Why it’s time to get real about sustainability reporting
Sponsored content: Doug Johnston, a partner in EY’s Sustainability practice, explains how non-financial reporting is finally coming of age and can drive business performance.
For many years, the way that companies measure and report on sustainability has been subject to accusations that it is more about fluff than fact.
That’s because, traditionally, sustainability metrics haven’t been seen as being that important to the core business and as a result have not been subject to the same levels of scrutiny and control applied to companies’ financial information. This is the year that will change.
Regulators tighten rules
Over the last 12 months, regulators are not only getting more specific in their expectations; they are also moving from voluntary to mandatory disclosure:
- The UK now requires large companies to report on their climate-related risks in line with the recommendations of the global Taskforce on Climate-related Financial Disclosures (TCFD).
- The EU Corporate Sustainability Reporting Directive (CSRD) means that companies will be required to publish detailed information on sustainability performance.
- The Transition Plan Taskforce (TPT) is strengthening disclosure requirements on net-zero plans.
- The US Securities and Exchange Commission has proposed rule changes that would require climate-related disclosures.
- At COP 27 in November 2022, UN Secretary-General António Guterres called for greater accountability and verification in a bid to end greenwashing.
Investors expect more
Increasingly, investors are looking to companies’ environmental, social and governance (ESG) metrics before making funding decisions – and are often finding them lacking. This was highlighted in a recent EY Global survey, which found that:
- 99% of investors utilise companies’ ESG disclosures as a part of their investment decision-making process.
- 76% of investors believe that companies are highly selective in what information they provide to investors, raising concerns about greenwashing.
- 80% of investors said that too many companies fail to properly articulate the rationale for long-term investments in sustainability.
Stakeholders must be satisfied
Companies have become increasingly alert to the way non-financial issues can impact their key stakeholders, including employees, customers and suppliers as well as investors. This is impacting business-critical areas such as investor confidence, customer satisfaction and demand, talent retention and even license to operate:
- 57% of consumers are willing to change their purchasing habits to reduce negative environmental impact.
- 70% of UK employees expect their employer to take action on societal issues.
- Companies with $4trn of purchasing power are requesting ESG information from suppliers worldwide.
Without robust non-financial information, businesses will not be able to adequately address these stakeholder concerns.
CFOs rise to the challenge
These pressures are making finance leaders, who in the past may have been reluctant to integrate sustainability into their reporting processes, sit up and take notice. Put simply, if the company is going to be held accountable for its non-financial performance, then the CFO must have total confidence in its reporting. That means putting in place the sort of high-quality processes and controls for non-financial metrics that are used for financial information.
The benefit of this forward-thinking approach can be broad and far-reaching. With proper metrics and management buy-in, a business is much better placed to understand the role of sustainability in driving business performance and creating long-term value. The connection between sustainability and strategy becomes clear and the need to apply it throughout operations rather than in the narrower field of sustainability reporting or health, safety and environment also becomes apparent.
While external pressure from regulators, investors and other stakeholders are key drivers, the creation of better sustainability metrics can help businesses to better manage risks and have confidence in the progress of sustainability plans. Unlocking this improvement means focusing on the sustainability issues that matter most to the individual company and investing in the key performance indicators (KPIs) that measure them best, putting in place the controls that provide assurance to management teams and investors. Given the increasing appetite of investors and customers for engaging with sustainability leaders, stronger ESG metrics can also become a powerful competitive advantage.
With these actions in place, 2023 looks set to become the year in which any remaining fluff and puff is finally replaced by meaningful and accountable disclosures that will not only reassure regulators but also support growth.
Leadership teams must better understand which sustainability measures are most important to the business and its stakeholders and why. Stronger processes need to be put in place to build confidence, not only in the delivery of critical sustainability programmes, but also in the data on which they will be judged. This will require stronger governance, accountability, documentation, quality assessment and control. It will also mean choosing technology platforms that support data confidence and completeness. Ultimately, it will be about delivering better data that can make a real difference to the delivery of both business and stakeholder outcomes.
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