucial ESG data-a trend that will undoubtedly continue.
Despite not being mandatory in the U.S., ESG reports are increasingly ubiquitous: 96% of S&P 500 companies and 86% of Russell 1000 companies publish such reports in one form or another. It's worth noting that ESG reporting requirements are under consideration in several U.S. states. Indeed, in March of 2022, the Securities and Exchange Commission proposed disclosure requirements related to climate-risk and greenhouse gas emissions which, if adopted, will significantly expand the annual reporting activities of publicly traded U.S.-based companies.
Organizations have been shifting their focus from CSR to ESG, as it provides a more holistic approach to sustainability and responsible business practices.
ESG Is Here To Stay
As corporate ESG programs continue to evolve, they're becoming more deeply ingrained in business models and core business strategies, which isn't surprising given their impact on financial performance, sustainability, brand reputation, and risk mitigation. When ESG initiatives are merely tokenistic, they not only lack impact but they also risk driving away stakeholders who take these issues seriously.
As ESG has gained momentum, critics have raised objections that typically fall into four categories, outlined as follows in a 2022 McKinsey report:
- ESG is a distraction - It gets in the way of what businesses are supposed to do: make as much money as possible.
- ESG is too difficult - Striking a balance on the varied aspects of ESG in a way that resonates with all stakeholders is simply too hard.
- ESG isn't accurately measurable - Variations in weighting and methodologies across ESG ratings and scores make accurate measurement questionable.
- ESG and financial performance aren't related - Positive correlations between the two could be explained by other factors.
While these are legitimate concerns, they're countered by a significant body of research. McKinsey, for example, found that companies whose ESG ratings improved over multi year periods exhibited higher shareholder returns on average than their peers following the improvements in ESG scores. "We found, too, that the effect of this result has increased in recent years," its report stated.
It would be premature to draw definitive conclusions about the above objections due to the relatively short time that ESG has been studied. However, these objections overlook a highly pertinent fact, as McKinsey observed: openly addressing and managing a business's impacts on its communities and on society are "preconditions for sustaining long-term value." In other words, ESG is an inherent part of doing business responsibly and protecting a company's value.
McKinsey also warned against the danger of taking a wait-and-see approach to ESG: "Companies should adopt a bias toward focusing on ESG today; if companies, particularly those with significant externalities (such as high-emitting industries), hold out for perfect data and a 'flawless' rating process, they may not have a business in 20 to 30 years. … True ESG is consistent with a judicious, well-considered strategy that advances a company's purpose and business model."
...companies whose ESG ratings improved over multi year periods exhibited higher shareholder returns on average than their peers following the improvements in ESG scores.
Criticism of ESG and sustainable business practices has been particularly sharp in the investment community lately. In fact, a number of articles and opinion pieces claim that investing in ESG funds is dying, despite the fact that these funds continue to outperform the wider market. It's important to note that many of these articles purposely conflate ESG investing (an investment strategy) with ESG as a business model or set of business practices. This is due to ESG's increasingly politicized status. Most of these same articles also admit that ESG standards will likely endure in the market-they'll simply be incorporated into the bedrock of stock valuations-and ESG metrics will remain part of the investor's toolkit, along with other analytics such as earnings-per-share, debt-to-equity ratio, and free cash flow.
Put simply, ESG is here to stay. Rigorous planning, informed legal compliance, and continuous auditing of and reporting on ESG initiatives are the best ways for organizations to ensure their long-term sustainability and success.
Trust and Transparency: The Heart of CSR & ESG Reporting
It's no secret that organizations of every kind and in every sector are experiencing a decline in public trust. Economic uncertainty, perceptions of governmental corruption, the COVID-19 pandemic, and suspicion of the media are just a few of the factors driving this trust deficit. Clearly, these things lie beyond an organization's control. However, one thing they do control is their transparency-a proven means of bolstering trust. Sadly, many organizations are falling short on making their operations and business practices transparent to stakeholders.
A 2023 Harvard Business Review article stated that companies generally continue to ignore "customers' desire to understand a company's stance on diversity, equity, inclusion, climate change, and other social issues." Although this refers specifically to customers, the same observation is true for other stakeholders including investors, business partners, and employees.
The article also cited KPMG's 2022 survey of more than 1,300 global CEOs, which found that 69% of executives now face higher levels of stakeholder pressure to improve ESG reporting transparency-an 11% increase in only a year. This reflects a major shift in peoples' values, HBR wrote.
This shift in values was the subject of a recent Gallup report that found the growing public trust deficit has been exacerbated by a widespread failure of organizations to keep pace with the values and expectations of Millennials and Gen Z-generations that are exerting greater influence in the world and have higher expectations around corporate conduct than previous generations.
These generations expect organizations to operate in socially responsible ways, and to actively champion social progress. When they do, Gallup notes, the outcomes are astonishing: "When Gen Z customers learn a brand supports a social cause or is viewed as socially responsible, 85% say they trust the brand more, 84% say they are likely to purchase the brand's products, and 82% say they are likely to recommend that brand to their friends and family."
Again, this observation refers specifically to Gen Z customers, but it's generally valid across generations and beyond the customer experience. Employees, for example, want their employers and their leaders to act ethically. This is true for Millennials, Gen X, and Baby Boomers as well as Gen Z. In fact, ethics is the top attribute they want in an employer.
Gen Z and Millennials now make up nearly 40% of the global workforce, a figure that's expected to rise to nearly 60% by 2030. They also have a burgeoning presence in the investment community, regulatory bodies, and government. As time goes on, their values and expectations will carry even greater weight and their influence will only grow stronger. Organizations that want to build trust and solidify their brand reputation with these generations will need to make CSR and ESG communications a priority.
Why Stakeholders Crave Transparency
Stakeholders in record numbers want to know where organizations stand on CSR and ESG:
- Investors — 99% of all investors now utilize ESG disclosures as part of their investment decision-making, according to EY’s 2022 Global Corporate Reporting and Institutional Investor Survey. ESG disclosures help them assess the impact of a wide range of issues on a business’s performance, its risks, and its long-term growth prospects. EY states, “Companies that embrace transparency—including being open when initiatives are not going according to plan—will be more likely to earn the trust of their shareholders and stakeholders.”
- Business Partners — Businesses that fail to embrace CSR and ESG not only put themselves at risk but they also put their business partners at risk, and the potential outcomes can be devastating on a number of fronts—competitive, legal, financial, and reputational. Given the world’s increasingly interconnected supply and value chains, more and more companies are asking their business partners to supply ESG data, especially those that face reporting mandates. Companies that implement robust sustainability and risk management strategies are far more attractive and viable as business partners.
- Customers — As previously highlighted, growing numbers of customers want to make their purchases from responsible, ethical, and sustainable businesses. They look to CSR and ESG information to understand whether the values of the companies they buy from are in line with their own, how they protect and give back to their communities, and whether they’re environmentally responsible. If customers don’t like what they learn, they take their dollars elsewhere. And in the current climate of waning public trust, customers are viewing businesses with a progressively critical eye.
- Current and Prospective Talent -- In the aftermath of the COVID-19 pandemic, ESG related issues took on a whole new level of significance issues such as workplace safety, pay equity, labor standards, and human rights, among others. In the U.S., tens of millions of workers quit their jobs because of these issues. Millions left to find new employers whose cultures are more respectful and supportive, and whose values more closely align to their own. In fact, research shows that company values are now even more important to workers than higher pay: more than half of the U.S. workforce won’t even consider working for companies whose values don’t match up to their own, and more than half would be willing to take a pay cut to work for a company with better values. Obviously, CSR and ESG have a major impact on the retention of current employees and the recruitment of new ones.
.
Focusing on the "S" in ESG
Although CSR and ESG have focused largely on the environment, attention is shifting dramatically to the social component, particularly in ESG reporting. Nearly 50% of investors surveyed considered the social component of ESG the most important when making decisions, according to a 2021 survey by Berenberg Bank in Germany, surpassing the environmental component at 35%. And social-related shareholder proposals rose 37% during the 2021 proxy season, while environmental-related proposals rose just 13%.
The social component of ESG encompasses all of an organization's relationships with people. This includes stakeholders-employees, contractors, business partners, suppliers, and communities-as well as society at large. The key metrics in social reporting include:
Focusing on the "S" in ESG
- Diversity, equity, and inclusion
- Pay transparency and equity
- Employee satisfaction
- Training and development
- Labor relations, standards, and violations
- Workplace conditions and safety
- Customer relations
- Community relations
- Human rights
- Ethical supply chain practices
- Product safety
- Data protection and privacy
These metrics go right to the heart of public trust, which is why they have such an enormous effect on an organization's reputation, performance, and bottom line.
As a professional in HR, Compensation, Total Rewards, or DEI, you have direct insight into several of these metrics. You know the investments your organization is making to build a supportive and respectful workplace and a diverse and engaged workforce. You're in an ideal position to tell this story with the metrics, insights, and transparency that stakeholders want.
Because the social component of ESG encompasses so many potential metrics, one way to give your reporting focus and structure is to address your organization's opportunity equity, a principle that spans your hiring, pay, development, and promotion practices.
Opportunity equity refers to the practice of providing equal access to individuals for employment, development, and career advancement irrespective of gender, race/ethnicity, age, and other personal attributes. Obviously, DEI metrics are a major part of this story. Metrics related to pay equity and transparency are another, especially in the current business climate.
Pay Equity & Transparency
Pay equity and transparency have become global concerns. Recently, the European Union approved a new pay transparency directive for its member states aimed at closing the gender pay gap across the EU; the directive includes measures related to pay transparency, pay data reporting, applicable reporting entities, and enforcement and penalty mechanisms, and will require every major employer to comprehensively review its pay equity policies. In the U.S., a growing number of states are adopting pay transparency legislation. And in countries such as Norway, Switzerland, Germany, and Canada, important transparency trends are also gaining a foothold.
Pay equity and transparency reporting helps give your organization a significant competitive advantage in the talent market. In the U.S., 63% of job seekers now say that pay rates or salary are among their most important decision-making factors when considering a new role, and nearly 70% of workers say they'd switch employers for greater pay transparency, even if their pay remained the same. As the Josh Bersin Company recently wrote, "Research shows that your ability to demonstrate fair and equitable pay and rewards practices is now a requirement to attract and retain hard-to-find talent."
In order to accurately report on your organization's pay equity and transparency progress, you need to have a clear and reliable view of it. This requires compiling, scrubbing, and analyzing all of your compensation data. Many organizations simply don't have the knowledge or capacity to do all of this on their own. Instead, they partner with a pay equity expert, like Trusaic, that specializes in data quality, regulations, and software.
The Power of Partnering
Partnering with an expert like Trusaic not only enables your organization to conduct sound ESG reporting but it also helps ensure the integrity of your overall compensation strategy and practices, including determining fair salary ranges, reporting pay data to agencies when necessary, and reducing the risk of costly compensation-related legal actions.
Although each partnership is based on an organization's specific needs, most involve a series of key steps including some or all of the following:
Step 1: A Pay Equity Audit - Using our proprietary PayParity® software, we conduct a pay equity audit across your workforce in a single statistical regression analysis. This gives you a clear picture of pay gaps and risk areas across groups of employees, at every level, throughout your organization.
Step 2: Addition of Market Data - We then bring labor market data to bear that helps you understand how you compare against the pay ranges of other organizations. We also provide you with pay ranges so that you can remain competitive while also avoiding the further creation of internal disparities and future problems.
Step 3: Identification of Root Causes - We help identify and correct the root causes of your organization's pay disparities by utilizing advanced analytics and algorithms that pinpoint biases, faulty systemic processes, and other factors.
Step 4: Development of Customized Budget, Remediation, and Communication Strategies - Next, we help you develop a tailored budget and remediation strategy that address pay disparities over time, as opposed to correcting every issue at once, which can be difficult and costly. We help you make progress toward your pay equity goals on a timetable that suits your needs. We also help develop clear, compelling messages for ESG reporting and communication to employees and other stakeholders.
Step 5: Continuous Monitoring and Reporting - We continuously monitor your pay equity profile so that you can ensure you remain compliant with new and evolving pay transparency laws, providing you with real-time insights even when changes occur within your workforce (promotions, terminations, new hires, etc.).
Specific performance metrics … realistic and measurable goals … ongoing audits to ensure steady progress. These are essential steps in achieving pay equity as well as a sound ESG strategy. Partnering with an expert like Trusaic puts all of this within your reach with maximum ease, dependability, and cost-effectiveness.
Some organizations continue to wait for a legal mandate to begin ESG initiatives. If you're not already obligated to issue an ESG report, you can do the same. Or you can be proactive. You can answer your stakeholders' calls for greater progress and transparency. You can take control of your ESG story now.
As noted earlier, trusted business advisors like McKinsey warn that waiting too long to address and report on ESG might well be putting your organization's future at risk. Is that really a risk worth taking?
Contact us to learn more about how we can help you with your CSR and ESG reporting efforts.