Why D&I Will Be A Critical Part Of Your ESG Reporting

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With proxy season approaching, companies need to get a handle on their ESG reporting, and more specifically, the D&I component, which will be under a sharp microscope. Three leading practices to get it right.

With the demand for greater transparency around companies’ strategy and progress on ESG, many struggle with how to measure the topics within the “S” pillar. These topics are broad, ranging from human capital development to community relations to social opportunities, such as access to finance and health care, and how to measure progress and impact aren’t always tangible. Diversity and inclusion (D&I), an increasingly important component of the “S” in ESG, is no different. And while many CEOs are committed to D&I and its impact on both internal company values and long-term value creation, companies may face another layer of complexity as their leaders learn more about employee perceptions of corporate culture and establish aspirational goals.

To overcome some common barriers to ESG, and specifically D&I reporting, executives can embrace three leading practices: build an authentic story, engage the right leaders and take a data-driven approach.

Build an authentic story

While historically, reporting may have been thought of as a compliance exercise, a requirement to fulfill, now it’s also about having an opportunity to tell your company’s story — what your company’s values and purpose are and what you are doing to achieve them. Tell a story about your company’s D&I efforts, highlighting practices that tie to the company’s purpose. This type of communication, if authentic and genuine, can ultimately inspire your employees, while helping improve transparency and building trust with external stakeholders.

And remember, it doesn’t matter where you start, as long as you get started and have a vision forward, one that can lead the organization to get involved and move together.

Engage the right leaders

D&I initiatives shouldn’t be treated as simply an add-on to a company’s other activities and objectives. They need to be embedded in the company’s broader risk management process and strategic planning. The CEO and other executives need to communicate why D&I is important and work with all internal stakeholders to ensure that D&I is part of the strategic plan. That means coordination with the CHRO, sustainability officer and diversity leader, if there is one.

These leaders should also be accountable for progress on the company’s D&I commitments.

And, of course, because we are talking about disclosures, the CFO and finance department, along with internal audit, should be engaged. The financial reporting group’s knowledge of processes and controls can also be helpful as the company implements similar efforts around their D&I data — because without proper processes and controls in place, the company won’t have credibility in the marketplace.

Take a data-driven approach

While the idea of disclosing D&I data might be uncomfortable for some companies — the metrics might not tell the full story, or they might look inconsistent — this data is key to your D&I efforts. It’s also been on the SEC’s radar: In late 2020, the SEC introduced new disclosure requirements around human capital that are designed to give stakeholders more insight into this aspect of listed companies’ businesses. The new human capital disclosures should be supported by effective controls and procedures, showing that there’s been movement toward a data-driven approach.

Companies may face challenges when it comes to measuring, reporting and gaining deeper insights from data to better inform their strategy, however. Often, there is no consensus on what metrics to report when it comes to ESG. Companies also frequently lack a standardized reporting process, controls and quality data, and reporting is mostly manual.

Leaders should define a set of relevant ESG metrics and determine what information to report (both internally and externally), how to source it and who the key stakeholders are. Beyond reporting, this data is useful in identifying strategic opportunities to make progress on D&I.  These leaders should likewise standardize data sources and attributes, data quality expectations, definitions of metrics, and general policies and procedures related to gathering data. And they should use existing finance reporting processes and tools to automate reporting and analysis — and upskill employees to be able to derive and communicate insights from the data.

Companies that successfully pursue these three practices will be better able to communicate their commitment and progress, increase employee engagement, manage associated risk and ensure their efforts are achieving their D&I goals.

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