In response to demands from investors, businesses have made significant progress on ESG commitments. But PwC's Global Investor Survey reveals there is more work to be done, particularly to address concerns about transparency and data.
The benefits of getting that right will include improved access to capital, greater value for stakeholders and reduced reputational risk.
Prepare for greater scrutiny
UK investors recognise climate change as a growing threat, with over a third (38%) saying it could leave companies extremely or highly exposed over the next five years.
This heightened concern, combined with client demands for more sustainable investments and increased regulatory pressure, is forcing investors to look more closely at corporate ESG measures and reporting.
But when it comes to the data being presented to them, a large majority (89%) suspect corporate disclosures still contain some greenwashing.
Investment in tech and talent
With increased scrutiny comes the need for a more effective response from businesses. Our UK CEO survey found business leaders are investing in talent and technology to transform their organisations. More specifically, when it comes to ESG, 55% of UK CEOs said they are investing in the tech skills and capabilities of their sustainability/ESG team, and 43% are investing in the technology used by that team.
This will be welcome news to UK investors, with a large proportion (83%) citing innovation as their number one business priority.
Zubin Randeria, ESG lead at PwC UK says: “Technology has significant potential but, to work, it must be specific, measurable and combined with the right expertise and interpretation. Its role is twofold. First, it can fuel strategic change, by reducing emissions or improving diversity. Second, it can help meet the need for better reporting to demonstrate progress.”
Reporting progress
74% of UK investors
say independent reasonable assurance opinion gives them confidence in the accuracy of a company’s sustainability reporting.
Behind sustainability reporting must be a significant amount of data. When captured with the right tools and technology, and analysed with the right skills and human ingenuity, this can demonstrate businesses are taking ESG seriously.
Hemione Hudson, Head of Audit, PwC UK says: “The argument that non-financial reporting needs to mirror the level of accountability seen with financial data is gaining momentum. But there’s a long way to go. While regulation will eventually catch up, companies that demonstrate their commitment to transparency and rigour, by proactively providing high-quality, independently assured ESG reporting, will build greater trust.”
“If there is assurance on sustainability reporting, I think the purpose should be the same as the audit of the financial statements, so the reader can be comfortable that what’s reported is reasonably accurate and relevant.”
UK based investor
Businesses have the opportunity to show not only the challenges, but also the rewards of ESG.
Providing a position on ESG issues that can generate value, as well as those issues that need mitigating, can deliver confidence.
Andrew Dunnett, Group Director SDGs, Sustainable Business & Foundations, Vodafone, reiterates this point: “Business is now part of the solution, rather than part of the problem, and that's a massive change. The investor community is looking very carefully and investing in a way they believe represents purpose.”
Don’t wait for ESG regulation
Regulatory risk remains a key driver for over three-quarters of UK investors when making investing decisions around sustainability. This is second only to client demands.
Lynne Baber, Sustainability Practice Leader, PwC UK says: “Demonstrating governance over how a company understands and responds to sustainability regulation is something investors increasingly demand. Keeping abreast of changes in the regulatory landscape - and demonstrating that you’re prepared to meet them before they are enforced - will abate potential risks when it comes to investor decisions such as capital allocation.”
Investors seem to be taking both a carrot and stick approach to encouraging corporate action on ESG. Over half (54%) view taxes on activities that are not sustainable as an effective way to motivate change, while a similar number (56%) think subsidies for business initiatives aligned with government climate priorities would be effective.
“When it comes to regulation – what you actually have to report – it’s not there yet,” says Baber. “So while companies are working towards technological solutions for the data they want to collect, they are second guessing what they’re going to be regulated against in a global market. The regulatory drive is pushing organisations, but action shouldn’t be taken just for compliance reasons.”
The crux for many businesses is being able to prioritise the ESG matters they need to address to future-proof their business, what this means for their reporting, and the data they need.
“There is a data challenge. When organisations are asked to track, manage and report on what they're doing across all of their scopes, across all of the business, in terms of the emissions and the impact they're having, that's really difficult.”
Musidora Jorgensen, Chief Sustainability Officer, Microsoft UK
For those operating across jurisdictions, with different regulatory and reporting requirements, this a complex area to navigate. PwC’s review of corporate reporting across the FTSE 350 shows, as expectations around ESG have increased, the annual report has struggled to keep pace.
Companies must consider: What information will help make the right, sustainable decisions for the business? What do stakeholders want to know? And what data is needed from the business and its supply chain?
Optimise profits and purpose
While many investors agree (74%) that businesses should have initiatives in place to reduce emissions, and should develop climate friendly products and processes (76%), there’s a parallel desire that progress doesn’t dampen financial returns.
86% say
they would accept only one percentage point or less reduction in overall returns from companies in their portfolio that take sustainability actions.
While investors seek reassurance that businesses are making progress on ESG, they also want to know that the actions taken are relevant to a company’s business model (72%), and the costs of meeting such sustainability commitments (71%).
Hemione Hudson, Head of Audit, PwC UK says: “Reporting on the strategy behind ESG decision making appears of almost equal importance to investors as understanding the financial costs of meeting these commitments. For some businesses, climate risk will have little impact on their financial statements today. However, this will likely change when taking a longer-term view, and that’s something investors should be made aware of.”
“A lot of companies report things that are not material, not relevant to what they're doing, but they're doing it because of the political pressure to be seen to be doing something and demonstrating something in the ESG space.”
UK based investor
What’s the bottom line?
Progress is being made but, while regulation catches up, organisations can do more to reassure investors. By setting a defined strategy, with clarity on the issues that will impact their business, they can provide robust and assured data.
With future growth increasingly being linked to an organisation's approach to ESG, it’s imperative that businesses invest in the talent and technology to deliver tangible change. Combining the right skills with the right data and reporting can prove progress, allowing businesses to demonstrate they’re well positioned to deliver sustained commercial and societal value.
This article explores the UK findings following a global PwC online survey, conducted in September 2022. The survey received responses from 227 investment professionals, of which 99 were focused on the UK market.
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