Recently I was briefing one of my fellow colleagues at KPMG ahead of a meeting with a Government Minister. He asked me about ESG reporting and as I marshalled my thoughts it came home to me just how critical reporting really is to progressing this agenda.
We constantly read that data is fast becoming an organisation’s most valuable asset (although I personally still put people at the summit). And just as data provides the basis for effective decision making on how to engage customers or how to increase productivity, it’s also a key element in driving the change that ESG requires. Data tells us how we’re doing today, how we measure where we want to be and how we track progress towards a greener and more resilient future.
I’ve talked before about how ESG is properly rising up the corporate agenda. Consumers looking at ESG credentials when making buying decisions. Employees – especially those from Gen Z – wanting to work for a company demonstrating strong corporate social responsibility. And all-important investors increasingly demanding assurance that companies have a strong ESG record – in particular, that they’re resilient to climate risks that could disrupt business operations.
ESG reporting gives investors clarity of goals and targets. It sets out your plans to deliver and progress against key milestones – and it means executives can properly be held to account. It provides transparency for your customers and people too.
Mandating removes the optionality and makes this all the more powerful. When ESG reporting is voluntary those with a great story tell it, but others can stay quiet. Publishing forces the debate. Think gender pay gap reporting some years back: here, the requirement to report shone a spotlight on pay disparities – and almost as a corollary allowed companies to take data-informed tangible actions to drive improvement.
Great then to see leadership from the UK on mandating TCFD (Task Force for Climate-related Financial Disclosures) reporting for all quoted companies by 2023 with the rest of business expected to follow by 2025. What next? Perhaps mandatory ethnicity pay gap reporting? Certainly an area of focus for many businesses.
ESG reporting can also provide a benchmark for companies to assess their progress. How do you stack up against industry peers on scale of ambition and pace of change? Where do you need to focus more? Are you a sustainable business attractive for long term capital investment?
But there is an issue here – and one we’ve raised many times before. There’s currently an ‘alphabet soup’ of ESG acronyms and reporting frameworks which creates confusion for companies and investors and makes it difficult in practice to track progress or drive effective change.
We urgently need alignment behind some standard metrics. That’s why KPMG worked together with the International Business Council (IBC) of the World Economic Forum (WEF), and the other Big Four accounting firms to develop a common set of metrics on non-financial factors. It’s a positive step forward and great that over 60 major global corporations have already committed to adopting the metrics. It’s a start.
However, once those metrics are reported, can you trust them? There are some genuinely great stories to tell – and some great stories being told! All that glitters may not be green. A recent sweep of websites by the International Consumer Protection Enforcement Network (ICPEN) found as many as 40 percent of companies’ green claims could be misleading. Whilst not necessarily untrue, many are vague, omit information or promote their own eco labels to appear more eco-friendly – all of which only serves to undermine confidence.
Which is why many are pushing for greater assurance of companies’ non-financial ESG data. For example giving it the same standing as financial data in annual reports would give investors and other stakeholders greater comfort in the validity and completeness of what they are being told.
Sir Donald Brydon noted as much in his report on the quality and effectiveness of audit, saying “Without taking sides in the debate around the value of [ESG] measures or the way in which they are reported by directors, it is self-evidently desirable that the published data in this area is trustworthy. To achieve such trust, a framework of audit could be established …”
My conclusions to my colleague? Overall, additional reporting rules do, inevitably, add to the compliance to-do list – there’s no doubt about that. But it’s the clarity, the comparability and the confidence which that published data also provides, which are the massive catalysts for the positive change we so badly need as we build back better. So do embrace them!
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