In a recent review of the 10 largest global chemical companies’ environmental, social and governance (ESG) reporting, an Ernst & Young (EY) team found that most companies already produce ESG reports, and many CEOs are committed to it.
Indeed, according to the EY 2022 CEO Outlook Survey in October 2022, half of the respondents in the chemical sector consider ESG capabilities a core aspect of the business. However, our research also suggests that most firms have a long way to go before they have the level of detail that investors, customers and regulators increasingly demand.
For instance, several major players still don’t disclose much with respect to their use of renewable energy, investments and progress in decarbonization and water management. Many need to enhance transparency on metrics, such as the share of renewables in power purchased and consumed, energy efficiency, and reduction in energy use. In addition, chemical companies’ Scope 3 emissions reporting remains limited at best.
ESG Reporting — Neither Standardized Nor Mature
Some major players also neglect to disclose key social data, such as number and share of small and diverse suppliers, and overall global spending on diverse suppliers. Many chemical companies have set few quantitative targets for social and governance topics. While companies are setting bold targets for their environmental initiatives in terms of greenhouse gas (GHG) emission reductions or increasing share of renewable energy, there are not so many goals regarding diversity, skills development and other socially focused metrics.
Health and safety reporting also needs improvement. Companies will need to expand reporting on employee and contractor health and safety, which includes reporting work-related injuries incident rates, total recordable incident rates and process safety total incident rates, to communicate how they are minimizing the safety risk of their products and services.
Companies also need to enhance reporting on employee engagement and satisfaction, as well as impacts on the community through products, services and community involvement. Additionally, there is a lack of data on benefits and pay, such as the ratio of annual total CEO compensation to median employee pay and share of base salary adjustments for a median employee. Most chemical industry ESG reports include little coverage of corruption incidents, anti-corruption initiatives, ethics and integrity, and supplier assessment for environmental impacts.
ESG Sticking Points
What’s holding most of these companies back? Part of the problem is simply that ESG reporting is still in its infancy. In particular, most chemical companies lack:
• Standardized guidelines for reporting regulations and data validation: There are no mandatory reporting standards set for companies, making it difficult for investors to make decisions based on the data that is available to them. There are currently more than 600 ESG reporting schemes globally, making the reporting landscape confusing to navigate.
• A segment-specific reporting method: There is minimal guidance on reporting for different chemical segments. This makes it difficult for companies to benchmark themselves against their peers and industry leaders. Moreover, there is no data validation by an authorized system or regulatory body that provides data transparency for ESG.
• Discipline, process and controls in reporting nonfinancial data: Given the wide array of products various chemical companies develop, many companies need to design standard processes to report and assess data across business segments and functions. They need to spend time and resources to gather, assess and accurately report ESG data; install proper internal controls and processes; and focus on audit preparedness.
• A reliable system and software: Currently, most of the systems do not adapt flexibly to different industries’ requirements. Failing to invest in adequate software support puts companies at risk of compromising the integrity and completeness of their disclosures.
• A consistent rating framework: Most ESG data providers have developed their own sourcing processes and rating methodologies, which has resulted in a low correlation between different providers’ company ratings.
Getting ESG Reporting Right In Four Steps
As scrutiny of their ESG performance increases, chemical companies need to make their ESG reporting a part of their regular operations, tools and governance. Here are four steps chemical facilities should take now to ensure holistic and effective reporting when it becomes not just advisable but a mandatory part of doing business:
1. Conduct a management system review on ESG goals and reporting: Companies often assign ESG issues to various departments, such as sustainability, procurement and human resources. However, the lack of an integrated system for reporting and monitoring ESG performance often fails to protect companies from penalties and negative public opinion, shield workers from harm, or address regulatory concerns over greenwashing.
2. Appoint the right leadership: To ensure more robust reporting, chemical companies must appoint a sustainability committee with clear roles and responsibilities, which works in sync with the strategy and other teams across the organization to ensure timely and accurate tracking.
3. Develop a multi-year improvement plan for ESG data, systems and reporting: Enhancing ESG reporting requires a detailed multi-year strategy to develop the frameworks and systems that record and report the data accurately. Chemical companies need to identify their key stakeholders and peers, to develop a robust yet flexible ESG reporting system that is integrated with the company’s strategic priorities.
4. Prepare systems for increased scrutiny by investors and other stakeholder audiences: Chemical players need to develop (or utilize) tools that make it easier for investors and other stakeholders (including employees and customers) to find answers to their questions on the alignment of the companies’ initiatives and reporting with their strategy and goals. These tools should help the investors identify if the company’s ESG strategy, goals and performance are united, and should be independent of the reporting framework used by the companies.
Although ESG maturity varies from company to company, the overall direction is clear: detailed, worldwide reporting. Considering the direction of the global regulatory trend, it is evident that ESG reporting is moving from a primarily voluntary disclosure-oriented regime to a mandatory regulatory one. The reporting of Scope 1 and Scope 2 GHG emissions mandated in the 2022 SEC proposal is one example of the kind of use of ESG data in regulatory compliance that companies should expect — a shift that will have significant implications for how ESG data is collected, verified and acted upon within an organization.
