Companies are facing increasing pressure from regulators, investors, and stakeholders to improve their environmental, social, and governance (ESG) management and close the ‘gaps’ in their performance. ESG disclosures are a critical part of business strategy and regulatory compliance, and organizations that fail to meet evolving ESG standards risk reputational damage, financial penalties, and loss of investor confidence.
Most companies are overwhelmed with the quality and comprehensiveness required of them in this new age of climate disclosure. This overwhelm presents an ideal opportunity for ESG consultants, who can step in to become a trusted source of guidance and simplify the disclosure process for their clients.
The best place to start in simplifying the process is with an ESG gap analysis, which will help your clients identify weaknesses in their ESG strategy, improve sustainability performance, and ensure compliance with global regulatory requirements.
What is an ESG gap analysis?
Before getting started with ESG disclosures, and periodically thereafter, we recommend consultants conduct a gap analysis on their clients’ ESG practices and disclosures. An ESG gap analysis is a process for identifying weaknesses or missing elements in a company’s ESG strategy, data collection, and reporting practices. It compares a company’s ESG performance against industry best practices, regulatory frameworks, and what investors expect to see. The goal is to pinpoint areas of improvement and develop a roadmap for closing those gaps.
You can conduct a single gap analysis based on one regulatory standard or framework, such as a CSRD gap analysis, or expand your gap analysis to include all the standards and frameworks you are considering reporting against.
By conducting an ESG gap analysis, organizations can:
- Align with ESG regulations and standards such as the Corporate Sustainability Reporting Directive (CSRD) and the International Financial Reporting Standards (IFRS S1 & S2)
- Improve their ESG data management to ensure disclosures are comprehensive and accurate
- Show investors they are making progress on ESG matters
- Find new opportunities and generate new insights to improve sustainability risk management and strategy
Key benefits of conducting an ESG gap analysis
An ESG gap analysis gives companies a structured approach to identifying and addressing weaknesses in their sustainability practices. This foundational step brings many benefits to a company’s ESG function.
1. Navigating compliance with regulatory requirements
Regulatory requirements for ESG reporting are becoming far more demanding. Conducting a gap analysis helps companies understand their obligations under frameworks like CSRD and the ISSB (International Sustainability Standards Board), and how their current disclosures measure up against new frameworks and standards. A proper gap analysis will reveal where companies are lacking on disclosures, allowing them to spend more of their reporting time closing gaps rather than re-inventing the wheel or re-writing disclosures that they’ve already produced elsewhere.
2. Streamlining ESG reporting processes
Many organizations struggle with fragmented ESG data. A gap analysis helps centralize and standardize ESG information, making reporting more efficient and reliable. It also improves interoperability between different ESG frameworks, reducing redundancy in reporting and giving teams necessary time back for execution rather than disclosure.
3. Refining corporate sustainability strategies
By identifying areas for improvement, companies can refine their sustainability strategies, prioritize high-impact initiatives, and track their progress over time. A well-executed ESG gap analysis helps companies line up sustainability goals with their core business KPIs and the expectations of their various stakeholders.
4. Strengthening investor and stakeholder confidence
Speaking of stakeholders, investors and other stakeholders have shown demonstrated interest in companies that take ESG seriously. Organizations that proactively address ESG gaps are more likely to attract investment, build trust with consumers, and maintain a strong corporate reputation.
Key components to consider in an ESG gap analysis
Materiality and regulatory requirements
The first step in an ESG gap analysis is understanding the regulatory landscape. This includes:
- Conducting a materiality assessment (single or double materiality) to determine which ESG factors are most relevant to the business
- Knowing what the company will be reporting to — identifying applicable regulations based on geography, industry, and company size
- Mapping out specific reporting requirements under the frameworks identified above
Centralizing ESG information
A comprehensive gap analysis requires access to accurate ESG data. Organizations must consolidate ESG information from multiple sources, including internal systems and databases, public disclosures (sustainability reports, corporate filings, ESG ratings), and any third-party assessments or audits you’ve conducted.
Internal resources and budget
Gap analyses can be time-consuming and resource-intensive. Businesses should evaluate whether they have the internal capacity to conduct the analysis or if they need external support from ESG consultants or AI-powered compliance tools.
Steps for conducting an ESG gap analysis
If you’re an ESG consultant working with clients on an ESG gap analysis, we recommend templatizing the following steps and taking a structured approach to your assessment. Getting the basics right first will likely save you a number of headaches and re-work down the line.
We also suggest getting the right tools in place, like an AI-driven ESG compliance tool, which can conduct a first-pass gap analysis for you, saving your team a lot of time in the early days.
1. Collect information
Start by gathering all relevant ESG data from internal and external sources. Ensure that information is comprehensive and up to date. Key data sources might include past sustainability reports, regulatory filings, stakeholder feedback, and other peer disclosures and industry benchmarks.
2. Conduct a materiality assessment
A materiality assessment helps determine which ESG factors are most important to your client’s business and stakeholders. This involves identifying the key ESG risk factors and potential opportunities for your company through a process of interviewing and surveying internal and external stakeholders. We also recommend consulting competitor disclosures and various industry-focused regulations and disclosure standards, as these often identify material topics.
3. Identify regulatory gaps
Compare your organization’s existing ESG practices with industry standards and regulatory frameworks. Identify areas where your current reporting falls short, any gaps in your data collection, and opportunities to improve existing disclosures in the name of better compliance.
4. Develop an action plan
Create a structured plan to address identified gaps. This should include measurable ESG targets and key performance indicators (KPIs), next steps for improving your data collection and reporting processes, and bigger-picture strategies for aligning ESG insights into the processes your company already has for making business decisions.
5. Update reporting to reflect internal changes
Once action plans are in place, update your ESG disclosures to reflect improvements. This ensures that sustainability reports, investor communications, and regulatory filings are accurate and aligned with best practices.
6. Set up automated monitoring and focus on continuous improvement
Closing ESG gaps isn’t a one-time exercise. Companies must regularly review progress and refine strategies based on evolving regulations, expectations, and business circumstances. We recommend setting up an ESG performance dashboard and monitoring progress in real-time, while also scheduling out more formal audits for assessing your progress over the long term. ESG strategies don’t have to be set in stone; you can update strategies based on the data coming in and your company’s needs at the time.
Common challenges in ESG gap analysis and how to overcome them
Lack of standardized ESG metrics
One of the biggest challenges companies face is the lack of universal ESG reporting standards. Different frameworks have varying requirements, which can make compliance difficult. Businesses can address this by aligning with widely recognized frameworks like CSRD, ISSB, and GRI and leveraging software that reveals similarities and differences in disclosure requirements, like Manifest Climate.
Difficulty in data collection and integration
Many organizations struggle with collecting ESG data from different sources and integrating it into a centralized system. ESG data often resides in multiple systems, making it difficult to access and analyze holistically. To overcome this, consultants and their clients can use ESG software platforms that aggregate data and do much of the manual data collection work for them.
Resource constraints
Conducting an ESG gap analysis requires significant time, expertise, and financial investment. Smaller consulting firms or teams might find it difficult to conduct an assessment at the level of thoroughness they need. In these cases, AI-driven compliance tools like Manifest Climate can help streamline the process and ensure accuracy while reducing the burden on internal teams.
Simplify ESG compliance and gap analysis with Manifest Climate
Conducting an ESG gap analysis manually can be complex and resource-intensive. Manifest Climate simplifies the process for consultants by providing AI-driven insights and expert-backed regulatory compliance solutions. Our platform:
- Automates ESG data analysis and compliance assessments
- Aligns ESG disclosures with global reporting standards
- Provides actionable recommendations to close compliance gaps
- Helps sustainability teams and consultants stay ahead of regulatory changes
By leveraging Manifest Climate’s expertise, businesses can streamline ESG compliance, reduce reporting burdens, and stay ahead of regulatory changes. Book a demo today to see how Manifest Climate can help your firm conduct a seamless ESG gap analysis.
