In May 2023, DecideAct hosted an online event on the importance of having strong governance of processes, controls, and data collection to support ESG (Environmental, Social, and Governance) strategy execution. The keynote speaker was Henrik Jensen, Vice President and Head of Group Accounting, Governance, Risk & Controls at A.P. Moller - Maersk. He provided an interesting and valuable insight into the way the world's largest shipping company handles the ESG reporting process.
ESG reporting has become a much more central part of business and should therefore be one of the pillars of a healthy business. But ESG is much more than just communication, and it makes no sense to talk about the ESG reporting process without talking about strategy execution, because if your ESG reporting is not connected, then the quality of the data and the way you report on ESG performance is at risk.
This includes how to work with both the ESG department and the financial reporting department when reporting on ESG, but also how to obtain the right data to ensure data integrity.
Finance has the toolbox for ESG Reporting
What you report on matters and should be connected to your strategy execution. There is no better way than to talk to your teams across the organization when you are strategically aligned. In accounting, this approach is dominant today, and the toolbox developed over decades in finance is a great gift that can be given back to the rest of the organization to put ESG reporting strategy into practice on a day-to-day basis.
Financials are no longer the only indication of whether we are successfully delivering on our strategy today. The non-financial commitments are just as important, so Maersk decided in the run-up to last year's report to place the Group's ESG commitments alongside the financial guidelines.
"In order to communicate how we are performing against our ESG commitments, there needs to be transparency on how we are implementing our ESG strategy. It is a call to action that requires us to be aligned with how we are performing across our ESG committees," explains Henrik Jensen.
"We launched a very ambitious ESG strategy, which makes me proud to be part of Maersk, because we want to lead the way—not because we have to, or because of regulatory disclosure requirements, but because it is the right thing to do. It provides a competitive edge and customers are asking for it. Among other things, we accelerated our decarbonization targets, some of the upcoming new ships will be dual-fuel capable, and we have implemented 13 new ESG KPIs that we started reporting on last year."
ESG must be embedded in the business
As part of the implementation of the ESG strategy, Maersk has selected a number of categories across the areas of environment, social, and governance and is committed to focusing on seven of them. At the same time, decisions have been made on which KPIs to deliver in the short and long term. For the long-term KPIs, roadmaps are in place so that it is not a matter of hope whether they will be achieved by 2040. These are of course less specific than the short-term targets, but it is important to have an overview of how the targets will be achieved in the future.
To do all this, it is also important that the right governance structure is in place. Three years ago, Maersk decided that strategy execution, including ESG, is anchored in the business. This means that the ability to define and execute the strategy lies in each function.
"My function, corporate functions, are there to guide, challenge and ensure that we execute the strategy in the best way and that the reporting is supported by a strong interim process," says Henrik Jensen. "Compared to the governance we have in financial reporting, ESG strategy governance is very complex, also because it cuts across many different categories."
He also stresses that what works for Maersk cannot be immediately replicated by any other organization. However, there are several elements that others can take inspiration from and build on.
Reporting on ESG on a monthly basis
Maersk has established a separate Board Committee responsible for ESG, which is a new approach to ESG reporting that was previously anchored in the Audit Committee. It is Henrik Jensen's responsibility to ensure that the Audit Committee receives the necessary documentation to fulfil its responsibilities.
In execution, multiple functions across the organization need to work together to deliver results, e.g., ESG sponsors and category owners. Owners need to ensure the execution of the strategy, reporting on performance on a monthly basis and predicting how ESG commitments are met.
Maersk's ambition is to be as mature in non-financial reporting as in financial reporting, and Henrik Jensen describes it as a big journey to get there. He believes that the toolbox developed in the financial sector over decades can help his colleagues in the non-financial world to succeed.
"When I talk to my colleagues about this journey, I often talk about monthly reporting on ESG performance and communicating with the management team about where we expect to be in 12 months' time. In finance, we must be able to provide guidance on our financial performance—to predict and provide guidance for the future—and not just talk about how we have done so far. We need to build a similar mentality and capacity in the non-financial world," Jensen points out.
A great journey of maturity
As mentioned above, when it comes to ESG reporting, it is crucial that it is linked to the company's strategy and that everyone in the organization is clear about their roles and responsibilities. At Maersk, ESG governance is based on six clear principles:
- Beyond the regulatory requirements, only ESG related to the strategy is reported.
- The level of ambition and targets reflect the strategic priorities.
- Reporting is based on best practice standards.
- KPIs are clearly defined, understandable, measurable and verifiable.
- ESG reporting should be as logical and easy to understand as financial reporting.
- The definitions cannot be changed to make up the results of the performance.
As ESG is a less mature area than finance, we need to understand and accept that we are constantly evolving and getting smarter. It is a maturity journey, and at Maersk, ownership is anchored in the business by the category owners, supported by Henrik Jensen's team and the corporate sustainability team.
"We call it our dream team, but it's a big team that has to work cross-functionally. It's about making sure that everybody—also the people who don't own the outcome—are interested in contributing to it. We need to be able to motivate them to help category owners succeed, even if it's not their main responsibility. We do this by being transparent in our approach," says Henrik Jensen.
People should be energized
When Henrik Jensen talks to his colleagues in finance, he explains why understanding the bigger picture is so important for success. And this is especially true when newly acquired companies need to get on board the ESG journey.
"It's a mindset shift and we need to be aware of the skills we need on the team. It's important that you have people who are energized by mapping internal processes with better controls. Not everybody is energized by doing it, so don't force them to do it. We shouldn't try to make people do something that doesn't energize them," he says.
Data integrity is crucial for ESG Reporting
When it comes to reporting tools, there is often one source of truth, one consolidation tool that can provide consolidated figures for an organization. But when it comes to ESG reporting, what exactly is the system of records from which you get the data? How do you ensure that when you must report on behalf of a larger organization, you do it in a standardized way across the organization? This is something that a finance organization can help with.
The people in finance have expertise and knowledge from the past. They also understand that data integrity is crucial to reporting high-quality figures and that making mistakes in reporting has consequences not only for external but also for internal reporting.
Because if you don't have quality data in your performance management, how can you make the right decisions? How can you make sure that you are following the strategy as expected? So, it's important to have this mindset of process control and that there are well-documented reporting processes that support your reporting and that can be validated across all KPIs.
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Newly acquired businesses need to catch up
When you buy a company, you often do so because of the value proposition and because you can create synergies within the organization. You often look at the financial performance, but now you also have to take into account their ESG performance.
If you have ESG commitments and you are going to acquire a company that does not meet your ESG expectations, should you refrain from making the acquisition? Probably not, but you should at least pay attention to how to bring the newly acquired company up to standard.
When it comes to sustainability reporting, you can only get limited assurance from the external auditor. So how do you ensure that you can get reasonable assurance or a higher level of assurance over time and that you can get the necessary insight and overview? Again, the people in finance can help you with this.
There are various quality criteria that need to be met to achieve a sound reporting process.
- The process must be strategically aligned to ensure sufficient ownership for high-quality reporting.
- Ownership and responsibility must be ensured in the organization, otherwise, nobody cares. There is nothing worse than reporting on a KPI that no one believes in.
- Everything needs to be measurable and verifiable, and drilling down to really understand what it is that is not being delivered.
- External reporting standards need to be aligned and the difference between the reporting and the requirements of external standards needs to be explained.
Non-financial aspects of materiality
In the financial world, materiality is often based on financial numbers, but when it comes to ESG metrics, there are also other aspects of materiality. Among other things, you need to consider how ESG metrics affect your organization and the surrounding society. And according to Henrik Jensen, it is extremely important that you start by reporting internally before reporting externally.
"At Maersk, we have started to include ESG metrics in our management remuneration, which means that we cannot wait until January to tell our management team that we have not met our KPI. We need to report more often, maybe even monthly. We are discussing how we can further integrate our ESG reporting into our annual report. We have kept our reporting package, which includes our annual report, sustainability report, ESG Factbook, and the website where we share ESG-relevant information," says Henrik Jensen.
ESG Reporting - Henrik Jensen's seven key recommendations:
