ESG reporting: a catalyst for change

Businesses getting to grips with ESG governance should look to reporting as a practical guide for creating lasting, positive change.

Good corporate governance and reporting have long been important, but with momentum building around Environmental, Social and Governance (ESG) issues, there’s even greater relevance. Companies are now expected - and mandated - to report on more, to an expanding list of stakeholders.

Governance, when looked at as part of ESG, can be seen as the guiding principle in getting things right. More specifically, businesses can look to their corporate reporting as a catalyst for change. By knowing you’ll be held accountable, you’re far more likely to take action.

For business leaders, it’s often hard to know where to begin when tackling the challenges associated with ESG. Reporting can help give the answers, and when done with the right framework, can provide a holistic view of where your company stands. Once you have a benchmark to measure against, you can decide how to move the dial and how to tell your story.

“Once seen as a nice to have, non-financial reporting now requires the rigour to stand up to regulatory compliance and scrutiny from all stakeholders, including employees, clients, customers and investors. CFOs are already facing challenges when it comes to signing-off data that’s not robust in the same way that financial reporting is, and the reputational risk of getting this wrong should not be underestimated. The rewards for businesses that invest in non-financial reporting are clear - better rates, access to capital and better relationships with stakeholders.”

^{Paolo Taurae, Head of Stakeholder Assurance at PwC UK}

Investors are demanding more from businesses in their search for quality reporting. Only one fifth (20%) agree current levels of reporting on ESG are of a good quality, and forward-thinking business leaders understand this is no longer a box-ticking exercise, rather a tool for sustained outcomes.

Reporting to create change and build trust

Starting with climate governance, business leaders have a key role to play in building trust in the climate transition. The foundation of that trust will be in corporate reporting and disclosures, by telling a robust story to stakeholders.

It’s not only investors that are putting pressure on business leaders. The demand through regulation is also increasing. In the UK, over 1,300 of the largest companies and financial institutions are now required to complete mandatory reporting against the Task Force for Climate-related Financial Disclosure (TCFD) framework. It’s likely this number will expand, with many companies voluntarily reporting to get ahead of policy change and to meet requirements further up the supply chain.

“The increased requirement to report climate metrics is undoubtedly a challenge, but it does force businesses to tackle climate-related issues head-on and map out current and future risks. Increased data quality and capture has seen businesses pivot their strategy in response to climate change. This is an extreme example, but taking a proportionate response to governance and reporting puts businesses on the front foot, ready to adapt and ready to answer important questions.”

^{Tom Loukes, Partner - ESG Reporting Advisory at PWC UK}

The social element of ESG covers a breadth of topics - from fair pay, diversity and inclusion, to modern slavery. The targets and goals linked to a company’s social responsibilities have typically held less focus from investors, but this is rapidly changing.

This focus is also true of the workforce. Approximately half of respondents to our recent PwC Hopes and Fears survey were confident that employers are transparent on issues such as sustainability (45%) and diversity and inclusion (51%), indicating there’s some way to go in gaining confidence and trust. It’s something the FCA is mandating, with D&I rules set to require UK listed companies to report information and disclose against targets on the representation of women and ethnic minorities on their boards and executive management teams.

“The broader ‘people’ element of ESG can often be the forgotten ‘middle child’. However, key groups - such as employees, investors and customers, increasingly attach a huge amount of importance to these issues. While environmental challenges combine to answer a unified future goal, good social governance has both the potential to impact the here and now and ensure people within an organisation are fundamentally aligned to the ESG ambitions of the business.”

^{Phillippa O’Connor, National Leader, Reward and Employment Practice, PwC UK}

An example is modern slavery. Incidences of modern slavery are rising across geographies, with media reports pointing to the displacement of populations due to climate issues, such as drought, as well as those fleeing conflict. With increasing numbers of vulnerable people, there’s a climbing number of accounts of human rights abuse and exploitation.

The Modern Slavery Act requires all companies with a global annual turnover of £36m or more, to report on how they find and eliminate modern slavery within their supply chains. The very mechanism of reporting on these difficult topics, while not directly solving the issue, ensures focus and momentum.

Corporate reporting relies on good governance

Without leaders taking action on ESG, reporting has no foundation. There’s a risk of ‘greenwashing’ - inadvertent or otherwise - and non-compliance. Companies have an opportunity to build greater trust in their reporting, including improving the quality of data and ensuring it is being properly assured.

The rise and complexity of reporting has also upped the stakes. Business leaders need to be more focused than ever on process and controls, particularly around data capture and quality.

“Investors, alongside all stakeholder groups, are increasingly forming decisions based on non-financial data. It is business critical that firms apply the same rigour to the governance they wrap around non-financial reporting as they do to financial reporting. This integrated thinking - an understanding that both financial and non-financial metrics go hand in hand - ensures an integrated strategy and with it, integrated reporting. By adapting to this way of thinking, firms can unlock long-term value and do "Good Business".

^{Lynne Baber, UK ESG Centre of Excellence Leader at PwC UK}

What’s the bottom line? Businesses need to prepare for stronger reporting standards and heightened scrutiny from all stakeholder groups. By building strong corporate governance across these issues, they’ll be well equipped to respond to policy and regulatory change, as well as questions from investors and suppliers.