Karen Abramson, CEO of Wolters Kluwer Corporate Performance & ESG, examines the trends set to impact ESG reporting, as firms strive to collect, analyse, report and assure the accuracy of ESG data.
The pace of change in ESG requirements and expectations over the past two years has come at a breakneck pace, and shows no signs of slowing down. While compliance may no longer be negotiable, beyond compliance lies the opportunity for better, faster, more informed decision-making, which can, in turn, be transformed into a competitive advantage. Forward-thinking C-suite leaders need to lay the groundwork for the digital transformation of their ESG reporting now – because yesterday’s ESG playbook won’t work in the future.
Broadly speaking we can identify five key themes, set to dominate the ESG reporting debate:
ESG’s virtuous circle
Large companies, globally, across industries, are facing an unprecedented level of scrutiny on ESG performance. Corporate C-suites are taking note, as ESG metrics increasingly influence the behaviors of key stakeholders including investors, regulators, analysts, customers and employees.
- According to PwC, 82% of investors say that their clients demand that ESG considerations be factored into fund investment decisions, and Bloomberg Intelligence reports echo that sentiment, predicting that ESG assets will grow to US$50 trillion by 2025.
- Regulators – in the EU, across Asia, in the US and globally – are setting mandatory disclosure requirements and working to align standards to drive comparability and improve transparency for investors.
- Consumer expectations are also adding considerable weight to ESG reporting pressures, an assertion reinforced by PwC data that indicates 76% of consumers would discontinue relations with companies that treat employees, communities and the environment poorly.
- Savvy companies are also incorporating ESG into their workplace talent recruitment and cultural strategies, driven at least in part by the knowledge that by 2029, 72% of the global employee workforce will be comprised of Millennials and Gen Zs, who place a significantly greater importance on ESG concerns compared to their parents and grandparents.
Executives increasingly feel compelled to prioritise and demonstrate progress on ESG issues, too, with PwC reporting that, as of 2022, 91% of business leaders believe their company has a responsibility to act on ESG issues.
Tidal wave of regulations and requirements
The EU has long been considered a leader in driving ESG reporting, with its Sustainable Finance Disclosure Regulation (SFDR) mandating ESG disclosure for asset managers across the 27-nation bloc. The EU will require green energy and carbon footprint financial reporting this year, the US will require it by 2026, and Moody’s has already announced it will be plotting ESG data for corporate ratings.
The Group of Seven, composed of the world’s largest advanced economies, recently signaled its support of mandatory climate disclosure, and countries across Asia are also ushering in a shift in ESG attitudes within the region, with numerous countries’ regulators mandating funds’ ESG disclosure in coming years.
Faced with a veritable tidal wave of financial and non-financial reporting regulations, corporate boards and C-suites are responding by placing ESG at the top of the corporate agenda. The 2022 Deloitte Sustainability Action Report found that 57% of executives report having implemented a cross-functional ESG working group tasked with driving attention to ESG – and 42% are taking steps in that direction. This is a significant uptick from the year prior, when the same survey found only 21% of execs had implemented a cross-functional ESG working group.
Intense demand for common standards
As companies report, or prepare to report, under a variety of mandatory and voluntary ESG frameworks, unified global standards for reporting ESG information don’t yet exist. Not only do the estimated 600 global ESG reporting standards create a lack of clarity, transparency, and robustness in ESG data, but inconsistent standards also lead to a lack of comparability. Until now, companies have been free to choose which ESG issues apply to them and which do not. The result? A jumble of less-than-useful data that has forced key stakeholders – ranging from investors to consumers – to have to some degree of patience for accurate, consistent ESG reporting.
However, the International Financial Reporting Standards (IFRS) Foundation’s establishment of the International Sustainability Standards Board (ISSB) has set the stage to change that. The ISSB is poised to bring much needed consistency and comparability to ESG reporting standards, through the development of a global baseline of sustainability disclosure standards that will help consolidate, and make sense of, the prior ‘alphabet soup’ of standards. Once ISSB international standards are formalised, stakeholders will be far less patient for the ESG data, insights and action plans they’ve long been demanding.
There will be a reckoning
Unfortunately, despite the mounting pressures from virtually all stakeholders, even organizations with strong ESG reporting ambitions rarely possess a centralised ability to collect, analyse, report and assure the accuracy of their ESG data. A 2022 EY study found that 60% of finance executives say their ESG data resides in a patchwork of software applications – many of which don’t connect with each other – and 55% say their ESG data resides in spreadsheets.
The aforementioned Deloitte research also found that 35% of executives list data quality as their top ESG data reporting challenge; while 25% cite access to data. These are real problems, given that – just like quality financial reporting – quality ESG reporting requires a huge volume of datasets, from disparate businesses, divisions and functions, to be collected in a way that allows them to be interpreted, analysed, reported and audited for accuracy.
These data problems are attributable, at least in part, to inadequate technological resources. C-suite leaders are quickly recognising that spreadsheets and a patchwork of software applications – long the go-to resources when it comes to collecting and analysing ESG-related data – no longer suffice for larger organizations that are committed to ESG.
Turning ESG disruption into opportunity
Now, here’s the good news. Just as cloud-based corporate performance management technologies have brought clarity to the complexity of financial reporting over the past decade, the same digital transformation is now taking place in the world of ESG. In part, that’s because an increasing number of C-suite leaders are seeing that ESG can be about more than just reporting. If managed well, it can be leveraged to manage risk, improve performance, and ultimately to drive sustainable business value.
In short, ESG can be a competitive advantage. In EY’s 2022 Sustainable Value Study, seven in ten respondents said they’ve achieved higher than expected financial value from doubling down on ESG. Perhaps that’s why 92% of the respondents in Deloitte’s 2022 Sustainability Action Report said that they believe their organisations need to invest more in technology to address demand for “consistent and reliable ESG measurement, reporting and disclosures”.
Indeed – businesses that are serious about formalising sustainability targets, executing action plans and tracking progress with key metrics to drive accountability are realising that they can’t afford to delay ESG technology investments. Forward-thinking CFOs are applying the same rigor to their ESG technology investments as they apply to their investments in financial technology. They’re seeking agile platforms that drastically improve process efficiency, drive collaborative data sharing and analysis, and empower executive decision-making in a way that supports their ESG, corporate and financial agendas.