Telling the real corporate story | Risk Advisory | Deloitte Netherlands

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Telling the Real Corporate Story

ESG Reporting at the Heart of Transparency

The impact of sustainability topics on financial stress and viability are climbing the ladder to become more topical in board discussions than nuances around historical financial numbers. Combined with increasing pressure from funders, investors and society at large for transparency on ESG performance and a growing demand for comparability and reliability of ESG information on the impact organizations have on their environment as well as how they are being impacted, makes this point of view very relevant.

In these unchartered times with COVID-19 lockdowns and increasing extreme weather events impacting supply chains and customer behavior, sustainability factors (also called ESG issues) impact on financial stress and viability and are therefore climbing the ladder to become more topical in board discussions than nuances around the IFRS impact on historical financial numbers. Over the coming years our collective view on desirable and viable economic models will change drastically and will focus on the purpose-driven and broader performance of organizations becoming mainstream, and in some cases regulated, for a broad community of stakeholders. This shift will ultimately result in organizations telling the whole story of their performance, their value add and their true impact on society.

On the back of this development we see increasing pressure from funders, investors and society at large for transparency on ESG performance and a growing demand for comparability and reliability of externally disclosed ESG information on the impact organizations have on their environment as well as how they are being impacted. Afterall in the current climate, the appreciation of the vulnerability of an organization to ESG risks is at the forefront of the mind of investors, regulators, prospective employees and suppliers. But despite this high need for comparability there remains an alphabet soup of ESG reporting standards and assurance mandates that are confusing to the average sustainability professional, let alone an investor or other stakeholder. This is why the recent developments and initiatives from the World Economic Forum Business Council on common ESG metrics, the consultation of the EU Non-Financial Reporting Directive with input from the EFRAG, collaboration between GRI and SASB and IFRS investigating ESG reporting framework options, are so important.

In our view it is highly likely that by 2030 investors, funders, regulators and employees will make their decisions on a company based more on their ESG outlook and performance than on historical financial information. Not only for large listed companies but also for small and medium sized organizations. For that to become a reality confidence in the information has to be a pre-requisite – at the moment a long way off. Fraud and scandals related to ESG performance have occurred but not yet at large as for financial performance, but with the growing interconnection between ESG performance and financial incentives, it is expected that green- or SDG-washing will evolve to the next level if laws and regulations remain absent. Very much like some of the large remediation programs that financial institutions have had to put in place to rebuild regulator, customer and community confidence we envisage a time when large scale ESG reporting and funding remediations will become common place.
So what is the way forward? How can investors be provided with comparable information that can help them distinguish between an organization with low residual exposure to ESG risk, both physical and transition, that is well managed and strategized to deal with emerging challenges versus one where the fundamental business model is challenged and where management are holding out in an old paradigm as long as they possibly can? And how can stakeholders rely on the information about the impact an organization claims it is making?

It will probably take some time before consistent and clear regulation regulating both reporting and assurance activities is in place covering all these topics. In this point of view we give insights in the current status and recommend practical no-regret actions organizations should take in the meantime.

Alphabet soup in need of harmonization

Throughout the last decade we have seen a proliferation of frameworks and guidance resulting in a scattered European and Global playing field which we became to call the ‘alphabet soup’. With a couple of large and well known frameworks like GRI , IIRC, GHG protocol and more recent TCFD there is a main stream of preferred frameworks but these do not all have the same focus and scope nor are they fully aligned, raising the risk of cherry picking of frameworks and unclarity to users when reading and comparing information. Furthermore at this moment there is limited regulatory and business backing, non-compliance and lack of assurance has no or limited consequences. Whilst at the same time some EU countries like France, Spain and Italy already require mandatory assurance on ESG information.
The future state of non-financial performance reporting has to be harmonized and grow teeth. The signs that this is indeed taking place is now visible. However, despite the promising developments on the international alignment of non-financial reporting standards much uncertainty remains on how organizations can respond in the interim while we wait for a sustainability standard, potentially from IFRS, and additional regional guidance from EFRAG reflected in the updated EU Non-Financial Reporting Directive which is expected to be effective in 2022.

How to respond

In our view being transparent about organizational ESG performance and risks is not about complying with regulation. Rather, it is about reporting on the organizations integrated performance in a VUCA world. In consultation with and with input of our experience with leading Dutch organizations who are both users and producers of non-financial information, we developed three rules of thumb as a no-regrets approach. We set this out below:

  1. Don’t wait for regulation, rather follow a strategic purpose led approach and set out clearly:
    What is your company strategy with respect to sustainability, how will your organization evolve and transition into a more sustainable enterprise and what should you measure to give stakeholders confidence that you are making progress;
  2. Don’t perform a wish list or tick-the-box exercise with all SDG’s, all IIRC six capitals or all GRI indicators rather be future-focused on material topics and real impact (on the organization and the organization on society and the environment) which the organization can influence and contribute to;
  3. Avoid greenwashing or SDG-washing (which often occur unintentionally), by focusing on the key ESG issues that are truly material to the organization and address these strategically and operationally and build tangible evidence criteria that can be independently observed and tested.

Translating this to actions we consider the following:

More information

Do you want to learn more about transparent ESG reporting and the actions you can take? Please connect with Han Hindriks.

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