ESG Reporting – friend or foe? How companies should tackle the growing calls for increased reporting

Anders Liu-Lindberg, ESG | 5 min. read

Unless you’ve been living under a rock you couldn’t miss the increased focus on ESG in today’s world. And once there’s focus on a topic there naturally develops a requirement to report on its development. For companies this has been a budding development in the past decade. However, ESG reporting is still in its infancy with no globally recognized standards.

Work has started on these standards with the likes of IFRS launching the Exposure Draft on IFRS S1 in March 2022 by the International Sustainability Standards Board (ISSB). Landing an internationally recognized and adopted reporting framework is a very iterative process at this point though. Many countries have already created their own standards and will likely have different perspectives on what’s needed.

One example is a letter submitted by the UK Endorsement Board on 27 July. Overall, the letter is very supportive of the attempt to establish international standards but also expresses concerns about the vagueness of the language used in the current draft. One example is highlighted in the effort to achieve a “global baseline”. It states:

“The proposals are extensive and require complete disclosure of all material sustainability-related risks and opportunities. This would appear to go beyond what is typically regarded as a “baseline”. Further, if the ISSB is to continue to use the language of “baseline” we recommend further thought be given to how this relates to the objective of completeness, and how this is articulated in the proposals”

The current process leaves more questions than answers at this point. However, it doesn’t lower the general sentiment in the public that companies must do more on the ESG agenda and show action and report on same.

 

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It’s about ESG risks AND opportunities

What’s important to note about the current discussions is that it calls for reporting on not just ESG risks but also opportunities. And this is not insignificant for companies. My take is that unless we start to discuss ESG and value creation in the same sentence we won’t see any significant traction. Sure, companies will report on what they are required to do, however, to make a difference we need to see some big moves that substantially changes the ESG landscape.

To try and understand in more detail what the proposed regulations mean for companies we can turn to a publication by KPMG, “Sustainability Reporting”. Here they outline how companies should generally consider the ESG reporting outlining this process.

This requires companies to understand the ESG disclosure topics, identify significant risks and opportunities, and develop an action plan around these. After that comes reporting where it will be important to be able to reconcile sustainability reporting and the financial reporting.

While companies likely have processes for operating from step three and forward everything obviously will depend on the specific disclosure topics and requirements that are set forth. And this can easily become a jungle for companies to operate. Perhaps the best way to prepare yourself is to look towards the requirements that are being levied on investment funds and asset managers. See for instance section 4 in the discussion paper “Sustainability Disclosure Requirements (SDR) and investment labels” by the Financial Conduct Authority in the UK from November 2021. It’s a long list though and it’s a forewarning about what companies should expect going forward.

However, even further complexity is introduced as individual countries such as the UK may go even further than the standards set forth by ISSB. In an article on www.esginvestor.net it is highlighted how the UK is following an independent path. While regulators say they try to operate within the broader international frameworks they’re also looking to take a broader view on ESG disclosure requirements than ISSB. Statements point to ISSB looking mainly at financial materiality while UK regulators as per above have highlighted that this is merely a vaguely defined baseline leaving lots for interpretation.

It's a complex environment to operate in and I expect that finance teams are going to be heavily involved helping companies get ready for adopting new standards.

Start by going beyond reporting

The discussion on ESG quickly lands on the reporting requirements that companies need to adhere to. Those are of course important, however, it’s important to note that the reporting is an after the fact activity. Hence to address ESG in any meaningful way you need to start by going beyond the reporting requirements.

The process highlighted in the KPMG report above provides a great starting point for doing this. Several questions can be listed that companies should answer and where Finance’s support will be needed. Companies cannot impact the disclosure topics in general meaning that focus should be on the next steps. You should answer:

  • What is our process for identifying material risks and opportunities?
  • What defines “material” in our context?
  • How will we create governance around working actively with ESG issues?
  • How can we embed ESG actions into our overall strategy?
  • How do we ensure we take a balanced approach to risk and opportunity management?
  • Which are the key ESG metrics that we need to measure
  • Where can we get the data for measuring the metrics and ensure a proper data quality?

This is not a finite list of questions, but all should be answered to formulate a meaningful response to creating value with ESG as opposed to merely responding to disclosure requirements. And in most companies the finance team will be a strong partner in answering the questions. Finance has experience with operating within heavy regulations as well as a continuously changing disclosure environment. In a blog from May 2022, KPMG UK highlights ten ESG issues that Finance should actively consider.

  1. Strategy
  2. Carbon pricing
  3. Frameworks
  4. Data
  5. Controls
  6. Technology stack
  7. Operating model
  8. People
  9. Awareness
  10. Stakeholders’ expectations

These are important ESG issues for you to consider your readiness to support the overall discussion and answering the questions listed above.

Are you ready to start ESG reporting?

It’s one thing if you’re ready and another that ready or not you still need to report. However, as we know it, Finance must often resort to Excel if not ready for new disclosure requirements. Will we see the same thing happening over again with ESG? I dare say it’s already happening but there’s still time to address your lacking tech stack. ESG reporting software has already been developed by leading vendors and naturally it integrates well with your already existing software.

Still, it wouldn’t be prudent to implement any new reporting tool until you have answered many of the overall questions as posed in this article. You should consider though that ESG-ready vendors could likely be your friend in answering the overall questions.

That said, while reporting is last in line in the work you need to do on the ESG agenda it cannot be an afterthought. You’d do well to consider already now, how to best handle this going forward. If Excel is your answer, you’re likely going to be overwhelmed by work from a steady stream of new disclosure regulations.

Is ESG reporting a friend or foe? The broader question of ESG – friend or foe – should also be considered. I have highlighted that even regulators want companies to focus not only on risks but also opportunities. That should make ESG an inherent friend that if tackled correctly can be a great source of value creation in the years to come.

ESG reporting could be considered in the same light. Consider what opportunities you can shed new light on to improve company performance through ESG reporting. This is a topic that’s top of mind for many business leaders so a great opportunity for Finance to use its seat at the table to influence the future direction of the company!

How are you currently handling your ESG disclosure requirements in your reporting? Are you using Excel or some reporting tool? Now is the time to take charge of this agenda. Why not start today?

To learn more about ESG reporting, watch our on-demand webinar ''ESG Reporting – What is coming for the UK and Europe, and what’s in it for me?'' with ESG experts from LucaNet and Evelyn Partners.

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