Regulators and supranational standard-setters around globally are establishing requirements on the ESG data that companies must gather and how that information is to be reported. This is not a “woke” exercise—many accounting professionals believe that even traditional financial reports should include data related to ESG risks because they can impact the value of a company’s assets and its profitability.
So Many Reporting Standards…
In the European Union, the European Financial Reporting Advisory Group (EFRAG) has issued exposure drafts for 13 proposed ESG reporting standards that would apply to many companies under the EU Corporate Sustainability Reporting Directive (CSRD). Large U.K.-based companies will soon have to comply with new reporting requirements based on recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). And, despite pushback about costs versus benefits, some form of the U.S. Securities and Exchange Commission’s proposed climate disclosure rule will likely impact most U.S. corporations.
Here are just some of the initiatives and standards that have been developed to try to address ESG disclosure requirements, and the year they were started or established:
- the Global Reporting Initiative (1997)
- the Carbon Disclosure Project (2000)
- the Climate Disclosure Standards Board (2007)
- the International Integrated Reporting Council (2010)
- the Sustainability Accounting Standards Board (2011)
- the Task Force on Climate-Related Financial Disclosures (2015)
It’s a lot. The good news is, there is some movement toward shrinking the list. The International Integrated Reporting Council and the Sustainability Accounting Standards Board have merged into the Value Reporting Foundation. The Value Reporting Foundation and the Climate Disclosure Standards Board have stated they would consolidate with the International Financial Reporting Standards (IFRS) Foundation. In late 2021, the IFRS Foundation formed the International Sustainability Standards Board (ISSB). So, the IFRS Foundation now governs the International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB).
Is This Reporting Really Necessary?
Even though there is a push toward establishing global standards, that will take time. Not surprisingly, some people wonder if ESG reporting is really necessary. Our response:
The purpose of collecting this data and satisfying these disclosures is not just to check a box that says “we satisfied this requirement.” In a speech given in March 2022, the current chair of Australia’s Auditing and Assurance Standards Board (AUASB), who is also a member of the International Auditing and Assurance Standards Board and Australia’s Financial Reporting Council, rightly pointed out that if we systematically collect data on corporate activities related to environmental, social and governance matters, there is a greater likelihood that important changes to corporations’ behaviors will occur, and will be sustained.
Consider this: GAAP accounting requirements were introduced in 1936, in response to the 1929 Crash and the Great Depression. Prior to that, corporations could easily conceal shady business practices. It is possible that the economic disaster of the 1930’s might have been mitigated if companies had been required to meet standard disclosures about their finances. It gets back to the old saying: you can’t manage what you don’t measure.
Increased disclosure requirements and growing demand for ESG transparency from investors, customers, supply chain partners, and employees will require finance teams to adapt. Investors have been particularly outspoken about their interest in receiving quality ESG data. According to PwC’s 2021 Global Investor Survey, almost 80% said ESG was an important factor in their investment decision-making, and around 50% said they would consider divesting from companies that weren’t taking adequate action on ESG issues. At the same time 34% said they believed that the quality of current ESG reporting was poor.
Despite differences across ESG reporting standards, a recent article in Financial Management (FM) magazine suggests that CFOs and finance team leaders take these steps:
Assess strengths and data needs
In reviewing ESG reporting requirements or procedures, evaluate what knowledge is already available within a finance team and what new expertise may be needed. According to a Deloitte study, a large majority of senior executives (82%) are not fully confident that their organization has the right staffing to comply with increased ESG disclosures. This concern is even greater among finance and accounting executives and non-C suite executives.
Having said that, finance teams may find that their expertise can be applied to ESG reporting. While ESG reporting standards vary across jurisdictions, many companies already comply with laws and regulations in other countries. Separately, because ESG reporting is so multifaceted the FM article notes that competencies may be available from other departments, including human resources, operations, and legal.
To comply with ESG reporting, companies will have to collect and report non-financial data as well as traditional financial information. But that isn’t necessarily a daunting task—finance people are accustomed to collecting data and doing analyses (that’s what FP&A is all about). To a great extent, meeting sustainability disclosure requirements is more of the type of analyses finance and accounting teams already do; it is just focused on different things.
Example: to measure its carbon footprint a company has to estimate its energy consumption. That may sound complicated but much of the data needed is probably available by looking at monthly utility bills and employee travel records (many airline flight reservation websites now provide information about a flight’s carbon footprint). HR departments often collect data on employee demographics, which can be used to determine workforce diversity and pay equity.
Of course, it won’t all be as easy as doing a search of a single, comprehensive database. Some reporting standards may accept historical trend analyses, while others may want more real-time data. But that doesn’t have to mean a company has to hire new teams of analysts – there are many services out there to help with these things.
Prepare to be audited
Up to now, companies have been able to choose which framework or set of guidelines they wanted to use in reporting ESG data, or simply not report anything at all. That has made it difficult to make comparisons across companies or to feel confident about a company’s ESG practices. Not surprisingly, according to PwC only 33% of investors believe the quality of current ESG reporting is good. As ESG disclosures increasingly becomes subject to audit, companies should understand what that entails. That can reduce audit-related risks and reassure investors.
Accept ambiguity and uncertainty
Remember that this is all fairly new and no one knows exactly how to respond to these various disclosure requirements. Accept that there will be uncertainties and ambiguity. Do the best you can. Make a sincere effort to provide the information as requested, so that whatever mistakes are made are unintentional. And when mistakes happen, learn from them.
OWL ESG uses data from hundreds of sources to feed our scores, data sets and analytics. We can help finance teams and asset managers to see what ESG data peer groups are publishing and where there are gaps. To learn more, contact us.