Historically, counting the money was all that mattered. Now, a whole new host of criteria are redefining why and how corporates must integrate financial and non-financial (ESG) reporting. Financial reporting used to be pretty straightforward. In fundamental terms, it was a system that set out the economic status, successes or failures of a business over a set time period, usually the last financial year. Outlining the basics, this simple financial reporting covered financial statements and data and their implications for future expansion, stakeholder investment and so forth.
There is of course still a critical need for such core financial reporting. It’s there for some vital reasons; primarily to give stakeholders the information they require surrounding the company’s financial health, or indeed lack of it.
Further, it’s valuable in tracking a company’s cash flow and projecting financial forecasts, plus it informs on individual business income streams and sets this against expenditure, which opens up transparency and accountability on how things are being managed and run.
Things diverge however when environmental, social and governance (ESG) reporting criteria come into the mix. ESG is there to attempt to quantify the wider values and impacts of what business does beyond the pound or dollar sign. That said, understanding is hastening that ESG, directly, also impacts on financial bottom lines.
So there is value in integrating these two seemingly disparate practices, to create a more holistic and ultimately realistic picture of what business does, what benefits and problems it causes, and how ultimately when business does its best on ESG, it tends to make more money too, for longer.
Getting ESG into the mix
Ernst and Young tells us the importance of non-financial performance is increasing in regulatory requirements, supply chain practices and investment decisions.
Further, ESG disclosures are contributing more to top level decision making. ESG analysis provides an additional lens for reviewing and evaluating companies and assets. These factors help in identifying new opportunities and managing long-term investment risks, ultimately avoiding poor performance that can result from weak ESG practices.
Ernst and Young argues that even those who remain sceptical understand that reputational and environmental risks can impact the bottom line. So from a business perspective, reporting on non-financial and ESG activities is important to help strengthen your corporate reputation with customers.
Ernst and Young aren’t alone in the belief that integrating ESG is essential. Deloitte notes that 79%
of global leaders in non-financial reporting confirmed that the reporting of such data in conjunction with the financial data improves decision making processes.
And there are further compelling Deloitte numbers. Eighty four percent of survey respondents have seen an improvement in the quality of the reported data over the years. Eighty percent confirmed that a reporting process which integrates non-financial and financial data contributes to the business success of the organisation.
Remember these Deloitte numbers are a few years old themselves now, so there’s every likelihood the importance of integrating ESG and its influence has risen yet further.
Delivering ESG and financial integration
BD Law reckons that global companies faced significantly increased pressure from investors, regulators, and customers to disclose ESG impacts throughout 2021. Even back in 2020, 96 percent of the world’s 250 largest companies reported on sustainability and 56 percent of those companies acknowledged the financial risks of climate change in their reporting, with a majority establishing targets to reduce carbon emissions.
In practical terms, there are some key basics for corporates to grasp. Though ESG reporting remains voluntary in the United States, public companies with operations in jurisdictions like the European Union face specific disclosure requirements.
BD says when it comes to voluntary disclosures, issuers often map reports to third-party standards. The Global Reporting Initiative (GRI) is the dominant global standard for sustainability reporting, used by approximately 75 percent of the world’s largest 250 companies.
Many firms also report on climate issues consistent with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations, a standards organisation that is largely responsible for the rise in prominence of recognising the financial risks of climate change.
In the US, public companies provide non-financial disclosures in accordance with a principles-based approach, based upon the “materiality” threshold. The U.S. Securities and Exchange Commission (SEC) finds a matter to be “material” when “there is a substantial likelihood that a reasonable investor would consider it important.”
With all this in mind, glancing through some GRI and TCFD guidance seems logical.
GRI advice on ESG
Eelco van der Enden is GRI CEO. He says the broader landscape can be confusing, but companies should not let the myriad of ESG guidelines, raters, certifiers and others distract them from fulfilling their transparency obligations.
GRI standards on ESG reporting, thankfully, are available for download here. Reporting support and services are also available, among them an online training portal in learning and applying these standards.
Crucially, GRI’s overall intelligence on non-financial integration and the ESG space notes that some 40 new ESG reporting standards across a variety of industries are on the way.
First among then, Mining News reported GRI has just announced its team to develop mining sector sustainability standards. Delegates from mining companies Newmont Corp., South32, Coeur Mining, Hyperion Metals, and Anglo American will help draft the new work.
GRI released its first sector standards for the oil and gas industry last year, in addition to its updated universal standards. Of the 40 new standards forthcoming, GRI will start with industries that have the highest impact. Other sectors which are high priority include agriculture, aquaculture, and fishing
TCFD opinion and advice
The TCFD believes rising demand for climate-related disclosure from investors and others is critically important.
In particular, large asset owners and asset managers sitting at the top of the investment chain have an important role to play in influencing the organisations in which they invest to provide better climate-related financial disclosures.
Key policy and legal risks from poorly-managed ESG reporting include carbon pricing and reporting obligations, plus mandates on and regulation of existing products and services. In the US in particular, exposure to litigation is key.
Of particular note, TCFD recommends organisations describe the resilience of their strategy and performance on reporting taking into consideration different climate-related scenarios, including a 2°C rise or lower scenario, where such information is ‘material.’
Such scenario analysis, says TCFD, identifies and assesses the potential implications of a range of plausible future states under conditions of uncertainty. Scenarios are hypothetical constructs and not designed to deliver precise outcomes or forecasts. Instead, scenarios provide a way for organisations to consider how the future might look if certain trends continue or certain conditions are met.
This is intriguing. Essentially, TCFD appears to be recommending that corporates not only embed non-financial reporting and ESG into today’s reporting frameworks. They should also futureproof and analyse future scenarios before reporting becomes due, making the effort to understand and apply their impacts more valuably than a ‘look back’ approach conventional with reporting, as logically enough you can’t conclusively report on something that hasn’t yet happened.
Integrating financial and non-financial (ESG) reporting; the future
Both GRI and TCFD make it plain that integration is this space is now essential. Investors won’t put up with anything less, but TCFD’s expert users rated all integrated disclosure as useful regardless.
So there are multiple wins to be made here, across both the investment landscape and across improving and maintaining internal practice.
Glancing ahead, there are pitfalls. Compliance Week wisely points out that a significant challenge for companies in all industries is assessing the multiple reporting frameworks available. These include guidance from the Sustainability Accounting Standards Board (SASB), GRI, Climate Disclosure Standards Board (CDSB), TCFD and numerous smaller frameworks.
Then again, a competitive frameworks and standards scenario makes for competitive and hence valuable frameworks too, updated fast against the ever-changing global ESG picture.
And to close, in fascinating developments, China is moving ahead on ESG reporting. China Briefing explains that it is clear Chinese authorities will become increasingly sensitive to corporate ESG reporting to fulfil key green economy policy goals.
For example, on February 8, 2022, the Measures for Enterprises to Disclose Environmental Information by Law will come into effect. It will require five types of enterprises to disclose environmental information.
China’s ESG investment market, while small, has developed rapidly in recent years. There is a positive trend of voluntary ESG reporting in the country. In fact, several mainland-listed companies released their annual CSR/ESG reports for 2020. The number of ESG public funds also surged in 2021. Meanwhile, ESG queries from investors have noticeably increased.
For your correspondent, this is all key. China has long shown disdain for environmental regulation, the adoption of foreign green policy concepts and even the COP goals.
Movement here indicates ESG reporting integration truly is in the global ascendancy. Corporates take note.
SEE ALSO: Accessing Sustainable Finance