ESG – the future of reporting

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Government climate change targets are obliging companies to adopt more sustainable practices. We offer advice on how best to communicate these to your key stakeholders.

For some time there has been an increasing focus away from purely the interests of investors, customers and other stakeholders. Now what matters most is a more sustainable approach, and these same stakeholders are expecting companies to act in a way which, above all, protects people and the environment. Environmental, Social and Governance (ESG) reporting is fast becoming a key source of information to present to the world how your company is making these priorities a reality.

More and more, ESG is the focus of financing decisions. This includes green and social financing and sustainability-linked facilities, all of which are expected to become the norm in the majority of future funding activity. That means the measurement and disclosure of your ESG policies and targets will be key to obtaining and maintaining future cash injections for your business.

What should your disclosure include?

This shift in focus from not only lenders but investors, customers and other parties too, means the ethical practices of your business are under greater scrutiny. These might include: the management of environmental and social impacts and challenges; fair treatment of employees; respect for human rights; anti-corruption practices; and diversity on company boards and in the workplace.

Although it is now a requirement for only certain companies to report on ESG, it is recommended that all companies seek to adopt their own strategy and report on this accordingly. It is highly likely the requirements will extend and capture more companies in the near future. So it’s important not only to be prepared and ahead of the curve, but also to appreciate the significant benefits of communicating your ESG objectives. Companies that lag behind will feel the detrimental effects of poor disclosure, or no disclosure at all.

Reporting helps businesses future proof against the risks that climate change presents. It supports improved internal risk evaluations and strategic planning, while also enabling businesses to gain a competitive advantage.

The benefits of reporting

By getting on the front foot and addressing the concerns and demands of your customers and investors, your business reduces the number of climate-related information requests it receives.  And, at the same time, it can assure customers and investors of its financial resilience over the short, medium and long term, leading to increased capital investment and profits.

So it’s important that you not only seek to ‘comply’ with the rules, but also focus on the central reason for reporting and how this targets your specific stakeholders.

With these benefits in mind, you should note that these only come when reporting is done properly and accurately. Stakeholders may well question the management on disclosures made, so it’s vital that companies fully understand and can support figures and statements provided in annual disclosure statements. That will ensure you are not exposed to claims for misrepresentation.

Use the guidance

The global Task Force on Climate-related Financial Disclosures (TCFD) have released its disclosure requirements to help companies improve their reporting of climate-related financial information. Their objective is more effective risk assessments on issues of climate by companies, suppliers and competitors. They also aim to improve strategic planning.

Even with the TCFD guidance, your company should still develop its own robust ESG strategy to align with your objectives, and also mitigate risk and create opportunities. There has been no specific guidance on how this balance between members’ objectives and broader considerations should be presented. So you need to carefully consider how to achieve ESG objectives, plus how they will be embedded into the company and aligned with shareholder and wider stakeholder interests.

Tailored and accurate

It’s very important that companies check the information presented in their ESG disclosures is calculated and reviewed with the same level as scrutiny as the financial information reported each year. Disclosure should be tailored to your company, but the TCFD guidance, which some companies have already adopted, is based on the following four pillars:

  • Governance –the organisation’s governance around climate-related risks and opportunities
  • Strategy – the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning (where such information is material)
  • Risk management – how the organisation identifies, assesses and manages climate-related risks
  • Metrics and Targets – the metrics and targets used to assess and manage relevant climate-related risks and opportunities (where such information is material

So there’s no doubt ESG is increasingly at the forefront of reporting requirements and stakeholder focus. There are a number of benefits to reporting, but there is also an increased risk of dispute due to greater exposure. To avoid this, it’s important you invest the necessary time to implement the process properly and, where required, seek assurance or legal advice from a risk management perspective.

If you would like more information on issues raised in this article, please contact Nick Joel.