Mastering ESG Reporting: A Step-by-Step Guide to Showcasing Your Sustainability

In today's business world, Environmental, Social, and Governance (ESG) reporting is no longer a niche activity but a critical component of corporate transparency and long-term strategy. Investors, customers, and regulators are increasingly scrutinizing how companies manage their impact on the planet and society. A well-structured ESG report not only meets these demands but also highlights a company's commitment to sustainable development and responsible practices.

This blog post breaks down the essential steps to prepare a comprehensive ESG report, drawing insights from the "HOW TO PREPARE AN ESG REPORT: A Step-by-Step Guide to ESG Reporting" (March 2020) by the Hong Kong Exchanges and Clearing Limited (HKEX). While this guide provides a strong foundation, always refer to the latest guidelines from relevant authorities in your jurisdiction.

Financial statements alone don't paint the full picture of a company's resilience and future prospects. Investors are increasingly looking at ESG factors to assess a company's management strength, its handling of environmental and social risks, and its long-term value creation potential. Effective ESG reporting can engender investor confidence and reflect a company's proactive approach to an evolving business landscape.

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Step 1: Engage the Board and Establish an ESG Working Group

The board of directors holds ultimate responsibility for an issuer’s ESG matters. This includes evaluating ESG-related risks and opportunities, ensuring effective risk management systems are in place, setting the ESG strategy and priorities, reviewing progress against targets, and approving the ESG report.

To manage the detailed work, issuers should consider establishing an ESG working group. This group, reporting to the board, should comprise senior management and staff with knowledge of ESG issues and the company’s operations. Clear terms of reference, outlining powers, authority, scope, and resource commitment, are crucial for this group's effectiveness.

Step 2: Understand the Requirements of the Reporting Guide

The ESG working group must thoroughly understand the reporting requirements of the applicable ESG Reporting Guide, and the board’s ESG strategy. Companies can also consider adopting international ESG reporting guidance relevant to their sector, provided it meets comparable disclosure provisions.

For each disclosure requirement, assess existing policies and data. Ask: Do we have policies in this area? Who is responsible? What data do we need for KPIs? Are there gaps?

To bolster credibility, issuers can seek independent assurance for their ESG report, covering all or part of it. The scope of this assurance should be clearly stated.

Step 3: Define the Reporting Boundary

The reporting boundary defines what entities and operations are covered in the ESG report. This decision depends on the issuer's specific business and circumstances.

Some issuers align the ESG report's scope with their annual financial reports. Others might use financial thresholds (e.g., subsidiaries contributing a certain percentage to revenue) or risk levels. Different scopes can even be adopted for different ESG aspects/provisions. Transparency about the chosen boundary is key.

Step 4: Conduct a Materiality Assessment

Materiality is a cornerstone principle. It refers to the threshold at which ESG issues are deemed sufficiently important to investors and stakeholders to warrant disclosure.

This should be led by senior managers and key employees who understand the company's strategy, values, risks, and the sector's challenges.

Engaging with stakeholders (investors, customers, suppliers, employees, regulators, NGOs, local communities etc.) helps identify their expectations and concerns. This isn't necessarily a separate exercise for the ESG report but can be part of ongoing operations.

While not mandatory, a materiality matrix is a useful tool to visually represent the outcomes, plotting issues based on their impact on the business versus their importance to stakeholders.

Step 5: Set Meaningful Targets

Issuers should set targets—numerical or directional—to help reduce negative impacts and evaluate the effectiveness of ESG policies. A common approach is to make targets Specific, Measurable, Attainable, Relevant, and Time-bound. The HKEX Guide specifically requires disclosure of targets for certain environmental KPIs on a "comply or explain" basis.

Step 6: Write the ESG Report

The ESG report should be a comprehensive document that includes:

ESG Governance Statement

A mandatory statement from the board detailing its oversight, management approach, strategy for ESG issues (including risk evaluation), and how it reviews progress against ESG goals.

Reporting Boundary Explanation

Clearly explain the scope of the report and the process used to determine it. Any changes from previous periods should be justified.

Describe how the principles of "materiality," "quantitative," and "consistency" were applied. While not requiring a specific explanation, the "balance" principle (disclosing both positive and negative information) should also be followed.

Application of Reporting Principles

Report on "Comply or Explain" Provisions

For each provision, either disclose the required information or provide a considered reason for not doing so (e.g., not material, confidentiality, legal prohibitions, information not yet available). Blanket statements of compliance or non-compliance are insufficient. The guide highlights common pitfalls for certain KPIs, such as A1.3 (hazardous waste), A1.4 (non-hazardous waste), A2.5 (packaging material), and A3.1 (significant environmental impacts)

Independent Assurance (Optional)

If obtained, clearly describe the level, scope, and processes adopted for the assurance.

Use the report to demonstrate business resilience and readiness for sustainable development. Showcase how the company identifies risks and realizes opportunities through innovation. Keep the report concise, use visuals, and consider case studies.

Key Messages

Beyond Compliance: Strategic Value

Preparing an ESG report is more than a compliance exercise; it's an opportunity to critically assess and improve your business operations, strengthen stakeholder relationships, and build long-term value. By following a structured approach like the one outlined in the HKEX guide, companies can produce a decision-useful report that truly reflects their commitment to a sustainable future. Consider also the TCFD Recommendations for guidance on climate-related financial disclosures, an increasingly important aspect of ESG reporting.