Partner London
"ESG reports are coming under ever increasing scrutiny by regulators, civil society and members of the public."
ESG reports are coming under ever increasing scrutiny by regulators, civil society and members of the public. Regulators and civil society are becoming more efficient at identifying red flags in ESG reports, including through the use of bespoke AI tools. As a result, we are seeing a wider range of companies and sectors coming under the spotlight.
Each year we assist clients to identify areas of legal risk and red flags to be addressed prior to publication by reviewing their draft ESG and sustainability reports and advising on actions to mitigate risk. Launching this year, we have developed a bespoke AI tool to better support our clients and match the increasingly efficient scrutiny with increasingly efficient risk mitigation.
As we move into the reporting season, we highlight five mistakes we commonly encounter when reviewing ESG reports.
1. Treating reporting as a marketing exercise
Whilst ESG efforts are often driven by reputational concerns, treating ESG reporting as a marketing/communications exercise could lead to serious legal risks for companies if there is insufficient rigour or accuracy.
Like financial and other reporting, there is an assumption that what a company puts in an ESG report is accurate and verifiable. However, often companies do not approach ESG reporting with the same (or similar) level of rigour as they do with other reporting (e.g. financial reporting).
Companies that fail to approach the exercise with sufficient care risk being criticised for misleading the public – whether that be through overstatements, lack of evidence or otherwise (as explained further below).
2. Overstating impact and achievements
In ESG reporting, companies are often tempted to include bold and broad statements about its impacts or achievements. However, as mentioned above, when a company overstates its impact or its achievements, this can be a source of legal risk as it may be deemed misleading conduct.
When drafting reports, it is important to choose words that accurately and reasonably reflect the company’s reality and avoid the urge to try and embellish by using words that risk misleading the reader.
3. Not having evidence to back up claims
All statements about the company should be verifiable and backed by evidence. Where a statement is not backed up by evidence, it is often apparent when reading and leaves the company open to scrutiny and criticism.
We most commonly see this issue arise with respect to value statements made by companies. For example, a company may state that it prioritises diversity and inclusion or reducing environmental impact. However, where there is no evidence that the company has in place a plan or strategy in pursuit of these priority areas, or where there is no evidence of year-on-year improvement, this may give rise to an allegation that the value statement is misleading.
"Any inconsistencies between a company’s ESG report and its other public statements may raise a red flag for regulators or civil society organisations."
4. Making statements that do not align with other public statements and documents
A company’s ESG report will typically be only one of a range of public statements or documents related to ESG. Any inconsistencies between a company’s ESG report and its other public statements may raise a red flag for regulators or civil society organisations.
Common inconsistencies include where an ESG report inaccurately describes what a publicly available policy says or does, or where a company’s stated goals and values are inconsistent with those stated elsewhere.
5. Using voluntary standards and frameworks… incorrectly
Third party standards and reporting frameworks such as the Global Reporting Initiative (“GRI”), OECD Guidelines, UN Global Compact (“UNGC”) and UN Guiding Principles on Business and Human Rights (“UNGPs”) can be invaluable tools for companies along their ESG journey.
The benefits of these standards and frameworks include that they provide companies with easy (and mostly free) access to clear, practical guidance and a standardised way of benchmarking and reporting on ESG practices that is internationally recognised.
On the flipside, given the international recognition and free access to these standards and frameworks, it is that much easier for someone scrutinising a report to identify where a framework has been used incorrectly or where a company does not in fact align with the standards it purports to.
When including international standards and frameworks into reporting, we always encourage clients to only refer to those they truly align with (and where that alignment can be evidenced).
Avoiding common mistakes
ESG reporting can be difficult to navigate. To facilitate better risk mitigation in reporting, WFW is launching a new AI-assisted ESG report review service. Our bespoke AI framework allows us to conduct our red-flag reviews of ESG reports more efficiently and cost-effectively. Our team uses the output of our AI-assisted review as a basis for advising on how best to mitigate risks identified, including through proposed amendments to draft reports before they are published.
If this article has raised any thoughts, questions or concerns for you and your company’s reporting, please contact the authors.
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