Now is the time for companies to act on sustainability reporting

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Carmine Di Sibio, Global Chairman and Chief Executive Officer, EY & Punit Renjen, Global Chief Executive Officer, Deloitte & Bill Thomas, Chairman and Chief Executive Officer, KPMG International & Robert E. Moritz, Global Chairman, PwC

• Business leaders have welcomed the G7 and the G20 Finance Ministers’ support for mandatory sustainability reporting.
• Consistent measurement of the risks associated with climate change will help companies and governments respond to the challenge.
• Companies need to act now to get adequate sustainability reporting processes in place.

As governments and business leaders increasingly made bold net-zero commitments over the past year, one of the most important questions has been how best to gather information to measure progress against these commitments. It is crucial that companies and governments’ progress towards halving greenhouse gas emissions by 2030 and reaching net-zero by 2050 are measured accurately.

We’ve been collaborating as part of the World Economic Forum’s International Business Council (IBC) to do just that. Many IBC members are already reporting on environmental, social and governance (ESG) metrics they have collectively identified as relevant. They also welcomed the news that the G7’s Finance Ministers support mandating climate reporting in line with the Taskforce on Climate-Related Financial Disclosures (TCFD), and the IFRS Foundation’s efforts to establish an International Sustainability Standards Board (ISSB) in early June.

Momentum continued with agreement among the Finance Ministers and Central Bank Governors to support the mandate at the Venice Climate Summit in July. Business leaders are continuing to press for stronger collaboration between the private sector and government leaders to implement a baseline global reporting standard for sustainability. Momentum should continue to build at the G20 Venice Climate Summit in July.

This November, the UK will host the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow. This is an excellent opportunity to accelerate action on climate goals. It will be essential for the private sector and capital markets participants to buy in to the process. Meaningful progress on consistent and comparable sustainability metrics should be a catalyst to mobilise the trillions of dollars of private sector finance needed to address climate change.

Where should companies start?

We believe this process will lead to some of the most important innovations in financial reporting in decades. It should also reduce compliance costs and reporting complexity. Here is where companies should start:

1. Implement the ESG reporting process now.

Since the Stakeholder Capitalism Metrics were introduced in September 2020, the pace of change has accelerated. But, as we know, regulatory action will take time. Many are calling for increased transparency in ESG reporting ahead of regulation – and specifically investors have been calling for TCFD-aligned disclosures. Companies should not wait for regulatory mandates and guidance. The Stakeholder Capitalism Metrics, which include TCFD, can be a starting point for companies to prepare for these changes by performing due diligence and implementing or refining reporting processes.

2. Use ESG reporting to drive business innovation.

Reporting on ESG-focused metrics is not only the right thing to do, it can also positively impact the bottom line. This is especially true as companies look to manage financial risks caused by climate change, and create innovative solutions to overcome challenges. Metrics that are comparable, consistent, and backed by science provide investors with the right information to act on. They can also can help leaders and boards make better business decisions. G7 support for mandating ESG reporting requirements will help accelerate action on climate goals by spurring innovation and unleashing the incredible power of the capital markets to build a more sustainable future – today, instead of tomorrow.

3. Create an ESG reporting infrastructure that works with your mainstream financial reporting.

ESG reporting needs to be of the same quality standard as financial reporting. It needs to reflect the strategic choices a company makes to minimize risk and capture value. The journey should start with embedding purpose into the DNA of the organization and delivering meaningful ESG performance information integrated into mainstream corporate reporting. Companies should set audacious targets that respond to their purpose and considerations of planet, people and prosperity. Companies should plan how to build the necessary commitment and capacity in the organisation. This will require organisational change at the governance, strategy, risk management and performance management levels.

4. Collaborate with others in corporate reporting

Looking at the ESG reporting landscape today, good progress is being made. A recent study found that 90% of the companies in Standard and Poor’s 500 Index already publish sustainability reports – an all-time high. Now, companies have the opportunity to consolidate that progress by collaborating with others to improve the quality, consistency and comparability of ESG reporting. To do that, everyone involved – companies, investors, rating agencies, policy makers, standard setters and other stakeholders – has a role to play. Collaboration will be vital in making sufficient and sustained progress across industries and geographies.

Background on the Stakeholder Capitalism Metrics

In 2020, the World Economic Forum’s International Business Council (IBC) curated a core set of existing relevant ESG metrics and disclosures, including from TCFD on climate reporting. These are called the Stakeholder Capitalism Metrics (SCM), and they are universal, comparable disclosures spanning four pillars:

• principles of governance,
• planet
• people, and
• prosperity.

The metrics can be reflected on a voluntary basis in the mainstream reports of companies on a consistent basis, across industries and regions.

Since the launch of these metrics, more than 80 companies have committed to disclose this information in their mainstream reporting. In May, the IBC Executive Committee formally announced its support of the IFRS Foundation’s establishment of the ISSB as an essential move. This will promote consistency and comparability of information, and increase trust and confidence in the private sector.

The members of the coalition will contribute their experience to the establishment of the International Sustainability Standards Board by the IFRS Foundation. In so doing, they will also help strengthen strategic alignment among capital markets regulators and policy makers, including the US SEC and the European Commission.