Sustainability can be difficult to measure and compare across distinct product categories, not to mention across companies and industries. While the stakes are high, organizations have not been collecting and reporting environmental, social and governance (ESG) data for long. The reporting landscape is evolving, and while pure financial reporting used to be enough, demand for integrated reporting — a blend of financial results and ESG metrics — is growing.
There has been a massive surge in the number of reporting instruments since 2016. In 2021, Carrots & Sticks, a multistakeholder resource on sustainability reporting, identified nearly 600 current reporting instruments across 100 countries. Compare that to 2013, which identified only 180 instruments in 44 countries. While regulators may require reporting against these instruments, this varies widely by country. In the United States, 77% of the outlined reporting requirements are mandatory; however, 58% of European and 57% of Asian requirements are mandatory.
Driven by regulatory compliance, risk mitigation and shareholder demand, many public companies are now releasing sustainability reports alongside their mandated financial information. However, a 2019 study by researchers at MIT’s Sloan School of Management revealed that ESG "ratings from different providers disagree substantially." This confusion impacts investor understanding and overall stakeholder confidence, which has led some regulatory bodies to propose including ESG and climate-related disclosures in regular reports.
In the European Union, large companies must publish regular reports on their environmental and social impact activities starting on Jan. 1, 2024. While in the U.S., the Securities Exchange Commission (SEC) proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports.
How should companies navigate this changing reporting environment? Here are some tips to keep in mind:
Integrate sustainability and financial reporting
While sustainability reporting may currently draw a different audience than pure financial reporting, there is great synergy between the two.
With integrated reporting, companies provide a more holistic perspective regarding performance and value creation by conveying financial results as well as ESG data. Integrated sustainability and financial reporting paint a larger picture of the company and its value — from community-building and resource-saving to long-term sustainability.
These benefits are increasingly understood and valued by shareholders, consumers and the business community. This encourages integrated thinking across the organization and communicates the company’s true value.
Accelerate reporting with digital tools
Reporting imposes significant burdens on administrative teams tasked with data collection, consolidation and review. However, digital systems automate data collection, analysis and reporting processes. These tools simplify reporting efforts and result in more timely and accurate tracking of sustainability and climate-related information.
Companies that use digital ESG platforms streamline staff time and resources. They also experience perks such as increased visibility across their organizations and reduced risk.
Prepare to validate data
To ensure the credibility of reporting, companies should have both internal and external processes and resources in place to validate the data in their reports. To avoid problems, they will need a systemic, documented and evidence-based process. With so many options for third-party assurance, it’s important to do your homework and select credible third-party resources that are well-versed in international regulations.
While the journey has only just started, companies that report climate-related information are already seeing big benefits:
- In 2020, EY, one of the world’s largest professional services firms, found that 91% of surveyed investors said nonfinancial metrics play a “pivotal role” in investment decision-making.
- 82% of leaders and board members said that their company’s approach to strategy and decision-making includes ESG and balances near- and long-term value creation to a "significant" or "very significant" extent in a 2022 EY survey.
- In 2021, the NYU Stern Center for Sustainable Business released a report demonstrating that 26% of studies focused solely on ESG disclosure showed a positive correlation with financial performance — ESG drives better financial performance over longer time horizons.
While it may be some time before we land on agreed-upon, completely harmonized, 360 sustainability and financial reporting, companies are wise to begin laying the foundation for their benefit and preparing for reporting demands to come.