How Can Companies Boost the Impact of Their ESG Disclosures?
STORY INLINE POST
As ESG regulations move forward and Latin America’s integration into global trade increases, companies will have to accelerate their transition to low carbon activities and boost their eEnvironmental, sSocial and gGovernance (ESG) disclosures.
The performance of ESG indicators has become a key measure to identify risks and growth opportunities for organizations, particularly in the financial sector. However, two surveys by EY,: the EY Global Corporate Reporting and Institutional Investor Survey, found a significant disconnect between organizations and investors in terms of ESG disclosures.
From both companies and investors’ perspectives, long-term value is a crucial component of a comprehensive sustainability strategy. However, when it comes to the trade-off between short-term earnings and long-term value creation, some disconnects appear. The surveys found that over three-quarters of investors think companies should make this trade-off, but only around half of finance leaders are willing to take this long-term stance.
More than half of the large companies surveyed in EY's research (those with revenues of more than US $10 billion a year) reported that they “face short-term earnings pressure from investors, which impedes our longer-term investments in sustainability.” On the other hand, four-fifths of investors surveyed said that “too many companies fail to properly articulate the rationale for long-term investments in sustainability, which can make it difficult for us to evaluate the investment.”
Despite these disconnects, companies and investors are aligned on the challenges to effective sustainability reporting. Both cite the lack of supporting evidence and assurance to provide trust in the information, as well as the gap between ESG reporting and mainstream financial information, as the main challenges to the usefulness and effectiveness of companies’ sustainability reporting.
In this sense, more transparent corporate reporting could build trust with shareholders and stakeholders. A rRecent survey stated that 99% of investors consider companies’ ESG disclosures as a part of their investment decision-making, with 74% using a rigorous and structured approach for their analysis. In comparison, only 32% of investors surveyed were using a rigorous approach, according to in EY’s 2018 Global Institutional Investor Survey.
How to Close the Gap
To bridge the gap, companies should prioritize aligning with investors and stakeholders on ESG disclosures within corporate reporting. This includes updating materiality analysis to incorporate post-pandemic priorities and new regulations. As companies with headquarters in other regions, such as Europe, are facing new regulations from the Corporate Sustainability Reporting Directive (CSRD), their subsidiaries in Latin America are setting up plans to accelerate their transition to comply with global goals and new standards.
Another important step for companies is to involve their finance leaders in building trust and confidence in their ESG reporting. By connecting the ESG agenda to broader initiatives and transforming the modern finance function, companies can help ensure that their ESG disclosures are accurate, transparent, useful to investors and aligned to global goals.
How to Select Reporting Standards to Build Trust
Another challenge faced by companies is navigating the vast sustainability information landscape, with an estimated 600 ESG reporting standards globally. In addition to a) Global Goals and Principles, b) ESG Ratings and Indexes, and c) Regulations: CSRD, Mandatory Climate Risk Reporting (aligned to TCFD), EU Taxonomy Regulation and SEC- proposed rules that we are expecting to be finalized in April.
To better suit the needs of investors looking for useful ESG data, disclosures should consider both investors focused on financial risk and those focused on social impact. Investors focused on financial risk seek material information related to the financial impact of sustainability-related factors on a company, while those focused on social impact seek information about a company's impact on its external surroundings, including people, communities, the environment, and society.
To better meet the needs of these investors’, collaboration and transparency within the ESG reporting landscape are crucial. However, measuring sustainability information comparably across ESG themes can be difficult, leading to variations in reporting. This is where companies can work with stakeholders to agree on how to achieve uniformity in reporting. By doing so, companies can help ensure that their ESG disclosures are correct, useful to investors, and based on the specific goals and principles, sector, size, time horizon, and location of the company.
Investors are amongone of the most relevant stakeholders and expect standardization, comparability, and consistency in a company’s ESG disclosures as part of their corporate reporting. While a range of actions are required, building governance structures, and changing the culture to create long- term value centered oin the people aligned with the purpose is crucial for successful disclosures.