The coming of age of ESG corporate reporting

The recent Covid-19 pandemic serves as an example of how something largely beyond our short-term control can have a devastating impact globally. It has also highlighted that interconnections between countries, businesses and nature cannot be ignored. It has taken a truly global response with focused governmental task forces, an international scientific community rapidly developing a range of vaccines, the development of new technologies and supply chains, and an acceptance of significant changes to society and behaviors to take control and overcome this threat.

But there are other significant crises and trends that are equally significant and that also require a global response. These can be grouped under the ESG label: Environmental, Social and Governance, or, as more commonly known, Sustainability and Corporate Social Responsibility (CSR).

• Environmental relates to how a company is exposed to, and manages, risks and opportunities connected to climate, natural resource scarcity, pollution, waste and other environmental factors, as well as the company’s own environmental impact. As put by UN Secretary-General Antonio Guterres: “For too long, we have been waging a senseless and suicidal war on nature […] The result is three interlinked environmental crises: climate disruption, biodiversity loss and pollution that threaten our viability as a species.”¹
  
  A recent survey conducted by Deloitte with 2,260 private- and public-sector Chief Experience Officers (CXO) in 21 countries across multiple industries examined how leaders and their organizations are grappling with this new normal. The CXOs ranked climate change as the top societal issue for business to tackle over the next decade and three quarters say they believe the climate crisis is of similar, or greater, magnitude compared to the Covid-19 pandemic.²

• Social is examining a company’s values and their business relationships through matters such as supply-chain, product quality and safety, employee health and safety, diversity and inclusion policies, workers’ welfare and slave labor concerns.  
  
• Governance takes into consideration matters such as a company’s corporate structure, diversity of the board of directors, executive compensation, corporate resilience and event responsiveness, policies and practices on lobbying, political contributions, bribery and corruption policies.
  

Many countries have signed up to international agreements and standards in order to achieve outcomes that meet many of these ESG concerns.

• With regards to the environment, one of the most important agreements was the United Nations Framework Convention on Climate Change, an international treaty with the aim of reducing global greenhouse gas emissions and rein in climate change. The resulting legally binding international treaty on climate change, known as the Paris Agreement, was signed at the annual Conference of the Parties (COP 21) in Paris in December 2015. Its goal is to limit global warming to well below 2 degrees Celsius, preferably to 1.5, compared to pre-industrial levels. 
• In relation to the broader ESG themes, the United Nations Sustainable Development Goals (UN SDGs) were launched in 2015 and the 17 SDGs were introduced as a blueprint to achieve a better and more sustainable future by addressing global challenges including poverty, inequality, climate change, environmental degradation, peace and justice by 2030.

We are, in many ways, reliant on companies to drive the ESG agenda forward. As significant users of natural resources, employers of scale and the source of much technological innovation, companies do have a significant impact. Their license and ability to trade may be provided by governments and regulators, but influence over companies’ strategies and operations also lies with its stakeholders: shareholders/owners, clients, consumers and employees.

If companies do not recognize the importance of their role, then stakeholders will take action. American multinational investment management corporation Blackrock, the world’s largest shareholder, informed the market that it “believes that sustainability risk, particularly climate risk, is investment risk. Accordingly, sustainability is a key component of our investment approach and where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy, including short- medium-and long-term targets, we may vote against the directors we consider responsible for climate risk oversight.”³

To support similar thinking by investors, S&P Global, a leading credit ratings, benchmarks and analytics provider, announced in February 2021 that it has released over 9,200 companies’ ESG scores to the market as part of its S&P Global ESG Scores transparency initiative.⁴ Furthermore, two new levels of information, encompassing 400 new data points, inform investors of those companies’ detailed ESG scores. The enhanced information aims to provide deeper insights and expanded transparency, enabling markets to better understand companies’ environmental and social impact as well as its governance standards. As Sonia Kim, Head of ESG Product Development at S&P Global, said: “The additional data points will be particularly helpful for the investors who are increasingly seeking to integrate sustainability performance into their investment decisions, as well as for the companies looking to meet the fast evolving regulatory and reporting mandates for ESG disclosures.”⁵

Some business leaders are starting to recognize the importance of companies in helping to achieve ESG goals. As Brian Moynihan, CEO of Bank of America and Chair of the World Economic Forum International Business Council recently noted, over GBP6 trillion a year is required to implement the UN SDGs and that charities, governments, foundations can’t finance this, “So it takes capitalism and it takes the companies to drive it and lead it.”⁶

As stakeholders increasingly make their demands known and the weight of their decisions have more influence, those companies are being urged to improve their communications and increase transparency. But key to communication is information, and in this case, it is often non-financial information, such as carbon reporting, water usage, waste produced, diversity metrics, governance policies and practices that is needed.

In many ways, the reporting of non-financial information is becoming as relevant to stakeholders as traditional financial information. Unfortunately, companies are not as mature in terms of collation processes and controls, calculation methodology and disclosures for non-financial information, as they are with financial information. However the industry is responding by creating ESG accounting and reporting standards and disclosures, developing careers for professional ESG managers, and expanding the role and importance of the Chief Sustainability Officer.⁷

This is all happening in the face of what can only be described as a tidal wave of legislation, regulatory requirements and expectation driving the production and disclosure of such information, and it will inevitably impact and roll out across all financial markets, including those in the Middle East:

• The Task Force on Climate-related 2020 Financial Disclosures (TCFD) which were released in 2017 by the international Financial Stability Board to respond to the threat of climate change to the stability of the global financial system by improving corporate reporting on climate-related risks and enable financial stakeholders to factor climate-related risks into their decisions. As an example of their impact in the market, for accounting periods beginning on or after 1 January 2021, all UK premium listed companies are required to state, in their annual reports, whether their disclosures are consistent with the TCFD recommendations, or to explain why not.
• Five of the leading framework and standard-setting institutions jointly published a report in September 2020, A Statement of Intent to Work Together Towards Comprehensive Corporate Reporting, to promote a more comprehensive framework for corporate sustainability performance, and have pledged to work together to further this goal. Cognizant of the current complexity surrounding the numerous emerging sustainability reporting tools, the organizations, the CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), have developed a vision of integrated reporting, involving both financial accounting and ESG disclosures. They will work with IOSCO, the IFRS, the European Commission and the World Economic Forum’s International Business Council.
• Also in September 2020, the World Economic Forum issued a set of ESG metrics and disclosures focused on four principles of governance, planet, people and prosperity to help align the existing standards to enable companies to collectively report non-financial information. The metrics and disclosures were developed following a consultation process with representatives from corporations, investors, standard setters, NGOs and international organizations, such as the Big 4 accounting firms.
• The IFRS Foundation issued a consultation in September 2020 to gauge market views on a global standard for ESG reporting to be set by a body under the Foundation’s umbrella and the Exposure Draft from the consultation is due later in 2021.

In the Middle East we have seen:

• All the key countries, including Saudi Arabia, the UAE, Egypt and Qatar, have not only signed up to the Paris Agreement on Climate Change8 but also the UN SDGs, and many have accepted those objectives and goals into their government initiatives such as their national Vision 2030 strategies and development plans;
• Increasingly, companies are following the UN SDGs as a blueprint for their sustainable strategies and the GRI for their ESG reporting to meet their stakeholders’ demands, influenced heavily by the international momentum of reporting developments;
• Local regulators are partnering themselves with the UN-led initiative, the Sustainable Stock Exchange Initiative (SSEI) and committing to driving ESG in financial markets; and also producing guidance for ESG disclosure for their listed issuers’ sustainability reporting requirements:
  • Abu Dhabi Stock Exchange (ADX) - SSEI partner; issued ‘ESG Disclosure Guidance’ in 2019
  • Bahrain (BHB) – SSEI partner; issued ‘ESG Reporting Guide’ in 2020
  • Dubai Financial Market (DFM) - SSEI partner; issued ‘ESG Reporting Guide’ in 2019
  • Egypt (EGX) – SSEI partner; issued ‘Model Guidance for Reporting on ESG Performance & SDGs’ in 2016
  • Jordan (ASE) – SSEI partner; issued ‘Sustainability 1 & 2’ guidance in 2018
  • KSA (Tadawul) - SSEI partner; no ESG guidance issued yet
  • Kuwait (BK) – SSEI partner; issued ‘Sustainability Disclosure Guide’ in 2017
  • Oman (MSM) – not an SSEI partner; no ESG guidance issued yet
  • Qatar Stock Exchange (QSE) – SSEI partner; issued ‘Guidance on ESG’ in 2016.

We are seeing these initiatives against the backdrop of significant local changes across the Middle Eastern region with regards to diversity and inclusion, supply chain “In-Country Value” localization initiatives and worker welfare concerns. These are all of great interest to stakeholders, and raise their own challenges in reporting.

Unlike the pandemic, there is no shot in the arm that can be used to stop climate change, or any home remedies for the broader ESG trends. Like the pandemic however, the response will need global focus, intense commitment and a continuous drive over a long period of time. Companies will play a huge role in this, responding to the increasing demands of stakeholders by creating and executing ESG strategies; and informing stakeholders through clear and high quality non-financial reporting, on which everyone can make important sustainable decisions.

The Middle East will not be immune to the challenges of ESG, or the weight of non-financial reporting that stakeholders increasingly demand. It is time for Middle Eastern companies to be part of the global response to these ESG issues and take action in the development of their response to and reporting of ESG; recognizing their role in driving a more equitable and sustainable economy and society, both now and in the future.

by Damian Regan, Middle East Assurance Leader for Sustainability, Deloitte Middle East

Endnotes

1. UN Secretary-General Antonio Guterres writing in the foreword of the report Making Peace with Nature published by the United Nations Environment Program, February 2021.
2. Building the resilient organization, Deloitte, January 2021.
3. Climate risk and the transition to a low-carbon economy, Blackrock, February 2021
4. Press release: S&P Global makes over 9,000 ESG Scores publicly available to help increase transparency of corporate sustainability performance - February 16th, 2021.
5. Press release: S&P Global launches enhanced ESG Scores with additional levels of data to provide multiple layers of insights - February 18th, 2021.
6. Brian Moynihan, What Does Society Want From We CEOs?, chiefexecutive.net, October 2020.
7. The future of the Chief Sustainability Officer, Deloitte, February 2021
8. List of Parties that signed the Paris Agreement on 22 April – United Nations Sustainable Development.