What to look for when reading ESG reports

While investors are increasingly factoring Environmental, Social, and Governance (ESG) criteria into their decisions, a significant challenge remains: the usability and comparability of ESG reports. A global EY investor survey highlights that a growing number of investors consider ESG, yet they frequently encounter limitations in the information provided, hindering their decision-making process.

Unlike financial statements, which have long been subject to standardized analysis, ESG reports often fall short of providing the clarity and consistency needed. Investors and stakeholders are learning to navigate these reports, but a deeper understanding of their structure, limitations, and underlying accounting policies is crucial. Without this knowledge, the numerical data presented in ESG reports can lead to incorrect interpretations.

To ensure ESG data is not misleading, users must pay close attention to the criteria used in preparing the information. This includes understanding whether data aligns with reporting standards like ESRS or GRI, or if it's based on internally developed metrics. When internal criteria are used, reports should clearly describe these, akin to accounting policies in financial statements, to enable accurate interpretation of the figures.

Furthermore, understanding the estimations and assumptions embedded in ESG reports is vital. Due to a lack of actual data, particularly concerning value chains, companies often rely on estimates. For instance, a group might estimate energy consumption for foreign subsidiaries based on internal data and the scale of foreign operations. Similarly, sector averages might be used for waste generation, or assumptions about business development and technology might shape decarbonization goals. Reports must provide this contextual information for users to analyze the data meaningfully, recognizing that these assumptions can also change over time.