ESG reporting: Is accountability the substitute for action?

The ESG (Environmental, Social, and Governance) space has witnessed a trend of overcrowding and overemphasis on sustainability standards reporting. Disclosing ESG commitments and progress against a plethora of all-encompassing indicators is not a solution to ESG imperatives and achieves little progress. What will lead to substantial gains, is region and sector specific, prioritized indicators that are weighted for actual progress on commitments.

What a difference two decades can make. Back in the year 2003 there were three universal ESG reporting standards. Now in 2023, the number of ‘universal’ standards has doubled. They range from region-specific standards like BRSR and ERSR in India and Europe, respectively, to industry specific parameters like GRESB. These standards measure a company’s ESG performance. Investors are increasingly basing their investment decisions based on how companies fare against these standards. Keen to invest in companies with a high ESG score, they are shunning companies who don’t score well.

Sustainability reporting and voluntary disclosures, as a result, have become the norm for large business entities across the world. So much so that accountability and reporting is getting ahead of actual, impactful actions.

One of the problems is that the multiple global and national sustainability reporting standards and indices don’t necessarily always talk to each other. There are overlaps and divergences between them and each can contain anywhere between over 80 essential indicators for BRSR in India, to over 200 indicators in Dow Jones Sustainability Index, to over 90 parameters under CDP. This is creating a case of disclosure fatigue for companies.

ESG standards and frameworks tend to create broad-based expectations of what responsible business is. But it must be understood that reporting is not a substitute for impact. Auden Schendler, author of the book ‘Getting Green Done’, articulates this beautifully.

“Measurement and reporting have become ends to themselves, instead of a means to improve environmental or social outcomes,” he writes. "It’s as if a person committed to a diet and fanatically started counting calories but continued to eat the same diet.”

A company could maneuver their way through the sustainability standards to show their sustainable practices to shareholders while indulging in environmentally harmful methods. A great example of this is the fact that permissible levels of renewable energy use in industrial areas in India differ widely by state and by size of operation. A firm’s intent, ambition, and readiness to act on shifting to renewables has no relationship to what they report on as renewable energy use. Frameworks and standards do not in any way consider these realities.

Moving towards a universal framework for ESG standards and reporting, robust, comparable, and relevant (geography and sector specific) standards, should be high priority for all rating and standards institutions. The alignment of international standards along with a bias for action and progress, and not just commitment, is the need of the hour. For now, the ESG reporting narrative seems unable to see the wood for the trees.

(The author is Head of CSR at Godrej Industries Limited and Associate Companies)