ESG Reporting: The Good, The Bad and The Ugly

In its just-released 2022 report, the Global ESG Monitor (GEM) looks at the environmental, social and governance reporting of 350 of the world's most important companies. GEM is the international leader in analyzing ESG reporting transparency and publishes a comprehensive annual report that analyzes non-financial reporting in Europe, North America, Asia and Australia. "2022 was a year in which the importance of ESG issues increased dramatically," said Michael Diegelmann, co-founder of the GEM. "Environmental and social crises fill the news daily, and companies need to clearly communicate what they are doing and how they are managing their efforts. Progress is being made, but the bottom line is that too many large multinational companies are still inadequate in their ESG reporting. This will not go unnoticed by investors and the public."

Global ESG reporting in focus

For the GEM 2022, 625 ESG reports from 350 companies represented in indices of ten major stock exchanges were analyzed. Comprehensive reports on the individual regions will be published over the coming weeks. At the end of November, the global GEM report was published, covering the four main continental stock market indices from Europe, the USA, Asia and Australia, such as EuroSTOXX), S&P 50 orASX 50 (Australia).

Only a few companies came close to the top score of 100 on the rating scale of the so-called "rating scale". GEM Assay, the Global ESG Monitor's proprietary analysis model. The highest score worldwide for transparency in non-financial reporting was 90, the lowest 7 points. The GEM Assay uses 184 criteria to analyze corporate ESG reporting. ESG reporting is used in a variety of ways, including as a factor in rating agencies' ESG scores, which are used by investors to guide investment decisions. 

Comparing the transparency of ESG reporting across continents, the average score for companies in Europe is 66 out of 100, followed by 56 points in Asia and 53 points each in the U.S. and Australia. 

European companies lead the way

"It is no surprise that the GEM finds such wide variation in reporting transparency across countries and regions. There is still no single, internationally recognized standard in ESG reporting, and this poses challenges for companies," said Ariane Hofstetter, GEM Co-Founder and Head of Research and Data Science. "Even though important analytical tools such as materiality analysis are widely used, the result is often overshadowed by window dressing and a low level of traceability and commitment."

The survey clearly shows that European companies are setting the pace in ESG transparency worldwide, with eight of the top ten companies coming from Europe and two from Asia. The company with the highest overall score and thus the most transparent ESG report was the Italian energy company Enel SpA.

The GEM Top Ten

The biggest shortcomings in ESG reporting

The GEM identifies deficits in ESG reporting in various areas. These include, for example, gender diversity on boards of directors and supervisory boards. Here, it was shown that the greatest gender diversity exists in the USA, for example. There, 90 percent of companies have mixed boards. The average ratio of women to men on management bodies is most balanced in Europe, at 50 percent in each case, while in the USA and Australia, for example, only a third of board members are women. 

Climate targets are also being achieved differently by global companies: many of the companies analyzed in the GEM have addressed CO2 emissions. But only a limited number of the companies analyzed are already carbon neutral. Most companies have set carbon neutrality targets and aim to achieve net zero in the future. The largest share of companies claiming to be CO2 neutral is found among the S&P 50 in Asia, the lowest in Europe.

Other problem areas that are assessed differently around the world: Many ESG reports still leave supply chains in the dark. In Europe, slightly more than half of the companies disclose at least the geographic location of their suppliers; in Asia, the USA and Australia, in some cases less than a third of the listed companies do so. And statements about child and forced labor continue to raise questions. While 72 % of EuroSTOXX companies disclose child, forced or compulsory labor risk in their ESG reporting, only 54 % from the US, 51 % from Asia and 36 % from Australia do so. And it gets worse: In Europe, 60 % of companies disclose strategies to eliminate forced and child labor and other forms of exploitation. In the U.S. (27 %), Asia (27 %) and Australia (26 %), the figure is less than a third each.

Lack of international standards in ESG reporting

According to GEM 2022, 96 % of companies in the global sample refer to frameworks and standards in their reports, with an average of 9.1 frameworks mentioned. In the EuroSTOXX, an average of 12.3 frameworks are mentioned. Some companies place too much emphasis on frameworks and publish separate reports specifically tailored to individual standards. For investors and other stakeholders, orientation is difficult and there is a risk that companies select the frameworks with the most favorable requirements for them.

Final examinations are also not yet mandatory or common. Such audits should actually promote trust and reliability. But only 68 % of companies voluntarily provide assurance on their disclosures through a financial statement audit. A limited assurance audit is still the most common (88 of the 353 audited reports indicate the depth of the audit).

European companies are increasingly preparing for an external audit. With its legislative proposal of the Sustainability Reporting Directive (CSRD), the European Commission is introducing an EU-wide duty to audit sustainability information with limited assurance. In perspective, this is to transition to a reasonable assurance audit requirement.

Source: Global ESG Monitor