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Enhancing Trust in ESG Disclosures
Significant progress has been made in corporate reporting of environmental, social, and governance (ESG) information, as evidenced by the rise in the number of S&P 500 companies that publish some form of a sustainability disclosure. At the same time, institutional investors, asset managers, lenders, credit raters, and insurers are increasingly relying on companies’ ESG disclosures to make important decisions regarding the allocation of capital. Against this backdrop, there continues to be a growing call for companies to enhance the quality, comparability, and usefulness of their ESG disclosures.
What Is ESG Reporting?
According to the CAQ, “ESG reporting encompasses both qualitative discussions of topics as well as quantitative metrics used to measure a company’s performance against ESG risks, opportunities, and related strategies:”
- “The E, or environmental, component of ESG information encompasses how a company is exposed to and manages risks and opportunities related to climate, natural resource scarcity, pollution, waste, and other environmental factors.
- “The S, or social, component of ESG includes information about the company’s values and business relationships. For example, social topics include labor and supply-chain standards, employee health and safety, product quality and safety, privacy and data security, and diversity and inclusion policies and efforts.”
- “The G, or governance, component of ESG incorporates information about a company’s corporate governance. This could include information on the structure and diversity of the board of directors; executive compensation; critical event responsiveness; corporate resiliency; and policies on lobbying, political contributions, and bribery and corruption.”
What Is ESG Investing?
ESG investing involves incorporating nonfinancial factors related to the environmental impact, social impact, and governance attributes of a corporation into the evaluation of companies and affects the allocation of capital.
“People may choose not to invest in a firm that has poor ESG, thereby limiting its access to capital and raising its cost of capital.”
The International Business Council (IBC) of the World Economic Forum (WEF) published a report that includes a set of core ESG metrics designed to enable companies to measure and report on sustainable value creation. Facilitated by the Big Four accounting firms, the publication helps advance the momentum toward global ESG standards by establishing a coherent and comprehensive corporate reporting system. The WEF-IBC report includes references to the separate WEF, Impact Management Project, and Deloitte’s facilitated efforts to align global standards and frameworks, which culminated in the issuance of a joint statement by the five major ESG standard-setting institutions of a shared vision of what is needed for progress toward comprehensive corporate reporting and their intent to work together to achieve it. At the same time, the International Federation of Accountants launched its consultation for the IFRS Foundation to create an authoritative nonfinancial standard setter.
Improving the Quality of ESG Disclosures
The manner in which investors are analyzing a company’s ESG disclosures is similar to how they assess financial information because performance on ESG metrics can affect financial performance. Evaluating ESG information at the onset of a potential investment can help investors better determine and understand the investees’ governance and short- and long-term strategies related to addressing material risks and opportunities. Once an investment is made, investors use ESG information to monitor performance, much in the same way they use financial information. However, the critical element of the financial reporting process that is still largely missing and needs to be institutionalized in ESG reporting is external assurance.
Growth in public and investor demands for ESG accountability is compelling companies to pay closer attention to expectations and enhancements related to sustainability disclosures. Developing a robust governance structure, integrating internal audit and the board of directors into such structure, and obtaining external assurance (i.e., the three lines of defense) can enhance public trust and improve a company’s ability to meet investors’ and other stakeholders’ expectations related to the disclosure of accurate and reliable information. It may also reduce risks related to misleading or omitted disclosures. Implementing the three lines of defense will promote high-quality, relevant, and meaningful nonfinancial disclosures, enhance investors’ reliance on reported information, permit better analysis of such information, and promote ESG investing.
How can Deloitte Help?
Deloitte has significant experience in assuring and advising on sustainability reporting. We can support companies in developing a sustainability reporting framework or assuring a framework based on GRI, SASB, TCFD, CDSB etc. In addition we can provide support to companies that are required to report to lenders on any green bonds/loan arrangements. Please reach out to Eileen Healy (Sustainability Reporting Lead) or Jack Lee (Audit Sustainability Lead) to learn more about how we can support your company.
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