Challenges and opportunities in ESG reporting

THERE is near unanimous agreement that environmental, social and governance (ESG) disclosures are necessary for companies, but there is still a lot of inconsistency in how those disclosures are made.

Some of the key standards and frameworks include:

• Global Reporting Initiative: Addresses disclosures of socially material topics affecting a company's stakeholders. It requires companies to determine which are material issues in consultation with stakeholders.
• Sustainability Accounting Standards Board (SASB): Recommends topics and metrics for 77 different industries across all three ESG pillars. These standards provide guidance on how organisations can align their reporting with investor needs and gather standardised data.
• Carbon Disclosure Project: A global environmental disclosure system to support the measurement of risks and opportunities on climate change, deforestation and water security.
• Task Force on Climate-related Financial Disclosures: Provides 11 recommendations across 4 pillars - governance, strategy, risk management, and metrics and targets - to guide companies in their disclosure of climate-related risks and opportunities. Initiatives towards convergence, however, are gaining momentum. Some developments just last year included:
• Five major framework and standard-setting institutions stated their intention to work together towards a comprehensive corporate reporting system.
• The International Integrated Reporting Council and SASB merged to form the Value Reporting Foundation.
• The IFRS Foundation Trustees progressed on its sustainability reporting initiative, including the potential creation of an International Sustainability Standards Board.

Stakeholder interests

The urgency to align standards is significant given broad stakeholder interests.

Institutional investors have historically considered ESG through the lens of long-term value creation.

But there is also a growing population of socially responsible investors or impact investors who focus specifically on sustainable companies.

Both these shareholder groups are urging companies to build ESG considerations into their long-term strategies; and some of the world's largest asset managers have voted against directors who, in their view, lag on ESG.

These investors are looking for more disclosures from companies, both qualitative and quantitative, so that they can better assess the intensity of the company's focus on ESG risks and opportunities.

They focus on ESG risks along with financial performance, or specifically eliminate or select investments based on ethical guidelines.

Even retail investors have started to ask ESG-focused questions at company meetings.

Another stakeholder group to pay attention to is ratings agencies, which guide investors through the publication of benchmarking data. These ratings may be used to create ESG indices, funds and other financial products.

Finally, ESG's impact is being felt within organisations and in managerial decision making.

Companies selling products that are marketed as "sustainable" are witnessing significantly larger growth rates. Similarly, ESG considerations are important to companies aiming to attract and retain top talent from the next generations: Gen Z and Millennials.

This cohort is likely to make up 72 per cent of the global workforce by 2029. They bring their own values to work and are genuinely concerned about their employers' stands on environmental and social issues.

Board oversight

Companies are expected to consider the interests of a diverse group of stakeholders, including investors, employees, customers, suppliers and communities. To help find a balance, the board and management must work together to define what is critical and identify the best way for the company and its stakeholders to measure progress.

Companies need to examine whether ESG risks and their impacts are captured in enterprise risk management efforts. The board can contribute by articulating such a requirement.

Additionally, stakeholders expect a comprehensive, cohesive story when it comes to ESG. Qualitative ESG messaging should reinforce the company's purpose statement, while metrics provide the quantitative facts that bring that purpose to life and help the company measure progress.

The metrics should focus on the current state and milestones along the way to achieving long-term goals, all of which should be monitored by the board.

Barriers to ESG effectiveness

Competing business priorities, reporting standards and leadership commitments hold back ESG, even in companies that prioritise ESGrelated issues.

Urgent as the need may be for common, external reporting standards to guide corporate disclosures, each business also needs to be able to identify and manage its relevant critical success factors.

A rigorous approach is necessary to understand and define critical metrics, establish a baseline, and enhance measurement and reporting.

Whether a company's journey commences as a response to a new reporting requirement or reflects a top-down strategy refresh, it will lead to a reappraisal of operations, activities and outcomes. It is bound to create opportunities to identify and realise significant new sources of value creation.

• The writer is honorary treasurer of the Securities Investors Association (Singapore) and a partner at PwC Singapore leading governance risk & compliance, as well as internal audit.